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The Market Determines Price, Not You

March 14, 2011 · 127 comments

in Personal Finance

Do you ever watch something on TV or overhear a conversation, and want to just smack the people and say “you brought all of this on yourself”?

Well, had I been Elvis, I would have shot the TV while walking on the treadmill Sunday morning.

I love to walk and watch HGTV.  The show during this stroll was ‘My First Sale’.  It featured a young married couple who was expecting their first child.  The couple was trying to sell their home, and their new home was in the process of being built.  THEY BORROWED AGAINST THE EQUITY OF THEIR CURRENT HOME TO PAY FOR THE DOWN PAYMENT ON THE HOME BEING BUILT.   Can you say ‘possible bridge loan’?  Can you say ‘very risky move’?  Can you say ‘what were you thinking’?

So, this couple is in quite the predicament!  They owe a bunch of money on their existing mortgage, $15,000 on the home equity loan, they have cruddy carpeting that is old and stained, and the housing market is a mess.  As an added bonus, their neighbor has a bunch of random stuff piled up in the yard (beds, metal things, you name it), and prospective home buyers are not impressed with the possibility of staring at a view comprising of garbage.

As the show progresses, no offers are coming in, and the homeowners end up asking  the neighbor to do something about his yard. Neighbor is actually willing to part with his stuff, and Homeowner Man ends up hauling it all to the dump.  Time is passing, and the price is dropping, and dropping.  Homeowner Man is flipping out because his house was an investment!  The house was originally listed at $229,000, which would have given them a little extra money after expenses and mortgage payoff.  However, the house apparently is not worth $229,000, and they do end up getting an offer for $199,000 (at this point, the house was listed at $209,000).  Homeowner Man feels ripped off.  They are offering $30,000 less than the original price, and he deserves more money!  He doesn’t feel he should have to ‘give’ so much.  Homeowner Wife is thinking “I am going to have this baby soon and I don’t want to scare away the only person that has been interested in our house.  We need to have a reasonable counter-offer.”  Homeowner Wife is smart (at least regarding the offer).

In the end, the buyer came up in price and paid $207,000 for the house, but the sellers had to contribute $6,000 toward the buyer’s closing costs.  Since the price was much less than expected, the sellers had to bring $7500 to the table at closing to pay everything off.  Very stressful.

So what is the lesson in all of this?

Well, what you think something is worth does not matter at all.  The price that the market will bear is all that is important.  You cannot say ‘but I have to get this amount out of the deal’ because it very well may not happen.  If you do demand a certain price, then you have to be willing to wait for it.  Nobody owes you anything, it is simple supply and demand.  If you are going to sell something, you have to take your emotion out of it and be realistic.   It always helps to get the thoughts of an objective third party.  You may not like what you hear, but it is important to try and get the facts instead of basing a decision on just your own knowledge and feelings.

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{ 124 comments… read them below or add one }

101 Centavos March 14, 2011 at 6:14 am

Nice summary, Kris. Whatever you have is worth whatever the market says, not what you think it is. I’ve run across this emotion frequently at yard sales, where some overpriced item will sit still on the driveway late in the day. A low-ball offer is sometimes met with indignation instead of negotiation, “but I paid X for it, and now it’s worth at least Y”. Well, right now this instant, it’s worth whatever I think it’s worth, which is way less than Y. Many times, I keep my money, and they get to keep their whatever-it-is.

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Kris March 14, 2011 at 3:31 pm

101 – So you are a savvy yard saler! When people say ‘but it is worth at least this’, then maybe they should sell it using the venue that is offering such a great price instead of at a garage sale.

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101 Centavos March 15, 2011 at 5:53 am

My favorite one was this fellow selling a nice framed painting for $20. I offered $5, mostly for the frame. He reared up and blustered that it was a painting done by his Mom, and it was worth way more. I just OK and walked off, thinking inside that if it was such a memento from dear old Mom, what the heck was it doing in his yard sale …. 😉

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Kevin@InvestItWisely March 14, 2011 at 6:28 am

Very important point. So many times, we can get caught up in our sense of worth and forget to understand that something is only worth what someone else is willing to pay for it, not what it cost for you or what it’s worth to you. On a market place of free exchange trades are beneficial for both the buyer & the seller, which means if the buyer thinks they’re paying too much, you as the seller are not going to earn any money no matter how much you think you deserve it!

This couple doesn’t seem like they got off that badly in the end. They lost up to 15% including transaction fees which sucks but really isn’t the end of the world. Maybe if they hadn’t borrowed against equity to finance the new place then they wouldn’t feel so squeezed right now.

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Kris March 14, 2011 at 3:30 pm

Kevin, you are right, they did get pretty lucky given the market these days. But Homeowner Man was definitely not seeing it that way!

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The Biz of Life March 14, 2011 at 8:08 am

Lesson #1– The house you live in is not an investment.

Lesson #2– Don’t buy another house until the first one you own is sold. You can sign a contract to buy a second house, but make it contingent on selling the first.

Lesson #3– Don’t take out home equity loans. If you don’t already have the money you don’t need it.

Lesson #4– Sometimes you’re better off financially keeping what you already own.

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Kris March 14, 2011 at 3:26 pm

Biz- very good lessons indeed, and the couple on the show ignored every single lesson! I love how people have a child and instantly need a giant house. (The house the family was selling seemed plenty big for 3 people.)

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First Gen American March 14, 2011 at 8:34 am

Housing is tough because it’s an emotional decision for both buyer and seller. I also think it’s especially true with home improvements. I may think my bathroom remodel was gorgeous but the next guy coming to my house might want something ultra modern and think it’s awful.

Great article.

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Kris March 14, 2011 at 3:22 pm

You are so right First Gen. That is what I love about the show ‘Bang For Your Buck’. People get very emotional about their choices while remodeling, and they get really mad when objective people come in and disagree with their tastes. (Or lack thereof.)

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101 Centavos March 15, 2011 at 5:55 am

Heh… I occasionally feel brave enough to remind the Mrs. that those pretty wall colors going up in our house may prompt future buyers to say “what they heck were they thinking?”

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Nicole March 14, 2011 at 8:41 am

Good lessons all around.

One of my colleagues was going to do the same thing, but their bank wasn’t willing to work with them on financing for their dream house (our state now has strict laws on tapping home equity), which turned out to be a GOOD thing when the husband’s real estate business took a huge nose-dive and they started living on one income. And they live in a nice school district without stuff piled up in the yard next door.

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Kris March 14, 2011 at 3:21 pm

Nicole- Thank goodness the bank stopped a big mistake. Too bad banks didn’t do that years ago. I bet they are thrilled that they were not able to make that purchase given their new circumstances.

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Nicole March 14, 2011 at 4:24 pm

My colleague has been taking on so many extra work projects (for consulting money) as it is, that I have to wonder what else is going on. Our hypothesis is caring for aging parents. I sure hope she gets some sleep soon.

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Yakezie March 14, 2011 at 10:10 am

Indeed, the value of your property or whatever it is is whatever the market decides to pay. Lots of delusion when it comes to selling RE.

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Kris March 14, 2011 at 3:19 pm

Yakezie- you are so right. Emotions come in to play, and almost always leads to overpricing.

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Jacq @ Single Mom Rich Mom March 14, 2011 at 11:38 am

I have a friend that put her house on the market a year ago. They did a FSBO and priced it too high. The problem being the equity in the house would go to pay off the mortgage plus all the credit card and LOC debt. (Yeah, it’s ugly.)
It finally sold this last week or so for about $40k less than the original list price. All along I told her she was priced too high – even showed her comps in her area. She finally got a decent realtor that told her the truth, not what she wanted to hear.
Don’t even want to think about how much interest was paid out in that year of not selling.

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Kris March 14, 2011 at 3:19 pm

Jacq- Pretty gutsy to try and sell by owner right now, although I would probably give it a try for awhile if I wasn’t in a hurry.

How did your friend determine price in the first place? When I sold our house (two houses actually) I had a few realtors come through and assign a price. I then went and sold it myself. It was a seller’s market back then though.

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Sandy @ yesiamcheap March 14, 2011 at 12:11 pm

He didn’t make off so bad. Lots of homes lost 25-20% of their value. This homeowner needed a dose of the truth. Thank God there is usually a smart woman to help the men along. 🙂

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Kris March 14, 2011 at 3:17 pm

Sandy, you are very right, they did get pretty lucky. Homeowner Man’s attitude was just so irritating because he felt he was ‘owed’ that original asking price and really had a hard time accepting that the house just wasn’t worth that.

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krantcents March 14, 2011 at 1:31 pm

One of the mistakes occurred very early in this story. The pricing of the home. They should have asked 3 brokers in to evaluate the house and allow them to determine the price. The 3 brokers hopefully would know the area. They should have asked for references, and checked them out! If the price was not enough, they would have an opportunity to rethink their decision. The home equity loan just made it worse. For most people, selling their house is their biggest transaction, but they treat it like it is nothing. It is not every day that you are selling an asset for several hundred thousand dollars. Add the fact that this is really a buyers market which added to the problem.

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Kris March 14, 2011 at 3:16 pm

Krant, I agree, getting multiple opinions is very important. The realtor pulled all of 2 comps and based the price on those.

This couple definitely was not in the financial position to build and then hope to sell. They took a very big risk building a new home and financing it without having enough money for even a down payment.

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retirebyforty March 14, 2011 at 2:08 pm

The buyer didn’t come up much in price at all. They are getting $6,000 in closing cost which really helps at closing. The 6k in closing cost is worth much more to the buyer than going up 6k in the offer because it is up front vs financing. It’s a buyer market, that’s the bottom line.

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Kris March 14, 2011 at 3:14 pm

RB40, I forgot to mention that seller paying closing costs was part of the original offer too, so they did actually come up on price.

You are right though, it is a buyer’s market!

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Money Reasons March 14, 2011 at 8:16 pm

Yep sometimes the impossible is reality. Housing historically has pretty much went up and up, but what was true in the past doesn’t necessarily mean that it will be true tomorrow.

Just be thankful that you and yours are more intelligent than to fall into such risky traps!

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Kris March 14, 2011 at 11:11 pm

MR, not sure if we were more intelligent or just lucky! We also bought our homes before we sold ours, but it was a totally different market and we could afford both mortgage payments if worst came to worst. But we never had a house on the market for more than a week, and we sold both our houses ourselves. Different times now for sure.

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Kaycee March 14, 2011 at 8:36 pm

“Your” house IS only worth what someone is willing to pay for it. @@

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Jeff @ Sustainable Life Blog March 14, 2011 at 10:52 pm

Great thoughts kris. When I had cable, these were shows that I used to watch and often wonder what some of these people were thinking. You mention that this guy said he bought his home as an investment – that was his first mistake – you need a roof dude, not an investment. As my dad once said, you cant live in a stock. Some people….

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Kris March 14, 2011 at 11:07 pm

I love watching these shows for some reason, mostly when I exercise. (Makes the time pass faster, especially when I am yelling at the TV…)

I like your dad’s quote!

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Squirrelers March 15, 2011 at 12:50 am

Always interesting how so many people – including many of us, at one time or another – consider paper profits to be real. The same phenomenon occurs with stocks.

A home is worth what the market will bear. Period. Not what the owner paid for it, or what he/she had originally listed it at, what sales price is hoped for, etc.

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MoneyIsTheRoot March 15, 2011 at 10:59 am

I love that show! They are coming to Michigan soon, actually to a city right next to me, Im excited to see it. You can see another example of this on Pawn Stars…people are always disappointed by what they think is the value, and what they actually end up selling it for! Great article.

http://www.moneyistheroot.com

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DoNotWait March 15, 2011 at 3:26 pm

I don’t understand why so many people continue to start a new home project without even knowing the true value of the one they have. If they started by knowing what its truly worth, maybe their plan would have not been the same and they would have see the project more objectively.

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Evan March 17, 2011 at 11:25 am

It is amazing how many smart people make stupid decisions when emotions get in the way.

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Kris March 17, 2011 at 5:16 pm

Evan, Smart people definitely make dumb decisions. Hindsight is also 20/20. There was a time that a house was thought of as an investment as prices just kept going up. I think people are having a hard time letting go of that idea.

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