Buying and Selling: July 2010 Archives

One thing prospective home buyers need to understand and don't is that there is always a reason for a low asking price. There is always a reason for a low asking price. Sometimes that reason is something you can deal with, sometimes it isn't, but until you know, you're risking your money on an unknown.

Look at the situation from the seller's point of view: They have this valuable property. They want to get as much money for it as they possibly can. So unless it's your mother or favorite uncle or similar family member giving you a deal on property they've owned forever, get religion about the fact that there is a reason why they're asking fifty thousand dollars less than all the comparable properties. It could be that there's a broken slab. It could be that there's a condemnation about to start. It could be the golf course is about to close, or that a chemical manufacturing plant is about to get built. It could be something you can't see that will cost loads of money down the road, such as a broken water pipe undermining the foundation. It could be any number of things. Sometimes the reason is because their agent persuaded them to put a low asking price on it as one way to get lots of suckers to come out and bid against each other and run the price up (That rarely works, though).

Usually, the asking price on properties of this sort should be even lower. It only seems low because you don't know what's wrong with it and what it's going to take to fix the problem - if it can be fixed. Lots of prospective buyers don't seem to understand this. The "get rich quick" scams never point it out - doing so would severely restrict their supply of people willing to plonk down hundreds to thousands of dollars for whatever "system" they're trying to sell. But it's true, nonetheless. There are any number of reasons for a low asking price, but there's always a reason.

Every once in a while, the reason is "because they need a quick sale." Right now this is fairly common. But just because they tell you that doesn't make it true. Even if it is true, doesn't mean it's the only reason, or that you know the reason why they need a short sale. Just because you know one reason, doesn't mean you necessarily know all the reasons for the low asking price.

If you read between the lines on MLS, you can often figure out what the reason is before you even go out to a property - or at least an agent who does this all the time can. But it takes careful reading, and thinking about what they're really saying - or what they're not saying. Keep your eyes open when you visit the property, and the reason for a low asking price usually becomes obvious - or at least one such reason does. Fairly often, there are one or more secondary issues that aren't so obvious that may well cost even more to fix than the obvious issue that leaps out and grabs you.

If you're certain you know what the issues are, and you are able to deal with them, that's what people call an opportunity. But that is a very different thing from walking in cold and taking somebody's word for the fact that the little old lady who used to live here needs to sell because the nursing home needs the next month's payment (Hint: this doesn't happen. Granny can get a Reverse Annuity Mortgage if she's that desperate, and whereas I recommend against RAMs in almost all cases, this is one exception where they are the lesser of two evils, as compared to just giving away a big chunk of equity).

When there's a low asking price, be thinking in terms of things that most buyers can't deal with. Defects that prevent some or all loans from being funded. Probate where there is no money to rectify even safety and habitability issues. Things that prevent your average buyer from actually carrying through on an intention to buy a given property.
Sometimes, as with lender owned properties, it's merely that no one knows if there are problems or not. Maybe it's just cosmetic stuff like paint and carpet, maybe it's a bad floor plan, and maybe it's something a lot more serious. Get yourself a good buyer's agent and go into the property with your eyes open. Be religious about investigating the property; you're risking the full purchase price, not just the down payment, whether you realize it or not. Plus interest due on the loan, of course. Buying a property like this is always a risk - but it's what insurance underwriters call a speculative risk. As opposed to a "pure risk" where there is only opportunity for loss, speculative risk means there is opportunity for gain, as well. Gambling is the poster child for speculative risk so you need to understand it's a gamble, but when you buy a property of this sort, there is opportunity for both gain and loss. It's never difficult to understand the opportunity for gain - people will stand in line to point those out to you. It's the opportunity for loss that you've got to watch out for. A good buyer's agent will save your backside on this score more often than most people would believe.

Caveat Emptor

Original article here