I must be in a cost/price/value mindset since my last post dealt with replacement cost should a disaster befall one or more of your properties. Today I will attempt to make the point that cost and/or price doesn’t always equal value.
Most of us understand this truism but every once in awhile we encounter people who go gaga over a piece of property. They usually go gaga because they are buying at a very low price in comparison to the price it was offered before the crash. And, almost invariably, these people are nice people but have very little financial education. This isn’t a negative all by itself since if they take the time to talk to someone with experience in real estate, they most likely will receive a quick and dirty on cost/price/value.
Here is an example from my backyard. One of my wife’s lady friends was all bubbly about a property on which she had just submitted a bid. She was telling my better half that before the crash this same house was offered at $750,000 and she was bidding the ludicrous price of $200,000. She added that now she could afford to pay for the property.
On the surface, this looks like one hell of a deal especially if the market actually rebounds in 2010 or 2011. However, cost doesn’t always equate to value. Almost all of us who have been in this business for more than a week know this intuitively. After all, the price is $200,000 but she doesn’t actually know the real cost. Real cost could be a completely different animal, right?
To complicate the scenario, value is a factor that has to be considered. $200,000 could be the value or could not be the value.
The Rest of the Story
Here is the rest of the scenario so we can look at cost/price/value for the home this lady wanted to buy. We have junky neighborhoods in our area just like you have junky neighborhoods in your area. The house she wanted was in a neighborhood on the down side of the S curve. The local park was less than kept up, the streets had more traffic than the freeway, the school in this “hood” could be called dangerous and the night roamers abound.
There were other negatives but these four are enough to scare even the most heartiest. At least I think so since I know the neighborhood.
Regardless of my opinion, these factors make the price too high and the value too low because the real cost could be a whole heck of a lot more than 200K. Basically it appears she was attempting to buy on the cheap. We all want to buy on the cheap side of the price curve but most of us spend a few minutes and try to put real numbers on cost/price/value. At least I think we do. That way we know if cheap is really cheap.
She was turned down for the loan which was a blessing in disguise. I don’t know why she was turned down but does it really matter? In her case cheap may have meant disaster from day one.
Had my wife’s friend asked questions from an informed advice source, she may not have even put in an offer. By proper advice source, I don’t mean the sales agent. In this case, it was abundantly clear the sales agent had only commission on the mind. I believe this particular agent should have done more due diligence for his client. It was the wrong house for the wrong person. It is the right house for the right person and I bet he has the ability to find that “right” person.
My wife’s friend also is responsible because she didn’t take a few minutes to speak with someone who has real estate investment knowledge. I know this lady knows people who have invested in real estate and I don’t necessarily mean me. The circle of friends we have in common include several investors.
She also happens to have a job that puts her in contact with people who possess finance/investment savvy. I feel certain at least one of them would have taken the time to explain cost/price/value to her. After all, she is a likeable type who listens and has the capacity to comprehend.
Just so I don’t get nasty letters, I am not in anyway disparaging that class of people known as real estate agents. I singled out one in particular because of the factors in this lady’s circumstance. So, if you feel the need to let me know about the honesty and integrity of real estate sales people, hang on to it for another day. I let my broker’s license expire years ago and while I held it, I heard everything that could be said about RE agents.
This story does have a happy ending because the lady did take the time to do some research after she was turned down. She also started asking questions and paying attention to the finer details involved in buying a home.
I also learned a lesson in that while cost/price/value is intuitively obvious to me, it isn’t to everyone. The lesson I learned was to not be afraid to offer advice to my clients who were contemplating buying or selling property. They don’t have to listen and can even tell me they aren’t interested. But, I do put out my 2¢ to anyone who cares to spend a few minutes listening.
Cost/price/value – one hell of a trifecta, isn’t it?