Today's Buyer...Uninformed Bargain Shopper?

Don't take this title the wrong way, in my investment and investor services side of the business we are ALWAYS looking for a deal. Rule #1 One of my keys to successful real estate investing is you make your profit when you buy, not when you sell, so buying it right is paramount. However I think the key word in the phrase "Buying it Right" is right, and right is relative. What is right? I think the better question is...What is right for you? Ask any buyer now and you will probably hear, "I want a good deal, and from what I hear that mean a foreclosure, fixer upper, or a short sale." Obviously that is true in some regards, but definitely not always. Most people don't know how to evaluate the entire cost, and inherent risks, involved in these types of properties nor have the resources and skills required to deal with these risks and added costs. Even the most skilled and weathered investors get burned all the time. Let me present an actual scenario or two and outcomes, and offer a better scenario. Both are based on actual deals that I have participated in within the last 3 months.

Scenario #1:

A home that is the perfect starter home, first time buyer price range, that is in move in condition. This home was purchased by the owner a little over a year ago, and got a good deal, about $8,000 under value at the time. His personal situation changed and now he wants to sell it, but does not have to, nor is he under any financial stress to do so. Believe it or not, not everyone selling today is! So the home is listed at the current market value based on comparable sales in the area. A few months go by and only 1 lowball offer, several interested parties but only 1 on paper. The offer is 13% below listing price. I had a chance to talk to the potential buyers and they gave me this rationalization... "The market is down, 15-20% (which in my town it is not by the way, but according to the nightly news and Yahoo real estate it is apparently everywhere), they paid $X for it last year, the market is down so he would be crazy not to take this deal." "Also we think he should pay our closing cost, pay all the taxes for next year, and you should cut half of your commission since we don't want a Realtor to help us, we know what we are doing."

OK. Guess what I said?! (Those of you who know me can guess probably). Anyway since I am always doing what is in the best interest for the parties I represent, and I must by law, I presented the offer to my seller. Guess what he said? I quote, "Tell him that marijuana is illegal in Kentucky!" I guess he though the guy was stoned? Anyway as I analyze this I want to make three points. 1. I do not blame the potential buyers for trying. 2. I don't blame my sellers for rejecting. and 3. I think this illustrates the toughest issue today in real estate, a lack of realistic educated decisions which are tainted by a desperate-inaccurate-biased-media. (Oops did I say it again?). They were making their offer on inaccurate market conditions, and based solely on the price the seller paid for it, not what it was actually worth to them or anyone. This rationalization makes no sense, because it penalizes the current owner for getting a deal in the past, and if that same method is used when they want to sell it then they will lose money. It is absolutely an uneducated and informed decision, made by unrealistic uninformed buyers.

Better scenario #1:

Suppose the same situation had happened but each side, particularly the buyer, had accurate realistic information beforehand, and was making offers to fill their need in a realistic manner, based on realistic information and expectations. This involves "Ty's Theory of Relativity (my apologies to Einstein, this only took me a few minutes and it took him years to prove) UUB + US = NGDA$ or Unrealistic Uneducated Buyers + Unrealistic Uneducated Sellers = No Good Deal for Anyone. (i.e. $), in which the opposite creates the opposite effect = A Good Deal for Everyone!" I know that is a deep thought.....

So suppose the buyers looked at the decision this way...Knowing they want to buy a home, they want to take advantage of the lowest interest rates in years, tax credits for first time buyers, and want to be in that price range, and on that end of town, and that school district. Which in this case are all true. Suppose they had done their homework with accurate information on the market and home that fit their needs currently on the market. Wonder where they could get that, maybe here? Suppose they had looked at all of the homes that fit their needs in the area, and suppose they sit down and do a comparison and determine which home fits their needs best, then did research to determine what the actual value of that home is and make an offer based on that. When I say actual value that is the actual value or total picture of the entire purchase not just purchase price. Actual value takes into account the overall picture, not simply the purchase price.

To illustrate this I want to use another example, this time I made the mistake of not looking at the overall picture on a home I purchased for resale, and I simply looked at the purchase price not the overall deal. If I had followed my own advice I would likely have made another decision. I simply saw a home I could purchase at approximately 40% of the after repair value, and though how could I go wrong? Well after putting in an amount equal to the purchase price in repairs, I was left with a home that I had to rent instead of sell, because I had no room for profit when based on the comparable market.

So that leaves me to my final point, and point that I feel is missing in today's market. The idea that simply getting a home for a relativly low price, no matter what that idea is based on (hopefully more than the past purchase price that the potential buyers were using above), is not a good idea. They must look at the overall picture. Suppose they find a foreclosure or short sale that is 20% below the last purchase price and buy it. Is that a basis for a good deal? True they got it 20% below the last purchase price, but who is to say that the last owner didn't pay 40% too much? Not an unlikely scenario these days! Did they factor in the cost of getting this home into the perfect condition of other homes priced to the market and currently available? Carpet, paint, blinds, lighting, flooring, fence, roof, HVAC, .etc? Probably not. Well if not suddenly this great deal turns out to be a not so great deal, and a lot of unnecessary work. To illustrate that point I will offer one last real case scenario. A home that is 7 years old, in a great neighborhood, that is in the higher end of the first time buyer market price range. We spent significant time preparing the home to sell, and pricing the home in its actual value range. Move in ready perfect condition, and priced fairly. Two offers in 4 days, sold in 5. The buyers made an informed decision, their Realtor did a great job she knew the market, the true value, and they in turn made an informed decision, and a realistic offer was accepted and everyone got a fair good deal. That means everyone made some money, buyers, sellers, me, and their agent to. I would love to have more of those deals, so I am again posting my theory, this time it is the good side of the equation.... UUB / US = NGDA$ or Unrealistic Uneducated Buyers/Unrealistic Uneducated Sellers = No Good Deal for Anyone. (i.e. $)

IRB / IRS = RGDA$ or Informed Realistic Buyers + Informed Realistic Sellers = Really Good Deal for All. (i.e. $)

Now is this to say that buying a foreclosure, fixer upper, or short sale is never a good idea? NO!!! They are often good deals to be found there, but they are not simply good deals because they are fixer uppers, foreclosures, and short sales. When factoring in the cost of getting many of these properties up to the condition of non distressed homes the costs often equal or surpass the cost of buying one that needs no work or repair. All I am saying is that the entire picture and price must be calculated into the decision to buy or sell a home in today's market. Most importantly, in the words of Waylon and Willie, Realtors Don't Let Your Customers Grow up to Be uneducated uninformed Buyers or Sellers....and people please be an educated buyer, not a bargain shopper, stick to the yard sales for that... there are plenty of good deals to be had that are not foreclosures, fixer uppers, or short sales.