Are You Anchored to List Price? What Really is a Good Deal?

We just walked from a deal we had under contract for $30,000 under it's listing price. We walked because a few issues arose in the inspection that we didn't want to deal with unless the sellers dropped the price further. They refused - so we walked. When we told that story to a couple of our friends they thought we were insane. Actually when I made my initial offer at $37,000 below the list price my husband Dave thought I was insane, or just really mean. He was sure I would offend the sellers. And, sometimes when I make offers that low compared to their list price I do offend people. I've actually had people pull their home off the market the day after I submit an offer and put it back on the market a week later at a higher price. I don't actually understand their logic but it's happened twice this year! The thing I want to share with you today is the same thing I reminded my husband of and told our friends that didn't understand how I could walk from such a "deal", and that is this:

It's not a good deal just because you bought it for less than it's list price.

It's also not a good deal just because it was previously listed for $430,000 and now you're buying it for $303,000. It's ONLY a good deal if it's actually WORTH more than you're paying for it. Don’t confuse list price with property value. In many cases, list price is just the wish price of the seller or some lofty value a realtor gave the property in order to convince the sellers to list with them in the first place. You’ll get a better indicator of value by answering the following questions:

1. What is the cash flow from the property? This isn't how you as a residential investor however it's how you figure out what a property is worth to YOU.
2. What are other properties in the area selling for? (Look at properties that are comparable in overall size, number of bedrooms and bathrooms, as well as lot size.)
3. What would it cost to build that property right now? In other words, what's the replacement cost? The easiest way to figure this out quickly is to ask a builder or a general contractor what the average house in that area costs to build on a per square foot basis. Then take that number and multiply it by the size of that home.

In residential real estate, the best indicator of value is typically based on comparable properties in the area — what they SOLD for, not what they are listed at. But you should also consider cash flow and replacement cost. At no time should you even consider what it's listed for. Which is why I can comfortably put in an offer for $37,000 below list price. It makes my husband squirm and my realtor gets hate filled voicemails from her colleagues about our crummy offers but I am not anchored to the list price. I am anchored to what that home is worth and more importantly, what that home is worth to me. List price shouldn’t factor into your calculations. Neither should the property’s assessed value. Neither of those numbers will consistently be a true reflection of what a property is worth. Do your own analysis. Then you can be certain you’re getting a good deal… whether you are buying a property for less than list price or not. If you are uncomfortable making low ball offers, it's ok. Overpriced homes either go off the market or drop their price. All you have to do is wait awhile. When the list price gets closer to the offer you're willing to make then you can put the offer in. Just don't let yourself get fooled into thinking the list price has any relevance to it's value.

Image: Julie Broad