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Tuesday, September 21, 2010

"Home Ego-Nomics" in Key West

When I first started this blog I wrote a blog entry about "home ego-nomics". I thought I had coined the phrase "egonomics". I was wrong. Somebody beat me to the keyboard. The URBAN DICTIONARY has several definitions for "egonomics" including two I like:
(1) "1. the logic used to justify ones actions for personal gain 2. the art of being self-centered 3. the actions and attitudes one takes to appear better than others, that to the outside observer, shows he/she is a real jerk."
(2) "The study of the (often inverse) relationship between the size of a persons ego and their true worth to society."
I would define home egonomics as the rationale a potential home seller employs to value his real property inversely to its worth as seen by a rational buyer.

An article in The Washington Post in 2006 discussed the role of emotions in buying and selling real estate. People think they make calculated decisions when buying or selling a house, but research shows that emotions play as big a role as intellect. Research economists formerly believed that people made important economic decisions like robots by applying simple logic. But research over the past 20 years has shown otherwise.

The article went on to discuss the role of “loss aversion” -– the concept that people deny reality as it applies to something they greatly value when it declines in value, such as stock. They tend to hope that if they wait long enough that the value will return and that the loss they would incur will in fact never happen.

Several months ago I had a discussion with a listing agent in my office about her listing. The agent said of her seller "He does not want to lose any money." Well, tough toenails. Nobody wants to lose money. Sometimes people lose money in real estate. If that same seller had a margin call on his account at Merrill Lynch do you think the Merrill account executive (they have such cute titles) would care--for a minute? Hardly. If the seller wouldn't authorize the trade to cover the margin call, the firm would do it for him. No intellectual or emotional discussion would alter the business decision that the time to sell is when a loss is imminent. Yet that same "seller" would argue with his Realtor over pricing and marketing of his very special piece of real estate.

Most sellers want to avoid selling at a loss even though it might (probably or certainly) reduce a greater loss in the future. Sellers like this dig their heels in and refuse to accept the fact that their real estate investment is not worth as much to the rest of the world as it is to them. I have two recent deals I that worked on that demonstrate this.

One potential seller has a very nice property in a planned community in Key West listed for sale at an asking price that is about $300,000 higher than the most recent sale in the same community. The seller believes his property is superior to the other units that sold because of its additional lot size, landscaping, and interior decorating treatments. My buyer is a sophisticated purchaser who knows the price of sold units on a per square foot basis. (We looked at them when they were for sale.) All of the units were built at the same time by the same developer. This seller's unit is slightly larger and has additional outdoor living area (primarily garden space) than the recent sold units. I personally think the seller's interiors are dated and amateurish (sponged walls!). I think the seller and his agent are both nuts if they think a piece of dirt is worth a $300,000 premium to any buyer. Nobody has made an offer on this seller's property even though it has been listed for sale for nearly a year.

I told the listing agent that I have a cash buyer for the property. I said I think the property is over-priced. I said it would be helpful to the seller to have the property appraised by an independent appraiser to help the seller understand the property's real present value as opposed to the perceived value etched in the seller's mind. I said the little plot of land is not worth the amount the seller thinks. I said a non cash buyer would need to get a mortgage to buy this property and that a new lender will not lend more money than the property is worth. The agent was not "buying" my suggestion. The agent asked me "What will your buyer pay for the property?" I gave an approximate price. The agent said "Seller would never sell for that!" I countered that the price I gave was probably what the property would appraise at and that the seller needs to hear from a disinterested third party as to value the extra plot of ground. I know that Realtors prepare CMA's all the time to help their principals understand the value of their real estate. In these problematic times, I think a disinterested third party appraisal is a superior tool for a listing agent to use in setting the asking price, marketing the property by referencing the appraised value, and in negotiating a successful contract. I think both a buyer and seller would benefit from such an appraisal.

Another owner has a very lovely home in a good location that has been on the market on and off for several years. Several different agents have listed this property over the years. The seller recently reduced the asking price by over $200,000. In about a week's time after the price reduction, I produced a buyer that made an offer just below the reduced asking price. The seller balked. He then refused to sell. A week later he raised the asking price by more than $100,000. I think the original price reduction achieved exactly the result the seller wanted-he got an offer on his property. The property, as nice as it was, was over-priced. It did not sell in the go-go years. It surely would not sell in the no-no years without a price adjustment. The price on the property went up and the buyer went away.

The Washington Post article referenced above included this passage:
“These studies have illuminated a few key concepts: Many people will pass up sure profits for illusory ones. Some will turn down profits if they believe someone else is unfairly profiting more. Some will even refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today....People will cling to prices they recall from a brighter day, even when market conditions have changed; they will walk away from a sale if they feel the buyer is getting too good a deal at their expense; and they are terrified that [if they sell now] the market will rebound and they will feel like fools.”
The article posited that most people make rational dollars and cents decisions when buying routine items such as milk and eggs, but let their emotions get involved in potentially life-changing decisions such as buying or selling a home. And "sellers" that establish asking prices and market strategies that inversely value their real property to its worth as seen by a rational buyer probably will not sell after all. Ain't that the truth!

I am a buyer's agent. If you are look to purchase a place in Key West, please consider working with me, Gary Thomas, 305-766-2642. I am a full time Realtor at Preferred Properties Coastal Realty, Inc. in Key West. Not all seller are home egomaniacs. Just some. Let me help you find your place in Paradise.


Anonymous said...

Old Guy #1 (Selling his used car):

I'll let you have it for $800 but its worth a lot more.

Old Guy #2: I always thought it was worth what you can get for it.

Anonymous said...

Don't let anyone tell you otherwise - if you believe it to be a good deal than it is a good deal. That is your perception and nothing can change that so go in with your heart but let your head rule your wallet. And don't be fooled to led by someone else - it's your money afterall.

Anonymous said...

Everyone says it's a great time to buy in Key West, but I'd liken it to being like Julia Roberts in Pretty Woman.

Me: I got money to spend here.

Sellers: I'm sorry, I don't think we have anything for you (because my ego tells me my house is still worth what it was in 2007).

I added that last part.

Anonymous said...

What happens when all those banks sitting with homes they foreclosed on start dumping them onto the marketplace? I saw on CNN last night that 70 per cent of the homes in the state of FL are underwater or in trouble. This news was from the website RealtyTrac that monitors closely the housing foreclousures and bank owned homes.

ow I ask, which bank wants to be the first to spring their load onto the market? I doubt any of them wants to be first. Are they planning to keep this inventory forever - no way.

We are only on the tip of a huge wave coming - there are more foreclosures to come. Anyone who assumes we are at bottom of the market isn't to be believed. Just wait. Just wait.

That short sale house you just bought and told was a 'great deal' at $400K (even thought it sold in 2003 for $750K) may be worth all of $150K in a few years from now when inventory surges due to the glut of bank owned properties about to hie the market.

Call it what you will but if anyone thinks this is the bottom of the market and a great time to buy ought to be sued for making false statements.

Remeber what PT Barnum said - there is a sucker born every minute.

Anonymous said...

We actually found a house we liked but didn't agree with the asking price. So we paid for an appraisal before making an offer--it was an expense, sure, but we thought it would legitimize our offer. We offered very near the market appraised price. The sellers scoffed. They think the house is worth more than $200,000 more than our offer. Perhaps an example of ego-nomics?

Gary Thomas said...

To the last Anon: I had buyers do the same on a very nice house. The "sellers" balked on the appraised price as well. Then they got their agent to "adjust" the square footage to make the asking price look more sensible. Didn't work.

My buyers ended up buying a lot and are building a new house with everything they liked about the house the two non-sellers had plus a lot more. The final cost will still be less than the non-sellers wanted.

I'll write more about the place when it is done-if my buyers don't mind. I would love for the non-sellers see what $950,000 CASH can buy in Key West.


Anonymous said...

Gary, you mention CASH now and then in your blog.

I appreciate (perhaps envy) those who have $950k in cash sitting around to buy a house--and I also understand the advantages that make cash buyers more appealing to sellers. For one thing, cash buyers can pay more than an appraised value because they don't have to get financing.

But... are buyers with some cash and locked-in financing on a $950k home considered "unattractive" by most sellers? That's how it feels sometimes.

And even if you have the cash to buy a primary residence, why not use that capital for other investments and get a mortgage to pay for a portion of the home purchase. At least you get a tax write-off.

I hope your buyer/builders want to show off their home when it's done!

Gary Thomas said...

CASH is better than financed in some instances because it shows an actual ability to close a deal. When there is a contingency, a willing buyer may not be a bankable buyer. Banks can be difficult lenders these days. I have an actual "buyer" with over a million bucks in the bank that does not have a job and who cannot qualify for a loan. Go figure that out. What kind of morons are the MBA schools creating?

To me a CASH buyer with a big cash earnest money deposit, limited contingencies, and a quick close is far superior to a financed deal with a buyer who has a list of "must haves" as contingencies.
The more contingencies or what ifs, the more opportunities for the deal to fail.



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Key West, Florida, United States
I first read about Key West in a magazine called "After Dark" sometime in the mid 1970's. But it wasn't until March 1984 that I made my first visit to the island that would become my home. I had two weeks for a vacation and reserved a room at Colours Guesthouse (now Marrero's Guest House) for one week. I thought that if I didn't like Key West, I could always go back to Miami or Ft. Lauderdale for the rest of my trip. But after a couple of days in Key West, that was no longer a consideration. But when I wanted to extend my stay for the extra week I found there was no room at the inn. The guesthouse owner did find me a room at LaTeDa, the infamous guesthouse/restaurant. That's a story I'll write another day. But those two weeks in Key West gave me the realization that I had found Paradise. Key West has been my home since 1993 and my only regret is that it took me so long to get here. I am a full time Realtor at Preferred Properties CRI. Let me help you find your new home or business in Paradise. Living in Paradise is not a slogan, it's a way of life.