Homebuyers and home sellers's expectations often clash with harsh realities of the market when it comes to the nitty gritty ... selling price and offers.
Magical thinking and this crazy real estate market. What am I talking about? I have some examples.
The Home Sellers’ Magical Thinking
PREMISE: The house next door to mine sold last year for $1.1 million. It was smaller and there was only one house on the property. We have two houses and more square footage, therefore we should list ours for $1.2 million and get at least as much as that one.
FACTS: The house next door was small, but every detail was well designed and evoked a very emotional response. The landscaping was lush and serene, like a Zen retreat, a special relaxing haven in the midst of a harsh city.
The subject property lacked curb appeal and the landscaping was non-existent. Being a 2-unit income property, it is valued very differently and income properties are supposed to be valued on a formula based on its income. Historically low rents in a rent-controlled area do adversely affect the property’s value. That’s why vacant properties usually sell more quickly and at a higher price than ones that have been occupied by long-term tenants in a rent controlled area.
PREMISE: Why are these offers so low? I saw that a house sold just down this very street for over a hundred thousand more!
FACTS: There hasn’t been a sale this high on this street in over two years, and that one was a 5-bedroom, 3-bath redone Craftsman. This is a 2-bedroom, 1-bath home with a lot of view but no yard.
What am I saying? We don’t value our own property anything like a buyer or an appraiser will.
But sellers aren’t the only ones subject to magical thinking. In fact, homebuyers can really try to bend reality to suit their own agendas.
Homebuyers' Magical Thinking
PREMISE: Today, we have a Sellers' market that has actually been going strong for a good 6 years. Buyers are convinced that now is the time for what has gone up to come down, and down hard. We all remember the Great Recession, don’t we? In Northeast Los Angeles, we lost 40 to 50% of our average sales price in just 15 months. But buyers today have an even better fantasy: prices will fall to 2009 levels just long enough that they will be able to buy their dream home for a bargain price, then right after they close escrow, prices will rally back up to 2018 levels.
FACTS: Many facts belie this fantasy. Do those of you who were actually in the market in 2009 remember what the houses for sale were like? Many were distress sales, so forget about beautifully prepared homes, forget about pre-inspections, and forget about decent loans with low interest rates and 21-day closes. The loan process was so draconian only those who could prove they didn’t really need a loan could get one. Plus, even more properties were selling for cash than are today and most sellers rightly preferred cash sales over the obstacle course that was the loan process then. Owners who didn’t have to sell (such as owners who were not in trouble, owners who had pride of ownership and didn't have to deal with penny-pinching buyers who acted like their lovely home was just a piece of trash) just waited it out. What happens then? Low inventory and higher prices. This is known as unintended consequences.
There is a whiff of desperation in the air today ...
Sellers want to time the market for the highest possible sales price, and buyers worry that if they buy now, they will close escrow the day before the market crashes and they will be left owning an overpriced turkey. What happened to owning a home as a place to enjoy your life, raise your family, and do whatever you want without a landlord telling you that you can’t? Even if you buy your home at the height of the market, if you hold onto it long enough, it will increase in value. And if you look at the prices over time, a correction almost never takes prices down to previous lows. Even the overblown prices of 2006-2007 are not seen today:
So if you want to buy a nice house in a great neighborhood for a bargain price, you will most likely be leaving LA.