Beware of Overpaying For Home Features
When a real estate agent sits down with sellers to discuss the value of their home, the conversation inevitably turns to the home’s features — a spectacular view, a cool garage workspace or perhaps a one-of-a-kind garden.
While those features might be selling points, the truth is potential buyers may not value them nearly as much as the seller. That spectacular view may not be something buyers want to pay extra for. Some buyers will see the garage workspace as a liability. And while beautiful to the seller, that unique garden could look like a lot of maintenance to a buyer.
A home may go on the market with what real estate agents call “seller pricing,” which is based more on the seller’s perceived property value than on actual market conditions. Inevitably, after some time on the market, the price eventually gets reduced.
Here are three strategies — one for sellers, two for buyers — to avoid losing money on home upgrades.
Sellers: Test the waters — but not for long
You fell in love with your home’s view, garage or garden when you were a buyer. You’re convinced another buyer will love it too and won’t mind paying extra for it. But, your agent thinks otherwise.
Consider this: By pricing your home higher because of what you see as a special feature, you’re shrinking its potential market. Don’t want to risk it? Try listing at the higher price for a short period. If that view-fanatic buyer is out there, chances are he or she will appear early on and make an offer.
If you don’t get a good offer immediately, do a sharp price reduction and give the listing another life. Here’s why: If that buyer doesn’t materialize and six to eight weeks go by, you’re facing an unpleasant reality. Even if a view-loving buyer enters the market, he or she is unlikely to offer the price you want. Your property, having been for sale for a while, will be seen as “stale.”
Buyers: Don’t get emotionally attached
As the market continues picking up, stories of multiple offers are everywhere, in places such as Indianapolis, Raleigh, Sacramento and South Florida. With such little inventory, buyers are forced to compete for the limited goods. This competition, which we’ve seen before, creates a frenzy, causing some buyers to make an emotional purchase based on their attachment to a potential home, its features or location. This results in a quick increase in home values — what some might call a “bubble.”
Make no mistake: This is a great time to buy, especially if you have a down payment, a stable job and good credit, and you’re committed to the community for the next five years. In most areas, it’s cheaper to buy than rent. Just make sure to always think like a seller, not just a buyer, as you move ahead on a particular property. Weigh the potential market value of its amenities five years down the road, when you may turn around and sell. To achieve the maximum equity, try not to overpay for those features, either for competitive or emotional reasons.
Buyers: Think like a seller
In 2005, a buyer in San Francisco bought a home without a garage. A deeded garage can increase a home’s value in that city by $50,000 or more, but the buyer didn’t see the value in having his own garage. The house was on multiple transit lines, he used his bicycle for transportation, and he knew he’d have access to a leased garage space if he needed it. He was competing with a few buyers and ended up paying a little more than his competitors.
Fast forward three years and the market slowed. The buyer didn’t believe his home should be priced less than a comparable home with a deeded garage because his house was so centrally located. Plus, he had the leased garage space nearby. What he didn’t want to believe was that 25 percent of buyers commute to work and don’t want to risk having a leased garage space taken away later. They wouldn’t even look at his home’s photos online — let alone go to the open house — due to its lack of a garage.
This was a clear case in which the buyer failed to think like a seller. He didn’t anticipate issues he might face selling the property later. Don’t let yourself fall into that trap.