Tuesday, January 09, 2007

Cost and Value

The difference between the cost of a home and its current market value, have little in common. I spent some time last night attempting to explain that concept to a couple whose mortgage was higher than the current market value of the property. They had purchased the home 18 months ago and now needed to sell. “Well, Ken we certainly are not going to sell our home for less than we paid for it.” “Well, then you have a choice to make, you can choose to sell or not but no one in this market is going to pay you $100,000 over your home’s current market value.”

Frequently when showing properties to buyers, they will ask me what the seller paid for their home. My computer has access to that information along with the amount of the mortgage and any home equity loans on the property, however, I have found that the information has little bearing on what price the seller will accept for the home.
If a buyer can purchase a home below what it sold for a year earlier does that make it a good deal? How about if a property is priced below a previous appraisal? No, especially if the appraisal was for a refinance rather than a purchase.

Cost of a thing is what is paid for it, in terms of money. Cost of an item can be easily defined. Value is intrinsic. Value is relative. When an item’s value, exceeds market price a buyer will buy. Paying $2 for broccoli isn’t worth it for me but I will pay $3 for a beer with free popcorn.
A new web site, featuring nearly 500 homes, points out the dynamic difference between cost and market value. Flippersintrouble.blogspot.com shows homes in Sacramento that are all priced below what the sellers paid for them, some as much as $100,000. So does that make them worth so price? Maybe. So if you have a few minutes take a trip over to our local flipper’s blog. It is another good reason that real estate should be considered a long-------------------------------term investment.


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