Everyone loves to get a deal. Nowhere is that more true than in the world of real estate, where the stakes are notably higher than clothing shopping at a mall sale. Retailers have known the lure of the bargain for decades. We have two full calendar days devoted to the concept: Black Friday and Cyber Monday. Some of those same retailers also have been known to employ the trick of an inflated “retail price” to make a “sale price” look more compelling.
Residential real estate deals are often measured in thousands, tens of thousands, hundreds of thousands, or even millions of dollars off the list price, depending on the market and type of home. Does paying below list price mean you actually got a “deal?” Does paying over list price mean you have been fleeced? Join me as we dive into those questions and some perspectives on what makes a good deal on a home purchase.
When it comes to buying or selling a home, sellers typically want as high a sales price as possible, and buyers usually want the opposite. At the time of this article, the real estate market in San Diego remains very competitive. Most buyers have been more concerned with getting an acceptance than with getting a deal. The sale-to-list price ratio is very high, meaning buyers are typically paying close to or above list price. That is pretty remarkable since many sellers are setting some pretty high list prices.
List prices and selling for below or above them make for some fascinating psychology. When I meet with a seller, I typically advise them on a suggested range for a list price. That suggested range is based partly on an analysis of comparable sales and partly based on my awareness of market conditions. My clients then ultimately set the list price. It’s rare they want to list for less than I suggest. And they sometimes want to list for more than I suggest.
That’s a fairly rational approach to setting the list price, but even with that approach, different agents may come up with completely different numbers. This is even more true on luxury listings in the $3M and up category. Value and what’s “comparable” gets a lot more subjective. A seller meeting with three different listing agents will likely wind up with three different suggested list prices. Sometimes the spread between those suggested list prices can be dramatic, again, especially on luxury properties.
There are also sellers that insist on listing their homes at an astronomical number. Often, these listings are from sellers with unrealistic expectations, a poor grasp of the market, or extreme bias on how great their home is (or, all of the above). In short, “list price” is not an objective, scientific number that somehow manages to perfectly divine the market value. Some list prices are high relative to market value and some are low.
A Hypothetical Tale of Two Homes
Let’s imagine two properties that are truly identical, desirable, and in equally great locations:
Seller 1 believes their home is probably worth $3M and lists for $2.9 to encourage strong interest. The home receives multiple offers and then sells for $3.2M.
Seller 2 believes their home is really worth $4M, not $3M. They list for $4M, sit on the market for months, reduce the price to $3.7, and then eventually sell for $3.2M.
Buyer 1 paid $300k over list.
Buyer 2 paid $500k under list.
Both home buyers got the exact same deal, but Buyer 1 probably is wondering if they overpaid. Buyer 2 is probably telling all their friends that they scored the deal of a lifetime paying $500k under list (after the home was already reduced, so more like $800k under list!)
What this example illustrates is that measuring success based on how much above or below list price was paid is an imperfect metric for assessing whether a property is a deal. Nonetheless, the psychology of list price is highly seductive, and most people love the feeling of getting a deal (myself included, for both me and the clients I represent). The easiest way to feel like you’re getting a deal is to pay below list.
Assessing Market Value
In past markets, being able to make an educated guess about what a new listing will sell for was more feasible. In the current market here in San Diego (mid-2022), it has become almost impossible. Some list prices seem incredibly high and still sell (sometimes even for above list). Some list prices seem reasonable and wind up sitting on the market a bit and then sell at or below list.
In more balanced markets, comparable sales could give a very good approximation of what a home might sell for. In hyper-competitive seller’s markets, comparable sales lose some of their power. A home will sell for whatever a potentially desperate buyer is willing to pay (and there are a lot of those in the marketplace, many that have made offers on countless homes and lost out). It’s a matter of time before we return to a more normal seller’s market where people pay more attention to comparable sales, but we’re not fully there yet in San Diego, as of June 2022.
When You Measure Whether You Got a Good Deal Can Determine If You Got a Good Deal
If you bought near the top of a market cycle and then sell after a price decline, did you get a bad deal? Or, was your timing just off? Historically in California, the longer you hold real estate, the more likely it is that it was a lucrative investment. Let’s walk through another hypothetical.
In San Diego, California, a buyer purchases a $1,000,000 home in 2006. The competition was fierce and the buyer rushed in with an offer $50,000 over the list price to quickly get an acceptance. The buyer’s friends said the buyer overpaid, especially since it was near the top of the market at that time. A short time later, the great recession hits. Just a few years after their purchase, the home the buyer spent over a million dollars on was now worth $750,000.
If our hypothetical homeowner decides to sell or has to sell at this point, most people would probably say they did not get a good deal. They “overpaid” for a home in a hot market, and then took a loss because of it.
But what if our homeowner didn’t have to sell in 2010 and instead kept the home until 2022? That same home in the San Diego market today would likely be worth over $2,000,000. The $50,000 the buyer paid over the list price is insignificant when looking at a home value that has more than doubled.
Neither the homeowner nor most people looking at the situation would say the buyer got a bad deal on their home. In fact, most would say they got an amazing deal. In both cases, the only difference between a bad deal and a good deal was how long the homeowner kept the home, and what the market did during that time.
If the first three rules of real estate are “location, location, location”, then the next three rules of real estate should be “timing, timing, timing.” That crucial timing refers not only to when you buy but also when you sell.
What ARE Good Metrics for Whether a Home Purchase Is a Good Deal?
The final advice when it comes to how to get a good deal on a house: focus less on what you’re paying above or below list price and more on the value of the house to you. That value can in part be relative to other comparable homes, but also how well the home fits your particular needs, wants, circumstances, lifestyle, and budget.
Several years ago I saw a modest listing sell for what I believed to be $100,000 to $200,000 above market value. This was at a time in the market when that kind of overbid was not the norm. There were multiple offers on the home, and this one particular buyer was at least $100,000 higher than the others.
The buyer was also related to the owners of the home next door. For this buyer, it was worth paying $100,000+ more than anyone else to ensure they could live next to their grandkids. I would guess they had no regrets about “overpaying” (at least not until their grandkids turned into teenagers)!
Although I don’t believe in a perfect home, some homes are going to check more of your boxes than others. Is the home you identified next to your work, in your ideal school district (if you have kids), designed in your favorite architectural style, perched with excellent views, near your favorite coffee shop, equipped with your favorite amenities, and situated with your best friends for neighbors? If so, stretching a bit more on your offer price might still be a great deal. If, on the other hand, the home is missing many of your key preferences, then paying 10% below list might still be a “bad deal.”
How to Get a Good Deal On a House
A good real estate agent can often help provide some perspective on the various pros and cons of a home. They can also help with reminders of criteria that are or should be important to you as you weigh your decision. Buying real estate is an emotional process for most people, and sometimes the emotions about getting a “deal” can lead to rushed or compromised decision-making.
It’s rarely worth sacrificing your essential requirements for a home just because a home seems like a deal. Don’t be afraid to invest in real estate that suits you best.
If you are considering buying or selling a home in San Diego and don’t already have an agent looking out for you, please reach out to me. Even if you are not in San Diego, I regularly refer people to outstanding Sotheby’s International Realty agents as a free courtesy. Our network encompasses 25,000 sales associates in 1,000 offices throughout 70+ countries. Please let me know if I might be able to assist you.