One of the most interesting phenomenon in Real Estate today is the transformation a property goes through from the time a person buys it and when they sell it. And no, I'm not talking about the painting, new fence and all of the typical things like that. Quite the contrary. What I am referring to is the fact that when a person buys a home, in their opinion the home isn't worth much. Sometime later, however, it's worth gold when they decide to sell it.
It's crazy but I see it every day, and recently, I've even experienced it even more so. Now don't get me wrong, everyone who owns a home and decides to sell it has every right to do so for whatever price they choose, whether that be one dollar, ten million dollars or some amount in between. However, the reality that no one is going to PAY what a person thinks their home is worth is the reality that matters.
So here's the deal: In a standard homebuilder type home where a developer has a number of lots then sells those lots off to several homebuilders, the home prices are very predictable and easily determined. The standard home in a neighborhood may by three or four bedrooms, close to a standard square footage, all the lot sizes are the same, etc. All of this similarity allows for "comps" that are very reliable.
For a home that isn't located in a neighborhood with loads of common characteristics, such as a home with acreage, a home that has been modified with add ons etc., the ability to determine a true market is next to impossible. It's in these cases that we see frogs get kissed!
In these non-traditional home situations, I find that people tend to buy a home and pay as little for it as possible, usually after a home has sat for sale for some amount of time. However, when it comes time for them to sell that very same house, all of a sudden it is worth top "market value" or even higher. In a sense, the homeowners have kissed the frog and turned it into a prince.
Typically, "prince" prices don't sell, "frog" prices do. That's a hard reality if you are the one who bought the frog and kissed it. But, nonetheless, it is reality. So then does that mean a home can never be sold for a profit? Not at all. In fact, adding a "fair profit" above and beyond the cost basis for the home or property is EXACTLY how you sell a frog.
Maybe you're thinking "Well my home has a certain market value." And it does, but most times, no one is willing to pay "market value" on these homes. Why? Because these homes are typically priced well above the average home or property price in any given area. For example, in Frisco, Texas, a standard home value may be $550K, but a property with acres that isn't in a standard Frisco neighborhood may be $2.2 Million. Your market for a $550K home is fairly large. Your market of buyers for a home over $2M is tiny.
The market of buyers in the higher price ranges (and in reality, this range is currently anything above about 1 Million) is not only super small, but they also have to WANT and LOVE what you have in your frog. What I mean is that the layout has to work, the location has to be right, the design, features etc. all have to work for them. Think of it like this, if you have 50 buyers, maybe 5 of them will love your home. If you have 3 buyers, most likely none of them will love your home. It's a pure numbers game.
So what ends up happening to frogs that are priced like princes is they just sit there and camp, like forever. Pretty soon there is an established history of the home (or property) sitting and not selling so people start to wonder what's wrong with it, why doesn't anyone want it? It's called market wear and its a real prince killer.
As I said, there is a way to sell a home that is a non traditional property with a limited buyers market. The idea is to use "cost basis." Start with what you paid for a home or property. Next, add the cost of all of the true "value add" things you've done to the property. What is value add? It's things that truly add to the bottom line value of a home, or improvements that 90% of average buyers would want added to the home or property. For example, adding a pool where there wasn't one before would be a value add. Installing an outdoor kitchen would also be a value add. Replacing a fence, painting (even the entire home) wouldn't be, putting on a new roof would also not be a value add.
In essence, anything that truly adds value to a home or property as considered from most homebuyers is what you should add to the price you paid for a home in this cost basis approach. Things that you do that are unique to your tastes or situation (like adding a 10 car garage, putting in a Koi pond or a meditation garden, etc. are not value add items because "most" buyers would not want that or need it.
Now, back to our cost basis concept. Start with the original purchase price, add the true value add items then add a nominal profit for yourself. What is the amount of profit? This is a variable that you will have to determine as there is no set scale for it or equation for determining it. You'll have to determine a number that is fair and that most people will accept. Again, no value you place on your home is the right value if no one wants to pay that for it.
You should consider things like how long you've owned the home and such when determining that fair profit number. For homes that have been owned for less than seven years, a 25 percent "profit" based on the original purchase price is close, but may need to push lower depending on the market. It is possible for that number to be pushed higher as well, but that is an exception, not the rule and certainly not how it usually goes. For example, a $1M original purchase price should probably bring a mark up of $250K for profit. A $750K home would bring a $187K profit number to add.
Beyond getting market worn and creating a real negative marketplace perception for your property (which equals no sale) you also have the sad reality that you will continue to pay property taxes, insurance, utilities, upkeep and a mortgage payment (if you have one) on a home that doesn't sell; all the while, risking a catastrophic loss at the property (flood, fire, wind damage, freeze) that will really make your little prince into a frog.
There is also a mental and stress related component to kissing your frog. When you set a price for a home or a property that doesn't get you a reasonable quick sale, you have the mental weight of carrying that around with you, always wondering if it will sell, did you make the right choice passing up offers, etc. And, believe me, there is huge value in removing stress from your life.
Ultimately, most owners finally determine that they will just keep their prince (frog) or they will come to their senses and sell the frog as a frog, but for a fair profit, which actually makes them a super smart seller, and not a stressed out frog keeper.
The homes and properties you see sitting (camping) for sale on the market are almost always people who are determined to get "market value" for their homes. In fact, this is the case 99 out of 100 times. Proof can be found by searching the "sold" listings of these types of properties. Not only will you see that the current frog owner purchased the home as a frog from a prince seller, but you will also see that they too had to sell it as a frog (hopefully for a profit though) themselves.
So what's the moral of the story? Don't kiss the frog. You may think it's a prince now, but it's not and most of the rest of the world will agree. It's an overpriced frog and nothing more. Be smart, make a fair profit and cut the stresses -your life will be much better for doing so.
Kiss the frog and call it a prince, put it on the market forever, don't sell it, let it get market worn, live a stressful life and be unhappy OR sell the frog, make a profit, move on, be happy. It's up to you.
Signed, everyone who lives in reality and not fairytales ;)
If you have a frog that you've kissed and prince charming is still sitting there, give me a call. We can get you a fair profit and make your life so much better! 214-783-5440 or Ron@RonLyons.com