WatchLong-time reader, first time poster. This site is great! I though this article was interesting...
Any thoughts on this guy's advice? The Philadelphia estate market is obviously different than CA, but encouraging people to make their first offer higher than the asking price seems very questionable to me.
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MickeyShea says
Heard that before.
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Anyone selling or who is bound to make a commission will always ask you to pay more money.
Do keep in mind that a counter offer is usually guaranteed to occur even if you bid higher. So you are much better off financially bidding under and meeting somewhere during negotiations.
If you start higher... you'll only go higher. There is absolutely no reason to start above the asking price, you'll just hurt your own negotiation buffer.
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46 male
Menlo Park, CA
Figure out what the house is really worth by estimating the total cost of owning it vs renting it over the typical holding period:
http://patrick.net/housing/calculator.php
Then do not bid above what the house is worth, ever.
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MickeyShea says
Yea, but the Phila realtors are using a page out of the CA realtors play book. Offer the property low to suck in the "sheep", then bid it up. At the end of the day, the realtors ONLY care about their commission!!!
The other piece of the equation is that there is ssoooo much "junk" and distressed crap out there that when a decent property that is beat up comes on the market that is priced right, the vultures swoop in... this happens only on a few properties, so don't get sucked into the "bidding war" hype!!
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Remember, a certified financial criminal gets a slice of whatever you pay when buying a house - making you a co-conspirator.
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Better yet, figure out what your going to pay over that life sentence loan vs. sticker price and then see if you could rent it out for 20% lower than the expected normal rents. Normal rent = $1000, future rent may decline to $800.
DOES IT CASH FLOW? Yes = buy. No = run away fast
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Patrick says
Well, doesnt that kinda depend upon where exactly the property is located?
For example, say I was looking at a 1/4 acre in midtown manhattan. Say too that the land had a shack, and I mean an absolute shit shack, the type of place that no reasonably sane person would pay over $1,000 a month for.
Thus, your calculators would say its worth $150K (or whatever.) Still, because of its location, people are falling over themselves, all willing to pay 20 million (or whatever) because they could put up a 70 story building and make a mint.
While my example is extreme, its applicable to any area where the land is valuable, but the dwelling is not appropriate to the intended end user. Also, im not saying this is the appropriate analysis in most cases. In many cases, were the land is basically fungible, yes rent/vs own is probably the way to go.
Still, wouldnt you agree that people (in these sorts of situations) strictly using your calculator, both would, (and should) get continously outbid?
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Philadelphia, PA
As a potential home buyer (for living long term and raising a family, not as an investment), it's frustrating to see such a low inventory of houses when I know full well about the backlog of foreclosures that the banks are holding off on releasing. How long will home prices stay artificially inflated? I'm hoping I'll see a surge in homes for sale soon with the 3 year anniversary of the Obama first time buyer tax credit upon us. I know quite a few people who "took advantage" of that tax credit and have been counting down the days until they're allowed to put their house up for sale.
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It's difficult to not be a glossy eyed first time buyer, even as I know you are "Patrick"educated. You think you will plant yourself down in that one spot. When we bought our first, so did we. We were feeling all grown up and responsible. We were now 'grown ups'.
But if you can't cash flow it, then in the event you will not want to stay the full term of family life, you will place stressful burden on yourselves. Change happens.
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46 male
Menlo Park, CA
Regarding comparing renting to buying:
CDon says
No, the rent to buy comparison does not depend on location at all, because the location is on the top and the bottom of the equation, so it cancels out.
CDon says
Nothing changes. If you buy it and build, what will your total costs be? Compare that to what you can rent the equivalent of your newly-built house for.
CDon says
Nope. They just have to compare apples to apples and it always works great.
If you get outbid by someone paying way above the cash-flow value of the house, the fact that they choose to lose money each month does not mean you should try to lose even more money each month by outbidding them.
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Palo Alto, CA
Common sense advice, really. It's only money, in this case only debt. I always bid higher than asking price at the car dealership and at the grocery store too. Especially at the grocery store. Every tomato, every apple is unique, even more so than real estate which is often mass produced or built from a kit.
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Patrick says
Respectfully, you are really missing the boat here.
OK different example, lets say the shitshack is located on 4 acres of oceanfront in malibu. And when I say shitshack, I mean like really wretched, a 600sf log cabin if you will. Again no sane person would ever want to pay more than $1,000 a month to occupy it. Thus your calculator spits out a value of $150k, (or whatever).
However, people are lining up around the block willing to pay 2 million (or whatever). They plan to demolish it, & put up a mansion, or they will subdivide it into 4 lots, etc. etc. Since these people have far more rights to build, subdivide, or do other things that a tenant cannot do, they will pay far more. This is so called "highest best use" in appraisers parlance.
Put another way, suppose you agreed that the 4 acres of raw land was worth 2 million. Are you trying to say that if it had the shitshack, (which could be demolished for 10K) on it, its suddenly worth "only" 150K?
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46 male
Menlo Park, CA
What we have here is a failure to communicate.
I'm just saying that you should compare renting to owning the same thing.
If the land is currently misused, that doesn't change anything.
CDon says
No, the rental value of the land remains pretty much constant.
If I agreed that the 4 acres is worth $2M, then that would be because I see that the rental value of the land is such that the annual rent divided by the current interest rate is about $2M.
Assuming it has the right building on it, meaning a building that you want to live in.
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MickeyShea says
I believe you will see the prices start downward again soon. Spring always gets a little bounce up with prices. By the time summer gets here, prices will continue with their downward spiral. Also, a bunch of new foreclosures will be coming "on-line" so the inventory will increase.
My advice, with the economy, jobs and Europe so volitile, I wouldn't be making the decision to buy and plant my ass in a house, unless you feel your job is VERY stable and you aren't planning on moving for a LONG time. I think you will be seeing house values drop another 20% to 30% or more before the dust settles....
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MickeyShea says
I bet many would LIKE to sell but I would guess many are underwater if they bought 3 years ago...
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Troll Hunter says
Ha ha, so true!! Sold my house last Fall, the guy that bought it was underwater even before his moving truck showed up to offload his furniture
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Call it Crazy says
Last Fall was the worst time to sale. It must have been a short sale then.
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MickeyShea says
If you know full well of the shadow inventory, why are you frustrated? Banks will have to release them eventually aren't they?
When you say artificially inflated, what price range are we talking about here? How much would something equivalent rent for?
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Ross, CA
Call it Crazy says
Yes, something similar happened to me once. I bought several thousand shares of AAPL @ $8.50 the day the markets opened after 9/11. I was underwater for almost 2 years with that boneheaded purchase!
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KILLERJANE says
Killer,
That certainly is one way of looking at it.
Just asking, are you a parent?
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E-man says
Unfortunately, it wasn't a short sale although I accepted a price $4K less than my asking price. Pulled out my equity and put it in my pocket instead of letting it evaporate away like all other homeowners are experiencing and will CONTINUE to experience!!
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Troll Hunter says
...and it's even worse time NOW to sell, but not for me!! I'm FREE of the liability!!
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@ B.A.C.A.H.
Yes.
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Killer,
Then as a parent, you can relate that people will do what they think is best for their kids, even if it doesn't pencil out with the cash flow.
Like, if they think it's best for their kids to overpay for access to a K-12 in The Fortress, they will do it. They may agree with you that it's a bad real estate investment. But they think it's a good investment for their next generation.
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MickeyShea says
They never went away... but they were never "real" to begin with.
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People can pay and live wherever they want, but you can accomplish a great education in many ways. There are many solutions. Tho, if you max out the mortgage payment which puts your financial future at risk and creates problems/pressure in your home life, that ain't a good way to be.
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killer, I don't disagree with you. Most of my colleagues live inside of The Fortress, "because of the schools". They could not be more wrong. But then again, it's hard to argue with two millenia of culture.
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B.A.C.A.H. says
yep.. its their culture... as wrong and screwy as it is. Eventually it will catch up with them.. this region is not so forgiven!
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Philadelphia, PA
E-man says
Yeah, I'm sure eventually these foreclosed homes will make it to the market, but it's taking a damn long time it seems.
There are homes in the western Philadelphia suburbs that are going for $500k that need a ton of work. A lot of the housing stock is so old, it's hard to imagine where prices will be 50 years from now. Renting a single-family home, while possible, is not very common outside of the city limits. I would estimate a single-family home in these pricey suburbs would go for about $2,500 a month.
If I decide to pull the trigger and buy something, there's no way I'm paying more than $300k.
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Baltimore, MD
We don't get a lot of commentary here on the Philadelphia market.
The city income tax would be enough to keep me from living there (inside the city limits).
Anyway, the job market there isn't so spectacular as to demand high prices for housing, so unless that changes, I would bid very low and bid often until I got what I want and paid what I wanted to for it.
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Philadelphia, PA
zzyzzx says
Don't even get me started on the city wage tax, haha. Thanks for your opinion. I have a coworker who also sells real estate sporadically for friends and family so at least I'll be going through the process with someone I can trust.