I Bought My Home for a Killer Deal

Jim saw his perfect home, called the Realtor, made an offer and made a killing in the negotiations process to get to an accepted offer.  Then after the home inspection, Jim further grilled the seller to further discount his price based on home inspection findings and ended up getting 50% off the original asking price!

This story doesn’t exist.  In Real Estate, it’s not like going to a Boxing Day Sale at The Bay and getting 30% off list price, then using your Bay Credit Card, getting an additional 20% off the lowest price, then submitting a 10% off coupon you clipped off of the newspaper and getting a $60 product for $30.

In Real Estate, it’s very similar to the stock market.  You pay what the market is willing to pay.  If you bought a share of a company for $5, it’s not likely that you can flip it the next day for $10 because people just won’t pay $10 for that share.  They’ll pay whatever the market value for that stock is the next day.  However, buyers in real estate sometimes think it’s like buying a 2nd hand good on Craigslist.  They think, “oh, the seller’s desperate to get rid of that product, so they’ll take a lowball price for it” and on Craigslist, sometimes buyers can lowball sellers and buy the product at a price that’s below market value.  However, in the real estate industry, sellers are often represented by Realtors, who are professionals and understand what their product is worth, understand the market and often will not allow their sellers to accept a lowball offer.  On Craigslist, when buyers are buying from sellers, the sellers on Craigslist aren’t represented by Professional Traders of that particular product they are selling, so it’s more likely that a buyer can buy a product for below market value.

My point is that in the real estate industry, Realtors and Appraisers can evaluate what a property is worth (between $X and $Y) via comparing comparable sales and that would be what’s called the “Market Value”.  Basically, it is what a buyer is willing to pay for and what a seller is willing to sell for at a particular point in time.

Say the Market Value for a home in Neighborhood A is $500,000 – $525,000.   For the most part, a home will sell for something within the Market Value range.

There are times (not common), however, when the sellers’ willingness to sell is lower than Market Value, say $490,000 and the buyer’s willingness to pay is lower than market value, say $490,000, and the home ends up selling for $490,000 (below Market Value).  So, the buyer may think that he/she got a great deal.  But if this happens multiple times in a particular neighborhood, the Market Value for comparable homes in that neighborhood will change to maybe $480,000 – $500,000 and if another buyer buys a comparable home for $485,000, it’s not a “great deal” anymore.  The buyer simply paid Market Value, what buyers and sellers were willing to close the deal at.

The message to buyers is that you can’t beat the market.  You buy the home at $490,000 thinking that you beat the market.  Other homes will use your sale as a comparable and price their home accordingly and will sell for around $490,000 and soon, $490,000 is not a “great deal”, it’s Market Value.

The message to sellers is the same.  If your home is worth $490,000 based on comparable sales.  Don’t think your home is worth $600,000.  It’s just not realistic to think someone will pay $600,000 for your home if it’s worth $490,000.  If an iPhone is worth $500, don’t think you can sell it for $750.  People just aren’t going to buy it for $750.  Some buyer who doesn’t know Market Value might pay $750 for the iPhone but that’s not common.  In real estate, buyers are not uninformed, and they hire professional Realtors who are definitely not uninformed.  If a house is worth $490,000, they’re not going to tell their buyer to pay $600,000.

One Caveat:  buying an iPhone is different from buying a home.  Homes often come in different shapes, sizes, floor plans, renovations, etc…  Market Value works for homes with comparable sales, but sometimes, there aren’t very good comparables.  If a home has particular rare features, then it can often sell at a premium.  Contact your Realtor to help you determine that.

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