January 24, 2009

Is it a Good Idea to Buy a Home Directly from the Owner?

I recently received a request for information on a couple who wanted to buy a horse property - they had found a builder who was willing to sell a home to them that they were remodeling. The home was not yet fully remodeled and the builder showed the original purchase price plus the invoices done so far on the property. The builder was willing to sell for his costs on the property, plus the remodeling costs done thus far and let the couple do the rest of the work. Their question to be was is this a good deal?

The answer to the question is that you never buy a property from anyone unless you are informed and armed with Market Data! The buyer must have sold data and sold comparables so that you know where the market is at this time. This property was located in Kaysville and this is what we found as we did our research.

We searched the data for horse properties that sold in the last 90 days. The average price per s.f. with land (.5 acres to 1.53 acres) was $86.69.

From the sold listings for “rambler style” houses sold in the last 90 days, the average price per s.f. was $76.40 with lots of about .25 acres in size. There was one house on Ewe Turn, just east of the home these buyers were looking at that sold for $182.38 per s.f.. This buyer had no agent representation and was willing to pay this price because of the condition of the house, amenities, 1.95 acres of land, and location. The price paid was more than twice the actual market value from other comparables. You have to make your own decision on whether the buyer did the right thing.

From the tax data on the Davis County Records, the County value for the land and buildings was $297,500 or $103.37 per s.f.

The price the seller is asking the Buyers to purchase this property at is $340K and it is not yet completed. At that price the value per square foot is $118.14. To calculate the true cost of the purchase, the Buyers would need to add the amount of money and time to finish the house which would bring their price per s.f. even higher.

A buyer must have market data and understand the terms “Price”, “Value” and “Market Value.”

Price is what the sellers would like to receive for their property. It can be high, low, or accurate as determined by sold comparables. In most cases, it is high! To determine a list price, many sellers will take what they paid for the property, add what they spent on improvements and consider that to be the list price. It is important to understand that price and value have no relationship, never had, and never will. For example, if I buy stock at $100 per share and the value goes to $70… all I can sell my stock for is $70. The same principles apply to homes. I may buy at house at a cost of $200,000 but if the market drops I may only be able to sell it for $175,000. My actual costs and my value are not the same and as a buyer you must be able to understand that you only buy on market value, not costs.

The second term is “Value.” This is the price set by a buyer (or a few buyers) for a home. A property may have a special swimming pool, heliport, or oil in the ground! For whatever reason, these few buyers would pay a higher price for this property. The home that sold for $182.38 per square foot is an example of “value” purchasing. This buyer was not represented by an agent and likely paid cash because this property would not appraise for a loan at this price per square foot.

“Market Value” is what many buyers (and lenders) would pay for this property. It is based on the sale of at least three or four similar homes in the area. If you are borrowing money to buy a property, this is where you want to make your offer. Again, it is important to buy the property at market value or it may take you years to recover from buying at “price” or “value” amounts.

The answer to the question is that a buyer must have accurate information before making any purchase. That is the main function of a buyer’s agent and any time a purchase is made without that information the buyer is at risk… and maybe the seller to, however the greater risk is with the buyer.

Posted By: Steve Randall