He was a young doctor with a new job.
Anxious to move to the next community, he hurriedly purchased a ranch house, paying nearly what the seller asked. Only after the papers were signed did it dawn on him that he’d paid $20,000 too much.
Overpaying cost the doctor dearly, both in money and aggravation.
A few years later, when it came time to move again, he had no hope of recovering his investment through a sale. So he wound up having to turn the house into a rental unit, an outcome he didn’t relish.
“The big message is that people don’t lose money when they sell; they lose money when they buy,” says Tom Hathaway, president of The Buyer’s Agent Inc., a realty chain focused solely on representation of buyers.
The doctor’s problem was that he rushed into a purchase without giving serious attention to price, says Hathaway, who knew the seller in the deal. Without having looked at other properties, the doctor lacked a frame of reference.
“Buying a house is like a great many other things people buy; they should shop by comparison,” he says.
Gaining a context for your home purchase may be as simple as stopping by a few open houses in the neighborhood. Or it may be as elaborate as commissioning a formal appraisal.
In failing to focus on price, the young doctor was different from most of today’s home shoppers, says Hathaway, whose company oversees 51 franchise offices in 26 states.
These days most buyers are preoccupied with the issue of equity, as well they should be in an era of low inflation when home values in most areas are flat or rising slowly and you can’t count on appreciation to bail you out of a bad deal.
“If you overpay, then the other guy’s liability becomes your liability,” Hathaway notes.
Are you determined to avoid the kind of buying error committed by the young doctor? Then these suggestions could have merit to you:
– Invest your time when you purchase a home.
Why spend just five hours buying a house and then another half-decade regretting your purchase?
“When people overpay, 9 times out of 10 it’s because they were under pressure to buy something quickly,” says Monte Helme, a vice president for Century 21 Real Estate Corp.
A transferee, who has just moved to town, may be vulnerable to time pressures, for instance. And those involved in some personal calamity, such as a divorce, may also make a hasty decision and wind up overpaying.
– Ask your agent to give you “comps” on any house you’re seriously considering. “Comp” is the realty business’s nickname for “comparable property.” This is a home similar to the one you’re considering that is now for sale or has recently sold.
Before you make an offer on a home, you should examine computer printouts on at least three like properties. In addition, you should attempt to personally visit a few other homes in the neighborhood to get a feel for local values.
– Take special care if the property you’re buying is located in an older neighborhood with a wide assortment of homes.
Comparisons on value are relatively easy in brand-new communities when properties are freshly minted and the builder is offering just a few models, Helme notes.
But older communities can be far more diverse in housing styles, with many properties customized to owners’ tastes. It’s not always easy to compare two properties, one with a small family room added on and the other with no family room at all.
In areas with many custom homes, there’s no statistical substitute for seeing the other houses with your own eyes, Helme says. “You shouldn’t put your total trust in a computer-based comparable.”
– Don’t always take prices on “comparable homes” at face value.
It’s worth investigating why one neighboring property may have sold for an unusually low or high price.
A house may have sold for a price below market by an owner under duress who wants a quick sale due to financial pressures or other turmoil in his personal life. Corporate owners may also liquidate at a low price to get a property off their books.
At the other end of the spectrum, a property may have commanded what seems to be a high price because several seller concessions were factored in. The seller may have picked up many of the buyer’s closing costs, for instance.
– Be suspicious of any home on the market for more than six months.
Very often a house that lingers on the market for a long time is overpriced, at least relative to current market conditions, says Hathaway.
Granted, when demand for housing dips in an area, prices can slip and selling times can expand. Still, properties that go unsold for a number of months are probably overpriced relative to the current realities or were overpriced when they first hit the market and have since become shopworn.
– Be especially careful not to overpay for a property that has just gone up for sale.
Very often, a seller will “test the market” with a high price in the early weeks of his listing, on the theory that he can always drop the price. Because this is the period when the most attention is lavished on the house, a buyer can get caught up in the feeling that he’s in competition with other potential bidders.
But don’t be hurried until you’re satisfied on the question of the property’s value, says Helme. “You don’t ever want to rush into anything so fast that you haven’t had a chance to check it out thoroughly.”
– Consider hiring an independent appraiser to give you a reading on value.
Granted, you’ll spend $200 to $500 to engage the services of an independent appraiser. But the fee could be well worth it, especially if you’re seriously considering a hard-to-value property or an upper-end home where a mistake on price could translate into a serious financial setback.
