Cost vs. Price

Everyone tells you, “It’s the best time to buy”.  If you are a seller, especially, you are wondering if people have lost their mind. To understand, you have to know the concept of cost vs. price. This is how taking $10k to $15k less (than you think it is worth)  on your current home  could save you $80k on the next home you buy.

Cost vs. Price

This is a relatively easy concept once you understand it and it will open your eyes to the incredible opportunity presented to us in the current market.  This market is great for move up buyers and buyers who have a lot of equity in their current home. (Let’s not fail to mention those exceptionally smart individuals who save and have money to put down aside from sale proceeds of a home.)

It  is a simple concept that works like this;

I have a home worth $150k in today’s market. It WAS worth $165k two years ago. I want to  move,but I want what I (note this has nothing to do with what it is actually worth at the moment) think my home is worth. So, I think I will wait another 1.5 years for the market to inch up a little. Basically, I want my $15k back. 

I want a house worth $350k. Today interest rates are 4.75%. With a 10% down payment I would finance $315k for 30 years with a P&I payment of $1,643.19 a month. This equates to $276k in interest over the life of the loan.

                Remember…I am waiting to get my $15k back

It is 1.5 years later and I got my $15k back on selling my house.  But now interest rates have risen to 6%.

·   That $350k house with a 10% down payment (finance $315k) at 6% interest has my monthly P&I at $1,888.58. This equates to $364k in interest over the life of a 30 year loan.

           In essence, your $15k has cost you $80k in interest. This is cost vs. price.

As we usually break down and base our mortgage decisions on monthly payment, here is another visual for you.  This shows you what rising interest rates (on the left) do to the monthly payments as they fluctuate.

 RATE    $360k (loan)    $380k (loan)
6.00%    $2,158             $2,278
5.75%    $2,100             $2,218
5.50%    $2,044             $2,158
5.25%    $1,988             $2,098
5.00%    $1,932             $2,040
4.75%    $1,824             $1,926

I could go on about this topic, but frankly, the numbers speak for themselves.  As I said before, this is a relatively easy concept to grasp once you study it. It is a different way of thinking about selling and buying; going against the grain of our instant gratification mindset to thinking long term and looking big picture.

Attention Sellers: If you want a buyer, you need a COMPELLING sales price!

COMPELLING is the word of the year for sellers. No longer can a price be “good”, it must be compelling.

What does that mean ? 

Take a look at what is for sale around you. If you live in a subdivision, how many houses are currently on the market around you and how similar are they to yours? Are there foreclosures or short sales? Are there other sellers desperate to get out for a litany of reasons and they are selling at a compelling price?  This is not to say that you must price your home at the same price as a foreclosure, rather to say you have to be compelling against your competition.  Don’t ignore the fact that foreclosures, short sales and other compellingly price homes in your community are enticing to a buyer.  They do affect the value of your home and to discount that is the equivalent of putting your head in the sand.  

Why should I buy into this line of thinking?

Put yourself in the buyer’s shoes. You are looking at two houses in the same community; one is perfect and the other is a foreclosure. The foreclosure is 300 more sq. ft than the perfect home and priced 10 to 15k lower than the perfect home. Granted it needs work, but at that price it is a steal! What are you going to do?  If the perfect house was at a compelling price you would have to really think, right? There is roughly 13.1 months of inventory on the market in Greenville county today.  That should not make you panic as I would wager to say there are a certain % of homes that are not priced compellingly and will fall off the market.  Anyway you look at it, there is significant competition at all price points. There are homes selling and those are the sellers who have agents that understand the market and price them to sell.  A good agent is there to sell your house for as much as they reasonably can in any given market, not give it away. If they can’t explain to you and help you understand why a compelling price in necessary, you don’t have the right agent.

Does the market data support this opinion?

If you can’t back up your opinion with facts and data, it is a worthless argument.  Lucky for you, there is plenty of data.  All indicators say two things; there will be more buyers in the market and that selling prices will fall again due to foreclosures over the next year. Both Freddie Mac and Bank of America put out their forecasts for home prices. They forecast at least a 5% decline in sales prices for the next  year and half; price rebound Spring of 2012. Why? Because they know EXACTLY how many foreclosures are coming to maket. There exists a certain number of foreclosures that hit the market every month (no one knows that magical number is but we know it exists).  It is a controlled number so as not to depress the market further. You may or may not know that Bank Of America, Wells Fargo and a few other large lenders suspended the processing of foreclosures for almost a three month period.  In essence, that put the market three months behind in foreclosures. So add that backlog to the carefully calculated monthly number of foreclosures and we have a large number hitting the market at one time.

So is this a horrible time to sell? NO!!! If you selling to buy another house, especially a move up buyer, this is a great time. Why? Cost vs. Price….stay tuned for that next week. It will open your eyes to the opportunity!!!

When you understand the market, you will understand the opportunity.  - Lori

Welcome to The Educated Real Estate Advisor Blog!

Welcome friends to The Educated Real Estate Advisor blog! If you don't know me, allow me to introduce myself. My name is Lori Bayne and I am a Realtor with the Allen Tate Company in the great state of
South Carolina. I work and live in Greenville, SC and I LOVE my job. I sincerely enjoy educating my clients
and friends about everything real estate from finance to market data. We are living in strange times and the
real estate market can be very difficult to understand and navigate.  My aim with this blog is to deliver intelligent, relevant and insightful information regarding the real estate market. I firmly believe that when you understand the market, you will see the opportunity.

Thanks and I look forward to sharing with you soon!

Lori