Just how important are comparable sales in the home selling process? In “Real Estate Principles,” the fundamental course for all real estate licensees, students are taught that market value is, “Whatever price a willing buyer and willing seller agree to, without the presence of duress” – duress meaning pressure from distress, divorce, job loss, health, etc. The duress component is a little ironic considering the effect of distressed sales in the market place. In fact there are markets where appraisers choose to completely ignore distressed sales because they are not comparable at all to the “regular” sales. Buyers of course are quick to point out every distressed sale when justifying a low-ball offer. So just how important are comps really?
When we experience a market in decline like we have just gone through, the low sale comps become an increasingly difficult current to swim against. Many times I have am able to justify my clients’ asking price or counter offer price by picking the comps that best support my value argument. Sellers invariably want to cherry pick comps to support an unrealistic asking price, and will always point to the “one” highest sale as proof of their argument for a higher valuation. So do sellers look at comps? You bet – sometimes.
Sometimes? What about when a market is changing? How do comps fit into an equation where the numbers are all over the place?
As a general rule I tell my clients that any offer that differs more than 10% from the asking price leaves virtually no where to go with negotiations. For a seller, 10% below asking represents a low-ball offer, even if the comps support it. This is an example of sellers who do not look at comps, or do and choose to ignore them. When I list a property I explain my “10% rule observation” to the seller and I usually get the “If I don’t ask for it, I can’t get it” argument or “the buyer is just going to negotiate anyway so I need to leave room to come down.” Then there’s the “But I NEED to net ‘X’ amount off this sale to live on or buy my next home” as if that has any relationship with the market value of their real estate. Many Realtors will give in to this seller’s price opinion just to get the listing, figuring after it doesn’t sell, they can get a price reduction to where it should have started all along. This is called “Buying the Listing”. Aside from the obvious, it creates a problem for a buyer who may legitimately want to the home, but is not going to over pay. Thus that buyer is left with two choices – write more than 10% off, a doomed approach especially on a new listing, or wait for the inevitable price reduction.
When I sit down with my buyers to write an offer we have the same discussion although the buyer doesn’t care about what the seller thinks, only what the comp-supported value is. So really the first part of the discussion has to focus on what kind of market are we in and is it clear cut? If we are truly in a transitional market, then the comps have to be adjusted p or down to reflect the changing market condition. If we can buy any one of a number of comparable properties (a buyer’s market), we are going to push for a lower price than the comps and the seller has little choice but accept our lower offer if they want to sell, because if they don’t we’ll go buy another property. However, if we are in the mode of waiting for something new to hit the market, the buyer must understand so must there be other buyers doing the same and therefore, the market may be more of a seller’s market, and that means we may have to pay above the comparable sales even if those comps are just a couple months old.
Here are three examples of offers I wrote for buyers this past week.
The first offer I wrote was for a very expensive home. We were told the seller wanted $3M. The highest sale of a similar or comparable home was $2.775M and noting had approached $3M in this neighborhood in 15 months; there had even been a model match (the exact same floorplan) that had just closed 2 weeks earlier for $2.6M – a solid 15% below this seller’s asking price. We went in using the comps to back-up and support our offer but the seller didn’t even respond. As I said before when you write for more than 10% off there really is nowhere to go. Still we came up to the high side of the comps and even added a little extra to motivate the seller to accept. But the seller argued that we’re in a changing market; that inventory is low, and that their home is worth even more than we’re offering – “the person who buys our house won’t be looking at the comps.” Uh, I’d like some of that Cool-Aid please because I don’t know any buyers who aren’t looking at the comps I said. Ultimately we let that property go, because a small premium is one thing but a 7.5% premium did not make sense, changing market or not, it’s not changing that much, not yet anyway.
The second offer I wrote was for an older property in a quality neighborhood. The home had just come on the market for $595K which seemed like a pretty good price given what else was available in this neighborhood at this time; that is until we looked at the comps. The comps showed the market value (even at a premium which my client was willing to pay because he liked the home) was around $530K. Uh-oh, more than 10% off asking price. The buyer likes the home but again wasn’t going to over pay and certainly not that much, so after considerable discussion and analysis we offered 9% off asking in the hopes the seller will have a reality check and come down. I also immediately checked with the buyer’s lender because I needed to know how quickly we could get an appraisal on the property since there are two nonrefundable out of pocket expenses a buyer must incur when buying a home: appraisal and inspection. In our area each cost about $500-$600. Normally, knowing the home is sound (which we learn by having an inspection), is usually the first thing we do before authorizing the lender to order the appraisal. However in this case, we have serious doubts the property will “make value” and we would then have to cancel since the seller would likely be unable or unwilling to come down to the appraised value because of how much they owe. Therefore,in this case knowing the condition of the property becomes secondary to whether we can finance this property.
The third offer is on a property listed for $539,000 and agent told us about how much she thought the seller might come down and while it was still a bit of a reach for the buyer, it was a really nice home with a beautiful pool and totally move in ready. Better to pay a little extra I argued, for turn-key home at 4% interest, than pay less but have to come up with thousands of dollars cash after closing to fix the place up. Then we looked at the comps. The comps suggest $490-515K is market value for this place; uh-oh again, almost 10% off, even in its really nice condition that’s a stretch. Now what? There are no comps that support the higher asking price, but there seems to be a shortage of homes on the market in this kind of condition. We’ve also been told, there’s another offer coming in today from someone else. So now we are to compete for a home that is overpriced? Yikes.
Back to the initial question, do the comps matter? The answer is yes but… only in so far they are a guide to market value but not a definition of market value, because in the end, market value is, just as the RE Principles suggest, “Whatever price a willing buyer and willing seller agree to, without the presence of duress”, and that is never more difficult to determine than in a transitional market.