April 10, 2007, edited April 11, 2007
Myth #5: "Priced Right"
(c) View From Silicon Valley, 2007. All rights reserved.
Today's
myth is a term heard from real estate bulls and bears. Bullish agents (lately the seller's agent) continue to claim properties
which are "priced right" will sell quickly, even in a slow market. Bearish agents (or buyer's agents, if you will), are presumably
expected to explain when properties are not "priced right" given the current inventory levels, days-on-market, condition
of the house, curb appeal, prospective cash flow or whatever device you can get them to invent to get a lower price.
At
best, we submit "priced right" is used incorrectly. At anything less than its most-generous interpretation, "priced
right" is an artifice used by both seller's and buyer's agents to generate a commission.
We have recently found even
folks one think can be trusted in the real estate business have mis-guided notions on "priced right."
This
past weekend, Mike Shedlock posted a new report by Mike Morgan, which is normally of great interest. Mike Morgan is
a Florida-based realtor who seems to "get it." At risk of under-reporting the depth and breadth of this guy's activities,
he has taken the local county inspectors to task for shoddy permit inspections, is involved in a class action suite against
Lennar, among others, for shoddy workmanship and is emerging as a consultant to Wall Street types who want to understand actual
real estate conditions on the ground in the Naples, Florida area.
Normally, such a background would constitute a clear
and convincing case Mr. Morgan is one of the good guys. A realtor who adds value instead of just collecting a commission
for letting you access the MLS database. Somebody who helps prospective buyers see the "big picture."
Unfortunately,
there were a couple points in his weekend report, "Waiting for the Blood to Rise," which raised concern. This post
strongly suggests Mr. Morgan's "day job" is still just a real estate agent hustling to book a commission. (There's nothing
"wrong" with that, assuming everyone clearly understands the deal...)
We went back on Monday morning to try and copy
portions of his weekend post to make sure we quoted it accurately. Surprisingly, we found the following, verbatim
on Mike Shedlock's routinely-excellent web site.
"Mish Note:
Post removed. The reason it was unexpected is because
it well not meant for publication. There was a misunderstanding. When I received that post I thought it was OK to post it.
But Mike only wants me to post them if he specifically say so in his email to me because of paying clients."
All that
was left in a Google cache this morning was, "Quote of the Week from Someone that Matters - 'The buyers are on the sidelines
waiting for the blood to continue to rise.' - Carlos Fuentes, President of ..." The rest of the article was already
gone...
First of all, we begrudge nobody with a working, revenue-producing business model for a web site. (Doubly
so when said model does not include the Google ads to which we have resorted. ;=)
However, it was sobering to realize not only does Mr. Morgan
have a couple of opinions with which we strongly dis-agree but it seems he may not be giving his real estate clients
and his paying newsletter clients all the same information. (This is perfectly within his rights. We just think
people should be aware.)
We will be happy to publish Mr. Morgan's weekend piece in full, if anyone saved a copy from
a public source?
* * * * * *
* * * * * * *
To (finally) get to today's point, he started out describing
his work as a real estate agent for a couple relocating from New York. In short, they were first-time home buyers.
Their finances were described as a husband/truck driver and wife/office worker with a ~$12,500 down payment saved up.
They wanted to use this down payment towards a $250K property, which he seemed to imply was a stretch for their finances.
However, they believed the NAR pronouncements that "now is a great time to buy" and insisted on buying.
By they way,
a $237.5K mortgage at 6.5% is $1500 /month +RE taxes is $430 +insurance ~$125 = $2,055/month, implies:
$82,200+/year income
if their RE payment is limited to 30% of gross
$70,500 /year if limited to 35% -or-
$61,650 /year if limited to 40%.
A
7% mortgage implies:
$85,440 at 30%
$73,250 at 35%
$64,080 at 40%.
Our first complaint is, if I ever agree
to work with a real estate agent in the future, I would be extremely disappointed, even angry (maybe even "lawsuit"
angry) to learn he (or she) published a summary of personal disclosures from our professional relationship in a web site or
newsletter. Doubly so given the image Mr. Morgan projects as one the "good guys" in the real estate agent business.
Again
working from memory, Mr. Morgan helped them buy a house priced at $250K which the couple believed was a bargain since it was
down from $290K (and maybe a higher price before the $290K). Mr. Morgan then commented, as though it was a matter
of fact, the house would only be "worth" ~$210K within six months.
Our second complaint asks did he reveal
this "fact" to the buyers? (yes, according to Mike Morgan) If so, what did
they say? ("Morgan tried to talk them out of buying but they wanted to buy," per Mike Shedlock)
If he didn't clearly explain this "fact" to them, why not? (OK, maybe we can answer this last one, "Because there was
a commission on the table!") (he gave up the commission, according to Mish.)
Our
third complaint comes out of the the story Mr. Morgan went on to relate in which a couple was looking for a "steal."
After a long search process they allegedly found something Mr. Morgan, again very matter-of-fact, pronounced was "priced right."
"Priced
right" from whose perspective? If I'm a buyer in the extremely over-priced, over-inventoried and slow Florida market,
"priced right" can only mean it's less that what any of the genius flippers or "investors," or even the original buyers, paid
within the last four or five or six years.
Failing that test, we might compromise and agree "priced right" is a
point at which the property could rent out at a positive cash flow (at, or somewhat below, currently-available
rental rates). We would require some additional margin of error in this case since rents seem likely to move lower
before they move higher. (Classically 10% is a reasonable margin of safety but we might not be satisfied with such a
figure.)
BTW, the arithmetic on renting out a $250K house, using a generously-small 1% annual maintenance figure, works
out to:
$2,514 per month rent given a 6.5% mortgage
$2,605 per month assuming a 7.0% mortgage.
Mr. Morgan himself
would have to admit properties selling for much, much more than $250K in this area could be rented out for
several 100's of dollars per month less, even $1,000+ per month less, than these implied rents.
Unfortunately,
"priced right" in this context probably meant it was comparable to, or somewhat cheaper than, other current listings in the
same area. Excuse me, but since when does a 5% or 10%, or even 20%, reduction after 100%, and even 150%, price increases
in the space of two or three years mean a house is then "priced right"?
Conclusion:
There is no such thing as "priced right." It's an artifice invented by realtors to convince
you to go ahead and make a real estate transaction in spite of your mis-giving. (So that they can go ahead and collect
a commission).
If we ever do use a realtor again, and he or she ever uses the term
"priced right," this person will no longer be our realtor. (In the interest of full disclosure, we do not ever
again expect to participate in a real estate transcation where agents collect 5% or 6% just for doing a little leg- and
paper-work.)
