What is My Home Worth?
Now, I will be the first to admit, when you are Investing in your own homes, either as a flip possibility, or as a wholesale deal; you always come up with the concept of pricing real estate.
If you are a newer Investor, determining how much a house is worth, much less how much is my home worth, you have a ton of resources!
You could use fancy, expensive calculators. Or, you could go on the Internet and determine what homes are worth by using formulas that no longer serve you!
How to Accurately Determine Price
In my nearly 19 years of buying and selling real estate; both as a Realtor®/Broker as well as a personal investor has taught me a few principles about real estate pricing and home values.
I’ve discovered along my way, three “Rules of Thumb” that many people are taught to determine price.
- “Price per Square Foot.”
- “After Repaired Value”
- “Maximum Allowable Offer”
Why Price Per Square Foot Sucks…
It’s true… you need some place to start when determining your sales price, or an accurate price to offer.
While pricing strategy is critical to selling your home by owner, it isn’t the only factor when selling your home.
Price per square foot will not accurately predict a proper sales price. All Realtors® inherently know this, yet this salient fact is apparently unknown to the regular purchasing public.
In fact, price per square foot is so inaccurate, that it cannot adequately predict not only sales price, but an accurate asking price.
If a home has been sold in a subdivision that has 1200 square feet and 3 bedrooms with 2 baths… and suppose it sells for a lower price of $100,000. You could make several assumptions based on the why it sold.
A lower price could mean repairs were necessary, or the Seller needed to sell quickly. There are so many factors, it is virtually impossible to know what caused a lower price.
What is known however, is that this is now your new comparable.
Does this therefore mean that the really nice, well maintained 3/2 bath 1200 sf home should sell at exactly the same price?
Of course not.
Why ARV and MAO Suck…
Ok, so let’s cut to the chase. One of the biggest “eye-openers” of new practitioners to The Red Pill Sales System is my insistence that complete reliance upon ANY formulaic approach to pricing is a recipe for disaster.
I’ve just seen way too many of my Coaching Clients, Premium Podcast Plus members using my ideas and having immense success.
The reason why After Repaired Value and Maximum Allowable Offer are insufficient pricing models for the modern day practitioner is because they are completely dependent upon subjective observation.
Value Is In The Eye Of the Beholder
No matter how you try to price a home, in the end, a Buyer will disagree. Let’s suppose you say the property’s After Repaired Value is 100k.
That is based on your subjective interpretation of the available comparables.
The problem comes with the interpretation. No matter how accurate your comparables may be, in the end, it is only worth what the end use buyer is willing to pay.
Your entire pricing strategy (when using MAO Theory) is based upon your interpretation of limited data.
This becomes clearly obvious when you see properties in your area selling for prices that you cannot explain. If you have been in the business for more than a week, you know that many times, you will come across a potential lead, you will make an offer based on MAO, they refuse…
Then some other guy offers more… and gets the deal done.
And you see it. Damn!!
“Barbie” Vs. “American Girl” Doll
When pricing property, I like to think of it in terms of a Barbie Vs. American Girl Doll.
If you have children, chances are that you are accustomed to the conversations you have about Christmas or some holiday. When you ask a child what they want for Christmas in June.. the sky is the limit!
If you ask a little girl, chances are.. in June.. if you ask her what she wants for Christmas… she may say “An American Girl Doll”. These dolls are extremely popular with little girls as they are individualized and personalized in many ways.
This conversation could even include the child being very specific about what she would want in this doll. “Brown hair, the brush, the bed set, and the doll named “Saige” is the one I want!”
It’s the same way when you are talking to a potential home buyer. No matter if they are a Rehabber, a Retail Buyer, or any other potential purchaser, they all say what they ideally would like at Christmas.. (Closing a deal)
However, if at Christmas time, I bring home a Barbie Doll, if the child is grateful, and would like a doll, she will take it even if it isn’t what she wants.
Critical Buyer Psychology
Now, it would be impossible for me in under 2000 words to describe a lifetime of experience in reading comparables, adjusting for various differences (carports, garages, and air conditioning) as well as the other nuances it takes to learn pricing in your area.
Don’t kid yourself. There are absolutely no shortcuts to real success in life, or real estate.
You must know your market.
However, it is helpful in pricing property to understand a few critical points when it comes to the end use buyer and their belief in price.
The biggest mistake I see newer Investors and Realtors® making is assuming that all buyers are the same.
This mistake is so prevalent, pernicious, and yet remains un-taught to the Investing community at large. Failure to recognize this fundamental truth is the primary cause for failure in most Realtors® and Investors.
Let me repeat, because it is that important. Failure to recognize that all buyers are not the same, nor think the same… results in the death of countless otherwise successful real estate careers.
Different Types of Buyers
Just like there are different types of people in real estate (Realtors®, Real Estate Agents, Rehabers, Wholesalers, Buy and Hold, etc) there are different classes of buyers.
- “REI Club” Buyer. This buyer generally attends REI meetings, local associations, etc. Many times, they are rigidly attached to the belief that a home must conform to MAO Theory in order to be “a deal.”
- “House Hacker”. This buyer is looking to purchase for him/herself; live in while they repair, and then eventually rent it out as their first rental. They generally are looking for “a deal.” Again, a very subjective term.
- “Retail Buyer” This particular buyer is generally using bank financing, or even private funds. An example of this could be a first time homebuyer, or even a college student who’s parents are buying for them. Again… they are unfamiliar with MAO Theory, and look for “deals”.
- “MLS Buyer” This buyer relies heavily on the advice of their agent, who will many times, rely on MLS comparables. Their agent will tell them what price will make the house “a Deal”. It is interesting to note that they do this without any knowledge of MAO Theory. (*Coincidentally, Agents are not taught ARV or MAO Theory.. only Wholesalers are taught that.. hmmmm)
- “MLS Agents” Agents are great buyers! Waiving commissions for personal purchases increases their buying power. Additionally, they do not consider ARV or MAO as they haven’t been taught what it is. They are looking for “a deal.”
- “Rehabber” Heavy dependence upon MAO Theory. In order to do quick calculations of ROUGH estimates of where you need to be? Assume 55% of value. If you get a house that is worth approximately 100k or so (again, subjectively speaking), and you get it at 55%, then duh… It’s probably a deal.. (again, not that much different than ARV/MAO)
- “Buy and Hold” Dependent upon the buyer themselves. If they are a typical “Real Estate Investment Club Buyer” then they will undoubtedly look heavily on the ARV/MAO Model. However, not all “Buy and Hold” buyers are REI Investors! Many times they are just wanting to buy their first, and are again… looking for a deal.
What Do They Want?
After 19 years of this business… hundreds of homes, thousands of customers and clients, I’ve discovered one thing.
Everyone wants “a good deal.”
It’s when we as practitioners try to quantify “what a deal is” is where we begin to run into problems.
We overlook obvious motivation, and ability and say “no” to deals because they may not “fit” into a box that we want to place them into.
There again rises the ugly problem of taking contracts and being unable to sell them. You don’t want to be “that guy” who has the reputation of having overpriced, and unsaleable homes.
You know if you are that guy when you call people to tell them about “your deal” and they don’t call you back!
If your buyers are lackluster, and do not respond, then you have a serious problem!
Building a Responsive Buyer List
One of the best things you can do to build a responsive buyers list is to have real deals.
I know that it is common for “Blue Pill Guru’s” to teach MAO Theory, as well as your need to “build a buyer’s list.”
However, this is precisely why you are having problems!
You build a “Christmas List” of “Rehabber Buyers” who only buy from MAO Theory….
See the problem?
Expand your buyer list, your opportunities expand! Some people are happy with a Barbie doll.. it doesn’t have to be American Girl… Likewise, when you have rehabbers with crews who aren’t doing anything, and no projects… sometimes a “less than pretty” deal will do.
But to build a responsive buyer list means that you need to change the way you approach business! You must control the motivated inventory!
Motivation More Important Than Price
So to solve the pricing problem you face, when trying to determine what your investment property is worth, there are several factors to consider.
Clearly, you need to have all the available information possible for the area. This would include other potential comparable homes for sale, recent solds, as well as any other relevant information such as statistics, upcoming construction, etc.
However, when it comes to determining what price you should offer for a property, even when selling, you must understand that motivation is more important than price.
It goes without saying that equity is the ultimate factor in determining the lengths to which a homeowner can sell their home. However, short of that, it is merely a question of motivation.
Value Vs. Price.
Many times, you cannot affect the price of something. It simply is a deal, or it isn’t. However, if it isn’t a deal at this time; that does not disqualify it from becoming a “deal in the future.”
Countless times, I’ve “added value” to the transaction in order to persuade a otherwise unwilling Seller to sign the contract on a price that was less than they wanted. I’ve offered to have personal items removed, allowed them to stay after closing, and numerous other incentives.
By adding value to your offer, your “price” becomes more “a good deal” subjectively. Remember, it’s not always about price!
With Buyers, the same is true. While you cannot reduce the price many times because of your position in the contract or equity position; you can still add value to the proposition with incentives.
By offering to pay Buyer Closing costs (Retail Buyers), paying off a portion of the buyer’s credit cards (Again, Retail Buyer), offering services like membership to clubs, or other services that are pre-paid can all increase the perceived value of your deal.
It Just Makes Sense
In conclusion, as you can see, a majority of the “buying public” is unaware of the conventional methods of determining value. They determine value in very subjective ways.. rarely objective ones.
It certainly makes sense that people will begin in logic, looking for comparables, and trying to determine price.
However, when making the actual purchase, many more factors play into their ultimate emotional decision to purchase. (again, I recognize for the “rehabber” it is all about numbers.. but he/she isn’t the only buyer out there!)
It just makes sense to take control of the motivated Seller Inventory if you are a wholesaler.
If you are trying to sell your deal, then it is helpful to understand the end use buyer motivations to help you accurately determine a pricing strategy when purchasing.
Hopefully, you have found this of value! I’d like to hear your opinion on Pricing!
Have a Powerful Sales Day!