Value vs. Value Retention and the Difference between Market Price and Market Value in Real Estate
WHAT YOU DON’T CONSIDER CAN COST YOU.
When a new client hires me to represent him in the purchase of his dream home or investment property, one of the first questions is "what is important to you in a home?" as you can imagine the answers are as varied as the types of homes in the market. The one answer I never hear is value retention. It is true that some people will say "I want a property that is a good deal" but what they are thinking is that they want to pay less for a particular home than the last guy paid for a similar property. The lowest price and the best deal are usually not the same thing.
“It's not what you pay for it, it's the difference between what you paid for it and what you sell it for years later.” I've been making this statement for the last 30 years and it is true now more than ever. We all remember very well that home values were trending significantly upwards before they fell sharply in the 2008 crash. Many home owners are still dealing with the effects in one way or another. Real estate has come a long way since those dark days, and home values continue to rise in most major markets and are expected to increase, but the overall trend has been much slower compared to the boom we experienced before the crash. What does this mean for the home buyer? It means that buying a home, especially high-end property, is a large investment that requires a carefully considered and planned approach, and you should be a wise investor.
In the years since 2008 a new reality has emerged. Values are more predictable than before, but for many high-end properties in certain markets that is not good news. The view of home values changed from a generally positive one, to a generally pessimistic view.
Here's a great example,… in 2005 a luxury home that was priced slightly above the level of comparable competing properties would sell quickly. I still remember hearing "the market is hot,… they'll buy it!"… and they did. Fast-forward to 2018, the same property is going to sit on the market much longer and may only sell when the desperate owner drops the price low enough to attract a buyer willing to purchase. What about the improvements made during the past few years?... basically worthless.
The global financial crisis of 2008 was devastating for the real estate market in the US. The unfortunate series of events that led to the housing crisis left property prices at an all-time low in the 21st century. The recovery of the housing market only began to show after 2012, when prices started to increase gradually showing recovery of the real estate market. However, due to the nature of the real estate business, some sectors of the industry actually recovered faster than others.
Here is an example of what one of my clients experienced before he asked me to assist. In 2005 he acquired a 2 ½ acre, 5-bedroom property for $3 million. In 2016, nearly 11 years later, he put the property back on the market with a price tag of $3.4 million. However, more than a year passed, and the property remained unsold on the market. In August 2017, he cut the price down to $2.5 million – his fourth reduction in a span of 16 months. His situation is hardly unique. The luxury residential property market is facing more than a few challenges, and many realtors only see a price reduction as the answer. In this case his real estate agent wasn’t a skilled sales professional. Even at $2.5 million he couldn’t convince a buyer.
IS THERE GOOD NEWS?
Yes! There is great news! After his listing expired and I became involved, the property was offered again for $3.4 million and sold for $ 3.350,000 after just 64 days.
The fact is, home market values are more predictable than they have been in the past during the boom years that lead to the crash. It's complicated and you must consider numerous factors, but I am assisting sellers with their properties that will retain their value and sell faster in today’s market.
I am having fun and my clients are getting good deals. Not just good prices, but good deals! I am also excited about the purchases I am making for my buyers, and I am more concerned than ever for those buyers who choose to go it alone or are not represented by a highly professional buyer’s agent.
There's a lot of opportunity today, but as always that includes the option to make a decision without enough information, a decision that could prove very costly in the future. The market crash, a successive recovery, new market conditions, a new generation of investors and home buyers,... all of these factors require a new way of managing the sales and buying process.
Traditional sales & marketing experiences are not cutting it anymore. What’s required is a lot of expertise in sophisticated re-marketing techniques. Traditional real estate practitioners are talking about “realignment and market correction”. Especially those realtors that see market inventory as commodity will simply follow the good old methodology of reducing the sales price until the property finally sells. Of course, the old real estate mantra of “the market dictates the price” plays a key role. Many brokers and agents suggest that it all comes down to price.
IS IT TRUE THAT A PROPERTY SELLS JUST BECAUSE OF PRICE? WHAT ABOUT THE VALUE COMPONENT?
Value is not always about bricks and mortar. Some buyers pay more for a property based on personal taste, preference and individual value perception. When I market a client’s property, I determine a market price based on a proprietary methodology especially developed for high-end properties and luxury homes. I determine a market value by considering all the specifics, benefits and intangible values that are appreciated by potential buyers.
Another amazing fact is that the vast majority of real estate agents entered the real estate business with no sales experience, no marketing experience, no strategic business development experience, and no negotiation experience whatsoever.
What are the essential skills needed to succeed when you market high-value assets? Sales, Marketing, Strategic Business Development, and Negotiations. Hmmm,… that explains a lot. How do you expect somebody without those relevant skills of fundamental importance to sell or buy a home,… especially a property in the upper market segment?
People are willing to pay more for a home if they believe it gives them a truly special or significant value, and if the offer is presented to them in just the right way. Many real estate agents often make fatal mistakes that forces them to compromise on price. They don't narrow their target market, and don't understand complex sales & marketing techniques. Everybody can sell based on price. Just reduce the asking price low enough, and of course the property will sell. Every dog has his day, and even the least skilled realtor will be able to sell if the price is low enough.
In the market niche of high-end properties and luxury homes, selling on value, not price, involves a balance of confidence, expertise, in-depth marketing know-how, and doing your homework. Affluent home buyers are sophisticated,… they understand how to explore price for value.
HOW DOES THAT RELATE TO VALUE RETENTION FROM A PROPERTY INVESTOR POINT OF VIEW?
It's simple, value retention is that “difference” between what you pay for a home and what it eventually sells for a few years later. To determine your probable value retention, you have to project what the properties condition and market value will be in the future.
So, you may be thinking "what's the big deal? As long as I get a good deal on a home today it doesn't matter right?" The answer is it depends, you have to ask yourself how the average buyer will perceive the value in the future, for example in the year 2024.
Further, for a property investment it is of critical importance to consider how much it cost to own and to maintain the home and it is impossible to accurately determine what any of these costs will be unless you know how much the property itself cost. Remember, the cost of the home is NOT the price of the home. The actual cost of the property is the difference between the total amount you have invested in it, including purchase price and improvements, and the amount of money you are able to sell it for in a market that might be stagnated or even crashed like we have seen in 2008. A brand-new home may hold its value better, have lower direct maintenance cost and even considering the cost of the capital invested, cost less to own than an older one.
In comparison, an older home may have an acquisition cost low enough that the savings in capital cost and the fact that there is simply very little room for the value to drop, may offset higher maintenance cost. Not to mention freeing up capital for improvements.
To understand more whether high-end and luxury properties are profitable or not for investment purposes, it’s important to define what they are exactly. Price, location, features, and facilities can define luxury homes in the real estate market. However, in today’s market the criteria of what makes a home luxurious or not are being altered. Various people have different understandings of what a luxury property is. However, there is a certain set of recognized criteria that define a luxury property compared to others.
It's a complex process and many decisions to be made. Whether you are in the market to buy a second home, an investment property, or seeking a primary residence, or you are considering selling your property,… contact me today and find out more about the benefits of using a specialist with incomparable expertise and specific high-value asset re-marketing know-how needed in today’s market.
Michael Turwitt has long represented buyers and sellers in the purchase of fine properties and high value assets. Specialized in extraordinary quality homes and luxury property, Michael Turwitt enables clients to successfully navigate the complex North East Florida – First Coast Real Estate Market. For more information, visit www.turwitt.com