Real Estate Bargains: Common Myths

So you’re looking for a home and you want a real bargain? You’re not interested in a fair price, or even a good price, you’re talking about a real steal, right? Join the crowd – there are a lot buyers out there just like you.

Reflecting on the Real Estate Markets

Unfortunately, bargain hunters have a number of misconceptions about the current real estate market. Today we’re going to examine a few of the surprisingly common myths.

Myth #1: You can get a great deal on a fully updated home.
There are two reasons why it is difficult to get a great deal on a fully updated home in Greater Hartford. The first is that most of our housing stock is older. Since we didn’t see a huge boom in new construction, the vast majority of “fully updated” homes are recently renovated older homes. They come on the market regularly, but are a small percentage of the active listings at any point in time.

The second reason why it is difficult to get a great deal is that buyer preference has shifted towards homes in move-in condition. Maybe it’s the fact that the real estate markets are no longer consistently rising, or maybe it’s all the HGTV shows in which everyone buys a fabulous home. All we know is that sweat equity is currently out of favor. Therefore our clients are competing against lots of other buyers when they try to bid on properties advertised as “New, new, new!” It’s difficult to negotiate aggressively when there is a lot of interest in a home.

Myth #2: You can get a better deal on For Sale By Owner properties.
Homeowners that sell their property on their own have a choice to make. They can use the money saved by not using (paying) a listing agent to price their home at a discount, making it more attractive versus their competition. Or they can price it at “full price” and try to net more money on the transaction. Most FSBO sellers try to make more money – they want to capture everything they save by not hiring a listing agent, not give it away to a buyer!

Myth #3: You can get a better deal by working directly with the listing agent.
Here are three facts to get us started:
1. Listing agents are hired to get the highest possible price for a home.
2. Sellers pay the same commission whether the buyer uses their own agent or not.
3. Listing agents have a fiduciary duty to represent their sellers’ best interests.

Listing agents know a lot about their sellers. In some cases they even know the amount the sellers hope to get for their home and the least they’ll accept. The line of thinking behind this myth is that listing agents are willing to undermine the negotiating position of their sellers in order to get a deal together and collect the double commission. Buyers who believe this are essentially assuming that the listing agent is unethical and untrustworthy. Naturally we disagree, but there is actually an even better argument against this line of thinking than drawing on our observations.

Let’s do a thought experiment. Suppose you’re a buyer and you believe that the listing agent for a particular property will give you “inside information” on the sellers. If the agent is willing to stab the sellers in the back to get a deal done, then how would you expect to be treated? Will the agent point out concerns about the property (rather than only playing up the positives)? Will the agent evaluate the price using all relevant comparable sales (rather than selectively choosing comps that support their price)? Will the agent vigorously protect your interests throughout the transaction (rather than try to convince you that with the “deal” you’re getting you shouldn’t expect X, Y, or Z)? If we assume that the agent doesn’t take their fiduciary duty to the sellers seriously, then it seems unlikely they will treat you fairly since they have no contractual obligation to you as an unrepresented buyer. Now who’s the sucker?

Myth #4: Discounts off of the original asking price, or cost, prove it’s a great deal.
Buyers are smarter than this when they sit down to really think. One way the problem shows up is when a home’s price has been lowered significantly from the original list price. Another is when the seller recently bought the home and claims to have put in thousands in upgrades. Every home price needs to be evaluated independently. It really doesn’t matter what the seller paid when they bought, how much they spent to improve it, or how much they were asking when it first came on the market. All that matters is how the home compares to other similar properties. Sometimes homes are priced realistically, other times they aren’t. Buyers, and their agents, need to understand what else is on the market and how they compare to the target property to truly understand the price.

The real estate industry is full of professionals looking for great deals. It is hard work and a full time job. Generally the best deals are only seen in hindsight – the buyer had what turned out to be the correct view on how the real estate market would evolve in the coming years.

To be continued … tomorrow we’ll share some ideas about how to put yourself in position to get the best deal possible.