As I show homes to my buyers, and as other buyers who are less savvy buy some of these homes, I see some pretty big mistakes being made by buyers who don’t know and aren’t being advised well. What am I talking about? If you’re a buyer, may I offer you some words of caution from 40 years in the business?
I’m not going to produce a laundry list of items here. I just want to highlight what I see happening a lot right now in this current market. We need to lay the foundation first to understand the mistake some buyers are making. The market in Sequim, Washington is like the market in a lot of places around the U.S. right now, so this has a wide application.
We’ve just come through several years of a strong seller’s market with prices increasing dramatically, and in an area with a small inventory like Sequim, basic supply and demand factors into the tremendous pressure on prices. Because this is one of the country’s most favored retirement areas, especially for Californians, and because retirees in their 50s and 60s have very similar ideas about what they want in a home, the ideal home was getting snatched off the market in a matter of days, and often with 6 to 24 competing offers.
As prices increased over these few years, and as inventory decreased, some buyers from California, where a basic 3 bedroom, 2 bath home without a water view was selling for $1 to $2 million, were offering $100,000 to $300,000 above listed price on a home in the Sequim area. Because many of these buyers felt so desperate, some of them were waiving all contingencies and paying in cash.
Now that you know the market conditions, let’s look at the big mistake. Buyers who are represented by Realtors who don’t care about protecting their clients, or who lack knowledge and experience, have made and are still making a big mistake.
The mistake some buyers are making even today is obvious once I articulate it, but it’s not obvious to buyers are are making this mistake. Here is the mistake in a simple narrative explanation:
They view a home that is 15 to 40 years old, or older, and without any depth of knowledge about construction quality, plumbing, electrical, bearing walls and remodeling, roofing, and without understanding the drainage around a home, moisture in the crawlspace, pest infestation in the crawlspace, and without knowledge about the threat of root systems growing into a septic drain field, and without an understanding of the private well depth and water flow and quality, and many other issues that will need to be addressed eventually at great expense to the buyer, they offer full price or above full price without taking into consideration all the money they will have to spend to get the home to where it should be. I am seeing California buyers especially who are paying full price for a home that will need $100,000 to $300,000 in work just to bring it up to a value equivalent to the current listed price.
Let me give you an example to make the point clear. Let’s say a home is listed at $800,000, and let’s say this 30 year old home needs $100,000 to $150,000 for repairs and remodeling just to make it worth $800,000 today. Logically, you would say, “Well that means a buyer’s reasonable offer would be in the neighborhood of $700,000, plus or minus,” to which I would say that is correct.
The problem in this current market for desperate buyers without the requisite knowledge and whom are depending on their buyers’ agents who are not protecting them, is that they are going to pay $100,000 above true FMV (fair market value) for a home like this. Add the fact that we are currently in a declining market and prices are headed downward, and where will that leave this kind of buyer in 6 to 12 months from now? I’ll tell you. If they pay $800,000 for this home, as soon as they close, it is worth only $700,000 in true fair market value or appraised value. But if prices continue to decline, and there is every reason to believe they will over the next year, this same home may end up with a FMV of $500,000 in a year or two.
Now you can see my point. They paid $800,000 for a home worth no more than $700,000 when they closed, and arguably less since we are in a declining market. In the longer decline, this same home eventually ends up with a FMV of only $500,000. Now add one more likely mistake. If they bought the home for $800,000, and they hire a contractor to do $100,000 in repair or remodeling work, their loss is even greater. They have a basis of $900,000 in a home that will be worth only $500,000 in 6 months to a year if I’m right about the decline. That’s a $400,000 loss in equity.
This is not a fictitious scenario. I am writing about this because I’m seeing buyers make mistakes like this all the time in this market. I cannot count the homes that have sold in the past 3 years in this same scenario.
As a buyer, you need to be informed about this market, and when it comes to making an offer on a home, you need a fairly substantial level of knowledge and understanding, not only about the home and property, but about values and making a reasonable offer. Either you have this knowledge yourself, or you team up with a buyer’s agent who does. Right? This is a unique market situation, and it’s made all the more difficult because there is a mass exodus from California of desperate buyers who just want to get settled down again.
Be cautious. Be patient. And as has been said elsewhere, “Surround yourself with wise counsel.”
Last Updated on December 7, 2022 by Chuck Marunde
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