Cost vs Value: Market Value
When purchasing a home, it’s important to understand the difference between cost vs value in real estate. In other words, asking price doesn’t determine market value. The best way to illustrate my point is with an example like this:
Buyer #1 pays $350,000 for a house that was listed for $345,000
=$5,000 ABOVE asking price
Buyer #2 pays $350,000 for a house that was listed for $360,000
=$10,000 UNDER asking price
Which buyer got the better deal? It depends. To answer that question, you need to know the difference between cost vs value. What’s the difference?
This difference between cost and value is:
Cost: what you pay.
Value: what it’s worth, both statistically and personally.
For now, let’s say value is based solely on market data. Later, we’ll look at how value is actually relative to your personal situation. If market the data shows that each of these homes are worth about $350,000, then neither buyer got a better deal. One payed above asking price, one payed below asking price, but both got the same deal. On paper, it was a tie. However, value isn’t based only on market data. Value also depends on your personal situation.
Cost vs Value: Relative Value
A given property can be worth more to you than the next person. Why? Follow me through this example. In this case, imagine both buyers are interested in the same house: 123 Main St. Both buyers have the same financial means…just for the sake of an apples-to-apples comparison.
Buyer #1
- 123 Main St is located:
- 5 minutes from Buyer #1’s work, church and kids’ school
- Plus, it’s right around the corner from his elderly mother, whom he visits frequently.
Buyer #2
- 123 Main St is located:
- 25 minutes from Buyer #2’s work and church
- Buyer #2 doesn’t have nor want kids
In this example, Buyer #1 has plenty of reasons why 123 Main St could have a higher value to him than to Buyer #2. What if Buyer #1 didn’t get this house, and later found out that he only missed it by $5,000? $5,000 is not a small amount of money in some regards. However, that works out to about $25-$30 per month difference in mortgage payment. If Buyer #1 settles for a house much further away from his daily routine, he’s likely spending way more than $25-$30/mo just in gas alone. Plus, the loss of personal time he could have re-invested with his mother, but is instead driving more everyday. I always encourage buyers to keep this in mind.
But, I Want The Best Deal!
I completely understand everyone wants the best deal possible. Me too! However, many people feel the need to ask for a certain percentage off of the list price, regardless of the value of the home, just to feel like they got a deal. I guess it’s human nature. Why else do you think a store like Kohl’s goes to such great lengths to inflate the supposed discounts you’re getting? “Your total is $100, but you saved $183.16!” Really? No, not really. But, you somehow still feel like you got a deal. The same thing goes for buying a house. The difference is that a house is a much bigger investment. The job of a good real estate agent is to help you really dig into the details of your situation, and to let you know all your options. That’s how you get the best deal. Always remember that cost (price) is never the only factor in this equation.
If you’d like to dig deeper into your situation, or just have some questions…give me a call. I would love to discuss your options with you. No pressure, just a discussion (seriously).
Justin Rollheiser – REALTOR®
Keller Williams Realty | Diamond Partners, Inc.
13671 S Mur-Len St | Olathe, KS 66062
Cell 913-800-7653
Office 913-322-7500
www.JustinRollheiser.com
Comments or Questions?