"Well...How Much Did The Current Owners Pay???"

By
Real Estate Agent with Coldwell Banker Residential

Buyers trying to make a decision about how much to offer on a home routinely want to know how much did the current owners pay.  Buyers want to offer a number that is based on how much the Sellers paid.  I wish Real Estate Market Value was that easy to calculate.  When was the last time you walked into Macy's and. before buying a pair of shoes, ask about the inventory cost.  Does it really matter to you how much Macy's paid to buy those shoes?  Or do you stand there, thinking about how much the shoes are priced, making a decision about how much the shoes are worth TO YOU!!! 

Unlike Consumer Retail items, there is no Keystone Markup for real estate.  That sure would make my life easier if there were!

In Texas, the actual sales information isn't always available.  Part of my due diligence in preparing to make an offer on a property is to see if I can get an answer to that question from either the tax records or the MLS data.  And, the actual sales amount can be kept out of MLS by agreement of the parties.  I tell that to agents from other states and they go "WHAT?????"  Welcome to Texas. 

Before my Buyer clients make an offer on a house, I sit alone in a room with a computer for a couple of hours and make a decision about how much I think the home is worth.  Part of that Due Diligence is to try and anticipate the Seller's position on our offer.  I do what I can to figure out what the Seller paid for the house as well as how much the Seller owes on the mortgage.  Then I calculate how much the Seller is going to have to pay to sell the property.  That number is going to give me an idea of where the Seller's absolute rock-bottom number is located.

For example, I had a Buyer recently make an offer on a flip.  The sales price was in MLS.  I know enough about rehab costs that I was able to do a down-and-dirty Guesstimate of how much it cost them to update the property.  The difference between that projected number and the list price less the cost of sale is how much profit the Rehabber wanted to make.  We were able to negotiate a great deal on the property, a number that was about 8% off list, 5% more than market.  When my Buyer decided to not go forward with the deal after inspections (another story for another day), we found out that the Seller had a full-price back-up offer.  That deal appraised and closed at full price.  So, a person might reasonably ask, which of the two possible sales prices was the right measure of Market Value.....The answer is that they both were.  Both.

Another example. I currently have a listing that is under contract with a back-up.  We have some concerns about the amount that an Appraiser will assign to the property.  Our price is supported by comparable sales in the area, but it is truly in the upper range of the comparable sales.  What I do with almost all my listings is to make sure that the Appraiser has a packet from me that explains our number.  Part of what I will be doing on the current listing is to make sure that the Appraiser understands that there are two buyers willing to pay our number.  I believe that is a truly great measure of Market Value.

 

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Topic:
Home Selling
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Texas
Groups:
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Buyer Information - What Buyers Need to Know in Today's Market
Advice for Sellers
Advice for Buyers
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appraisals
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Rainmaker
663,292
Kathy Stoltman
Rockwood Realty - Ventura, CA
Ventura County Real Estate Consultant 805-746-1793

Judith, I do get asked this question quite often.  The only time it may come into play is in the case of fix and flips when the market up maybe too high for certain lenders to loan on.  Otherwise, it makes no difference as you state.

Apr 12, 2013 03:21 AM #1
Rainmaker
744,870
Jeff Pearl
RE/MAX Distinctive / LIC in VA - Lovettsville, VA
Full Service Full Time Realtor

I suppose knowing price seller paid is useefaul at times, as long as it's not too old. I had a neighbor that wanted to buy one of my lot listings tell me " L know what the owner paid for the lot in 1978". So what. That has nothing to do with the current value of the land.

Apr 12, 2013 04:27 AM #2
Rainer
192,298
Judith Abbott
Coldwell Banker Residential - Dallas, TX

Kathy, my experience is that there is a broad spectrum of rules on fix-and-flips, depending on the lender.  I invested a fair amount of effort one afternoon trying to get someone to tell me what were the rules and how was I supposed to know if they had been changed.  I didn't get a coherent answer...

Jeff, thanks for the laugh...and the extreme case of why original sales price is totally irrelevant.  It would be reasonable to suggest that a reasonable measure of market value for that lot is to calculate how much the 1978 lot price would have become if invested in any other sort of investment...Another approach is to place the 1978 price into the context of the minimum wage at that time...and then convert the number to how many hours you would have to work to earn that amount at minimum wage.  To bring the 1978 number into the present, you just multiple the 1978 hours worked times the 2013 minimum wage...

Thanks for stopping by!

Apr 12, 2013 05:13 AM #3
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Rainer
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Judith Abbott

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