Thursday, March 1, 2007

Location, Location, Location vs Price & Value

I ran across the following article by Kerry Bodily. He is a 25 year veteran of the real estate industry, a real estate instructor, award-winning software designer, real estate board officer, and advisor to the Multiple Listing Service. So I think what he has to say about the difference between the old adage about real estate value being "location, location, location" may need to be questioned. The following is his article in it's entirety. His book on the topic is available at Amazon.

How the Real Estate Market Really Works
Determining Price and Value

Imagine living in a home on a busy street with a major train line just beyond the back yard fence. People really do live in these locations, and even worse ones, by choice, but why? We’ve all heard the real estate adage, “location, location, location,” but there are two things much more important than location, and they are price and value.

You see, in real estate especially, you can only buy what you can afford. But regardless of the location, style, or attributes, as a buyer, you should still receive maximum value for the price you pay.

Let’s say, for example, that you’re wearing your buyer’s hat. You’ve hopped in your car, driven all over town, and you’ve personally inspected every viable property in today’s market that meets your particular needs and requirements. Now you’ve chosen one: A single, perfectly beautiful piece of property and the first issue you should decide is what is its intrinsic value to you. After all, you are the one who will be living there.

But what if you could determine the value of this property before deciding to enter the negotiating stage? Then you would know whether the asking price was too high (forget it), too low (a steal), or just right (perfect). In other words, there wouldn’t be a need to consult with an appraiser, a real estate agent, a relative, or even your best friend, because we all know what happens next: if you ask the opinion of others, the answer would come from their perspective of price and value, and not yours.

What I’m getting at, is that the truth about price and value in real estate is quite simple:

Today’s competition determines today’s value

If you have just viewed a dozen properties, and you have inspected and evaluated each, then that is today’s competition. It’s not what sold yesterday, or what recently sold up the street, or what just sold three blocks over, but it’s what’s on the market today. Once again, it’s today’s competition that determines today’s value.

Think of it this way: that you, as the buyer, are the expert on value. The real value is simply what it is worth to you. And therefore, your opinion of price and value is now exalted. Why? Because, without a buyer, i.e., without you and your genuine interest in that single, perfectly beautiful piece of real estate, there is no sale and you are not going to pay more that it’s worth to you, the buyer.

Now, by contrast, let’s put on a seller’s hat and take a walk through the immediate neighborhood. Yes, walk! Though the buyer must drive, the seller can walk. Why? If you’ve ever sold a home, or talked to a real estate agent or appraiser about how to value a parcel to sell, the typical explanation takes a wild and crazy turn away from the simplicity of value. The common answer passed down through the decades would sound like this: Find three properties that have sold recently, in your neighborhood, preferably mirror images of yours, and even on the same street, if possible.

Now those comparables, when presented to the seller, along with a myriad of statistics, market trends, charts, graphs, and other non-conclusive data, will ultimately suggest a price range from which the seller can choose. The typical seller will usually choose the higher values from the range. Wouldn’t you? But, does that sound anything similar to how buyers value properties? No. In fact, it’s exactly the opposite! Sellers are looking at properties from a market that no longer exists, and buyers are looking in today’s market at the only choices they have.

Let’s ask the question, “Why should there be any difference in how value is determined, regardless of who is asking the question, or for what reason? All logic says, “There shouldn’t be,” but each half of the market, i.e. buyers and sellers, determine price and value from opposite sides of the fence, if you will. Is there a problem here? And, if so, is there a solution?

One example of a problem for sellers is signs that say, “Price Reduced.” The implication is that the seller has finally realized the property is over-priced, i.e., not priced competitively, and now wants to fix it. Too little, too late? Maybe. Consider this: When a new property is added to the market most of the activity takes place in the first few weeks. In real estate circles, this is often labeled as, “The window of opportunity.” Buyers and agents who are actively looking in that area and price range will often try to be first-in-the-door. If their first impression is, “Nice house, but overpriced”, then they move on and rarely look back. Though, to appease sellers, it is often said: “Buyers can always make an offer,” but most buyers don’t want to start negotiating with a seller who has visions of grandeur. The point is: the property would not have been over priced if the seller had determined the value the same way typical buyers would in the first place.

The real solution for the seller is almost as simple as driving around town or looking on the Internet and identifying your viable competition. Now adjusting for differences and determining your comparative value requires some simple tools, which are slightly beyond the scope of this article, but the real challenge here is overcoming the natural human trait of resistance to change. As a seller, put on the buyer’s hat and try looking at the market through the buyer’s eyes, though this approach would be foreign to most real estate agents or appraisers. Open minds, open doors!

Kerry D. Bodily, author of Untold Secrets How the Real Estate Market Really Works.,
To reach the author directly, you can email him at

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