It’s natural for home buyers to be leery about paying too much. Since the beginning of time, sellers have always pushed for a higher price, and buyers want to pay less. It’s the primary reason why agents have a job.
But the market’s recent resurgence has seen many buyers gladly pay full price – and higher. The more-conservative buyers are reluctant to participate in such folly, yet the folks who got in to their house 12-18 months ago are thanking their lucky stars. They probably paid what seemed to be a premium then – but now their house is worth more.
I’m going to do my best to get you a great price. But if you are in for the long haul, don’t let a couple of percentage points stop you. Add a little mustard to your offer price, and get it done!
How to Justify Paying a Premium Price
Only pay a premium price for a premium product. If the home has obvious defects in condition, location, or suitability, then reject, rather than paying retail, or retail-plus.
Timing is everything. With low inventory, you may not get another chance for weeks or months. If you don’t have flexibility in your schedule, then make sure you get the next premium house that hits the market.
Know the value of upgrades. Have a keen sense about the cost of upgrades, so you can pay the right price for an premium product – or know how much it will cost to upgrade a plain-jane.
Sniff Test/Days on Market. After a few weeks on the market, the only way a seller can justify his high list price is that the market is catching up with him, which is verifiable. Otherwise, just say no – at least for now.
Just cap it to 5% or less. If you have to pay more than you think it is worth, try to keep the price paid to under 105% of its actual value. The appraisers will live with that, and so will the bank’s underwriter – there is wiggle room.
Wait for market downturn. No problem, it could happen. But sellers won’t be convinced until 1-2 years into a decline or flattening, and the premium homes will be the last to feel it. Get your easy chair and popcorn.
People have more horsepower than you. People with more money are throwing it around, and the competition has been fierce. Your best hope is to out-smart them, so be crafty.
Money isn’t everything. Based on how fast prices have gone up, it appears that buyers think there are more important things than their money. Real estate is becoming a highly-valued asset due to the intrinsic value – shelter in which to raise a family.
Never pay more than you are comfortable paying. But with tight inventory and low rates, know that sellers are going to keep pushing higher, and many less sophisticated buyers and agents are going to jump – especially at the good ones.
Get good help!
• Investigate whether the asking price is too low before calling an over offer a premium.
• Examine the risk of rising interest rates negating a lower future purchase price.
RE: higher rates – especially with the lag time between higher rates and sellers being willing to reflect them in their pricing.
There is a new variable going forward that we have never had before. We’re done with foreclosures as a general policy – you don’t have to pay your payments if you don’t want to, which is going to gum up the inventory flow.
As I was saying 6 years ago………….all those QE dollars HAVE to go somewhere and where they are going is to increase the inflation rate. 5% on a house price may seem a lot now but in 5 years you will be laughing at those who did not take today’s opportunity. Remember real estate is a HARD asset.Ask your parents how much they paid for the old homestead 15 years ago and be astonished.
In addition, after a few years, people don’t remember the exact price they paid for the house.
$315K in 1996 🙂
I was going to add, “except for engineers”, but then I looked you up.
$305,000 in 1995!
Oh yeah…..$315 is what they countered with and we went back one more time and got $305. They weren’t happy – that much I do remember!
Jim, your first point is the most important one. Paying a premium for a premium asset pays off more often than not.
I deal with a lot of country properties, one thing that makes a premium property is the quality of the well.
Not the flow, necessarily, but how long and how consistently it has produced.
It’s a big issue and with a third dry year it’s going to get bigger.
I just don’t see how real estate is a good inflationary hedge. There’s certainly pockets of premium real estate that will likely beat inflation, but I’m not sure that pocket includes everything in North County Coastal.
Most people still buy real estate using 5-10x leverage and pay for it using a significant portion of their income (30% gross). Higher inflation means higher interest rates because nobody is going to intentionally loan you money at a lost. So 5% inflation means at least 7-8% interest rates. We also know that in the last 20 years wages haven’t kept up with inflation so it’s unlikely that wage growth is going to beat inflation. So in the equation of principle * interest rate / amortization schedule = 30% * gross income I just don’t see where the money comes from to drive real estate at a rate greater than inflation. Either wages have to rise significantly faster than inflation to make up for the higher interest rate or the amount of gross income you spend on housing has to rise significantly higher (i.e. 50% gross income instead of 30%). You have to make the math work to support your theory.
Wealthy empty nesters from the east coast buying your beach front condo/cottage yeah I can see that. Buying your 4,000 SF CV home because of the great schools, uh not so much.
Here are some inflation vs SD real estate charts. My personal feeling is that over the long hual RE follows inflation pretty well if you ignore the bubbles and dips.
http://www.aboutinflation.com/glossary/real-estate/us-real-estate-index-long-term-charts/us-real-estate-index-long-term-chart-ca-san-diego