Many first time home buyers these days are looking for great deals, and rightly should be. Depending on the market you are dealing with, you may be able to pay less for a house than it is actually worth. However, the most common mistake first time home buyers make, is judging a great deal based on price as opposed to value. What I mean by this, is often buyers make statements like, “If I can’t buy a house for 80 cents on the dollar, then I would never buy it”. If your desire is to get a great deal, then to pay 80% or less than fair market value may be a good strategy. However, for this to be valid, you want to compare the price your paying to the value NOT the asking price.
For instance, if your strategy is to offer 80% of the asking price when presenting an offer, this is how it could potentially play out. Lets say you find a house you like that is listed for $300,000. Based on the fact that its been on the market and needs some repairs, you employ your 80% tactic and offer $240,000. And guess what, the seller accepts! Hurray, you just paid 80 cents on the dollar!!!…But wait, what if based on similar properties that have recently sold in the area, the property is only worth $220,000?!?! You just potentially paid $20,000 more than you should have to purchase it at fair market value. Furthermore, you may have paid $64,000 more than you should have under your 80% rule.
On the other hand, what if you offered $240,000 for this property but were beat out by another buyer offering full price? On the surface you might say, “What a joker. They actually paid full price in this market??” But what if the property was actually underpriced by about 20% and the appraisal came back at $350,000? Would the buyer really have made a poor financial decision by offering full price? Of course not. Under this scenario they still would have purchased the property for 80% of fair market value.
In this market, there are still plenty of overpriced homes on the market. That being said, we have really started to see a transition of underpriced homes as well. This may be because of homeowners getting more realistic about what it takes to sell in this market, paired with more bank owned properties where the asset manager just wants to get the property off the banks books and therefore prices it accordingly. It is true, that at the end of the day a house is only worth what someone is willing to pay for it. But whatever the situation, it will probably fair better for you to consider the price your paying in comparison to market value as opposed to asking price. If you would like more information about buying a home in this current market, please go to our Calendar page and register for one of our FREE seminars.