The $975 Per Square Foot False Alarm

A couple of weeks ago, Joe and I toured a 720 SF house while it was on the market. He wasn’t a fan of the outdated plumbing and I hated that the washer and dryer are in an exterior closet. Still, it was undeniably adorable.

Last Sunday, I noticed that the house had sold for $702,000! I spent the evening feeling out of sorts. Doesn’t it seem wrong for so little space to cost so much?

Monday morning, Ted and I toured a couple of $1.3 million homes, which suddenly looked like amazing bargains.

As it turns out, the high-priced shocker was just a data entry error. The listing agent retracted the $702K price. The house is under contract, but the sale hasn’t closed. (8/23 update: it sold for $512,500.)

All this drama reminded me of a recent workshop where an appraiser came to talk to our office about market value. As Realtors, we’re used to sifting through large numbers of offers for popular homes. In these cases, prospective buyers fall into 3 categories:

1. Optimistic bargain hunters will make super low offers that sellers will scoff at. Still, their mere presence fires up the competition.

2. The majority of hopefuls will submit offers that fall within a relatively narrow price range.  This is because everyone comes to an inevitable consensus after carefully studying the same list of recent sales nearby.

3.  And finally, the wildcards. These folks want the house at whatever cost and they have the resources to outbid everyone else. When multiple wildcards get into a bidding war, it’s not at all inconceivable that a 720 SF house could get not one, but several, $700K offers.

If you, as a seller, are in this fortunate situation, your Realtor will now try to convince the buyer’s appraiser that $700K obviously reflects the market value, as that’s what multiple parties are willing to pay.

However, as our appraiser friend pointed out, banks are not in the business of betting on unknowns. In the worst case, if the loan goes bad, they would be stuck trying to resell the property. Unfortunately, during any given sale, no one can predict how many “whatever it takes” buyers will come through. So to play it safe, they wouldn’t want to lend beyond the #2 range. This is why prospective borrowers end up getting dreaded low appraisals.

But because many #3 buyers have the ability to pay cash, or increase their down payment when they aren’t able to borrow as much as expected, most crazy sales do close at “whatever it takes” prices. This means the next wave of buyers will base their offers on higher reference points. I am relieved that for now, $700K won’t come up as a sale comp for 700 SF homes.

Posted on August 15, 2017 at 9:37 pm
Isabel Wang | Category: Uncategorized

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