The Hidden Costs to Cheap

Jane Gray
Published on January 24, 2017

The Hidden Costs to Cheap

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We talked about price so now let’s talk about cost.  This is a true story so settle in. Note:  The names have been changed to protect the innocent!  

Meet Barb & Steve, who dreamt of a bigger home. With their Realtor, Bob, they looked on and off for a few months and it wasn’t long before they discovered the home of their dreams.  Bob explained that in the current market that in order to have a competitive offer, they needed to have their house on the market to submit a contingent offer.  They decided to purchase their dream house first despite Bob’s encouragement to do both transactions together in the market they knew because with Fall coming up, that introduced some seasonality into the mix and it was common knowledge that the Fed would be raising rates sometime soon which could impact sales.

Steve and Barb pressed on with their plan and in July, they bought their dream home without putting their current home on the market.  You see, Barb & Steve were comfortably retired, no debt (save the mortgages), high FICO scores, and with enough cash to handle paying two mortgages just not for a long time.

With the dream home now owned but unoccupied, Steve turned his attention to selling their current home.   He admitted to Bob a little sheepishly, “I’m just cheap!”  And besides, he asked,

“How hard could it be?” he asked smiling.   fsbo

It didn’t take long for him to realize that maybe there was just a little bit more to marketing and finding buyers so he asked Bob to list and market it. Bob laid out the market data and explained how competitive pricing would attract the most buyers, but Steve was unconvinced.  In his mind, he had a dollar amount he wanted to net so he committed the cardinal sin of pricing his house $25,000 higher than the model match down the street which had just sold for $399,000 only two months earlier!

Bob explained that in this price range, $25,000 matters a lot to buyers. There was little in the way of showings – San Francisco folks came looking and people came in from signs and open houses, but no offers.  Bob explained that buyers were rejecting their home at that price.  Bob conducted multiple open houses and marketed heavily in the Bay Area and then one evening, Steve called to say he wanted to try to price below market value because Bob had told him that in so doing, they could potentially generate multiple offers like an auction effect. So, they dropped the price to $385,000.  It stayed there for less than a five days before Steve decided it wasn’t working and he asked Bob to re-price it at $410,000.

Unfortunately, the effect of the lowered pricing didn’t make much of an impact because it had barely propagated out to all the websites like Realtor.com, Redfin, and Zillow.  In addition, the house was working against the DOM (days on market) or in effect, time. Bob explained that after almost a month, that people start to think something’s wrong with the house because they reason that with the market as good as it is, “Why hasn’t it sold?”

reduced-priceBob suggested a $399,000 price, but Steve was done.  He informed Bob that he could come and pick up his signs.  Bob knew that for Steve it was purely a monetary decision.  Steve didn’t tell Bob that he was looking to hire a cheap agent, he just did it right after he fired Bob.

Bob lost the listing after just a month because he couldn’t sell Steve and Barb’s house for more than it was worth.  Bob lamented to his real estate friends that there are valid reasons why a house might be valued higher than the comparable houses in the neighborhood – special features (like a view), some special workshop in the garage that no other house has, or a desirable location but the buyer has to be willing to pay a premium and an appraiser, if it’s financed, has to value it higher than the comparable houses.  Steve and Barb’s house didn’t have any uniquely desirable features so the other option was to find a cash buyer who didn’t know the market and just had to live there…it could happen.  It just wasn’t likely.  No hard feelings.

A couple days ago, Steve texted Bob saying that their new home was ready for a housewarming party. Curious, Bob asked how the sale of their original home was going.  Steve iterated through how much money he had saved by going with his low-cost agent.  Bob asked, “But isn’t it still pending?”sale-pending

“Yes”, he admitted.  Turns out that Steve wasn’t quite sure why they weren’t closing, but he told Bob the buyers had asked for some credits and repairs and his low-cost agent just acquiesced without negotiating a better deal.  Steve and Barb were also paying yet another month of a mortgage payment.  Bob didn’t tally it up for him but July to November was at least 4 months more of payments.  Bob told me today that the house still hasn’t closed. You know, “some escrows don’t close”, he murmured.

Buyers have been known to go out and purchase new cars before escrow closes.tesla

Then, sadly, the lender checks the buyer’s credit one last time before they fund and they say, “Not qualified” and it falls out.  It happens.  In this industry, we don’t consider it closed until it records and that’s after the signing!  Steve and Barb’s house likely will close.  Bob’s hoping it does, but it did cost them more than a month’s worth of a mortgage payments plus taxes and insurance and utilities on two houses…

The moral to the story?  There’s a hidden cost to price.  Oh, and don’t buy a car before you close escrow or you probably will have to park your new car at your old house.

choice-to-learn

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The Hidden Costs to Cheap
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