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How Much is Too Much?
We were driving around looking at houses and came across a $400,000 property that was very interesting. It had been on the market for six months and the price had been reduced from $500,000. We thought maybe the owners might be motivated to sell. We did a little more research and found that the property had been sold two years earlier for $200,000. Looking at the photos from the previous listing, it appears that the property has not been upgraded at all. What justifies such a huge price increase?
Buyers have every right to look at the public sales and listing history of any property they want to consider. This research may suggest how to structure a purchase offer. That said, to paraphrase Wall Street, long-ago sales cannot justify future value, whether higher or lower.
In this case, you found that the listing price had fallen by 20 percent. That would make the property seem like a bargain, at least compared to the initial price. Then you found it had sold two years earlier for $200,000. Suddenly, what seemed like a bargain now has you wondering about the property’s real value.
When you look at a property, its past price really doesn’t matter. It may be that the current owner acquired the home at a low price through a short sale or foreclosure. Or maybe this was a family deal with a big discount. In any case, that was then. The real question concerns the value and allure of the property now.
The appropriate value test is to check recent sales of similar homes in the same neighborhood. How does the target property compare? Consider that an appraiser would look at current values and not the selling prices from long, long ago.
Given that the property has been available for six months it might be that the owners would consider a still-lower offer. Maybe they have purchased a replacement property, face two mortgages and need to get rid of this home. Or perhaps they can no longer afford the current property because of an income loss.
Whatever the case, you must consider the property as it is today. Do you want the house? Given the comps and your personal preferences, what are you willing to pay? And how much is too much? As to what happened long, long ago, forget about it. Focus on the present.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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