Love Thy Neighbor

Today’s featured properties illustrate a growing phenomenon in the real estate world: Comp Killers.

When one property on the same street or in the same condo complex sells for a price significantly higher or lower than nearby properties, it sets a new “comp,” or comparable value for the area. A comp is one of the tools realtors, appraisers, lenders, and (hopefully) buyers use to determine the value of a specific property.

Comps are great when prices are going up because if you bought for $500,000 and a neighbor sells a similar house for $550,000 the next week, the new value for neighborhood
properties is $50,000 more than what you paid. Sweet, right? Instant equity!

However, in a declining market (which even the most delusional real estate bulls agree we are in currently) comps can be extremely dangerous. For example, if you buy a place for $500,000 and a house on your block, similar in size and amenities, sells for $400,000—that’s the new comp for your property. And if your asking price is much higher than the last comp, your house is overpriced and is virtually guaranteed to rot on the market.

When neighborhood values drop, suddenly homeowners realize they are struggling to pay a mortgage on a place that is worth considerably less than what they (over)paid for it. When this happens, an owner becomes “upside-down” on their house and many (especially those who put nothing down) are tempted to just mail their keys back to the bank and walk away. And sometimes life simply happens: Divorce, illness, and unemployment can cause the owner to fall behind on payments and eventually result in a foreclosure.

Whatever the circumstances, that property goes back to the bank. Banks don’t like these properties to sit on their books for too long, so it’s in their best interest to minimize losses and just get rid of them. (One way of ensuring properties don’t get on the books is a “short sale.” This is when a bank allows the owner to sell the house to someone else for less than the value of the mortgage. The bank takes a loss but the house stays off their books. The seller loses their down payment and equity and searches for an apartment).

The bank has a lot more money than the other neighborhood sellers, so they can afford to ask much lower prices. A bank only cares about their bottom line and couldn’t give two sh*ts about your neighboring rat-trap condo that’s been sitting on the market for 180 days. They need to get as much of their money back as possible, even if it means setting a new low for neighborhood comps.

And sometimes, sellers who need to get out due to relocation, divorce, retirement, etc. will set an asking price much lower to get ahead of the competition and ensure a quicker sale. Or sometimes certain sellers have owned for a long time and therefore have enough equity to absord a lower asking price.

Regardless of why certain sellers set lower asking prices, you can imagine a next door neighbor trying to sell a nearly identical property wouldn't be too thrilled with someone trying to set lower comps. Here is our first property:

Address: 533 Walnut Ave. # 13
Wishing Price: $439,000
Size: 2 beds, 2 baths, 1463 sq. ft. (built in 1990)
$/Sq. Ft.: $309
Purchase price: $330,000
Purchase date: 1/2005
MLS#: P958415
On Redfin: 66 days
Required Down Payment: $43,900
Required Monthly Payment: $3,000
Required Income: $109,750
Description: COMPLETELY REMODELED AND LOCATED IN A FAMILY ORIENTED NEIGHBORHOOD, BLOCKS FROM THE SHOPPING/ RESTAURANTS OF DOWNTOWN, THIS IS THE NICEST HOME IN WALNUT VILLAS. THE OPEN LAYOUT FEATURES CHERRY HARWOOD FLOORS, A FIREPLACE AND CUSTOM BLINDS. SLATE, TILE AND UPDATED APPLIANCES ADORN THE KITCHEN, AS WELL AS A SEPARATE BREAKFAST NOOK. ENJOY THE MASTER SUITE THAT FEATURES A WALK-IN CLOSET, PRIVATE BALCONY AND DOUBLE SINKS IN THE BATH. OTHER FEATURES INCLUDE A SEPARATE LAUNDRY ROOM AND A PRIVATE PATIO.

THANKS FOR THE ALL-CAPS. ARE YOUR EYES BLEEDING YET?

Realtors have certain “codes” to embellish amenities when describing houses. For example, “CUSTOM BLINDS” sounds pretty good and implies some money has been invested. Plantation shutters are a great example of custom blinds that add value.

But take a look at the pictures. If digging through a bin of pre-fab mini-blinds at Wal-Mart and selecting your window size is considered “custom,” then lots of people are wearing “custom underwear.”

Codes are one thing, but straight up lying is another. “COMPLETELY REMODELED”? Are they selling to people with no eyeballs? One quick look at the kitchen reveals there’s nothing “complete” about this supposed remodel.

Floors: Old ass, dirty looking tile.
Counters: That ain’t granite—that’s the white tile garbage that came with it in 1990.

Cabinets: Nothing special.
Lighting: That overhead fluorescent monstrosity is horrendously outdated and clearly demonstrates this place has barely been touched in 18 years of existence.

They must mean “COMPLETELY REMODELED EXCEPT FOR THE KITCHEN.” So let’s look at the bathrooms, shall we?

Well, I guess they didn’t complete the bathrooms either. Check out the original white countertops and cheap lighting! Yikes!

Other than cherry hardwood floors, new tile in one bathroom (come on, pal. How about a little effort?), and a new stove and microwave, this place is all original, baby. Maybe that’s the marketing position they should have taken.

Anyhow, if a brief glance at some low-resolution pictures can expose this seller as a delusional optimist at best and a fraudulent liar at worst, let’s look at some other details of the listing to figure out the motives behind their insane asking price.

What immediately stands out is that this seller purchased this “all original” condo in 2005, just as the market was starting to peak. They paid $330,000 three years ago, which is a decent price considering the hot market, but are now asking for $439,000 in a declining market.

If they get asking price, that’s about $36,000 appreciation per year of ownership. Shoot, why work when your house can bring in more than the annual median income?

Since we’ve already established there are no significant upgrades to this 90s classic, return on investment can’t be the motive. That only leaves one possible impetus behind this attempted money grab: Greed. Pure and simple avarice.

Or maybe, as the listing indicates, this truly is “THE NICEST HOME IN WALNUT VILLAS.”

I wonder what this property a few doors down has to say about that?

Address: 533 Walnut Ave. # 8
Asking Price: #399,000
Size: 2 beds, 2 baths, 1463 sq. ft. (built in 1990)
$/Sq. Ft.: $281
Purchase price: $415,000
Purchase date: 9/0/2005
MLS#: P608968
On Redfin: 76 days
Required Down Payment: $39,900
Required Monthly Payment: $2,700
Required Income: $99,750
Description: INCREDIBLE VALUE!!! Charming townhome featuring an open & spacious floorplan, a light & bright kitchen adjacent to the dining and living room w/ newer stainless steel appliances, & a charming breakfast nook. Living room offers a cozy fireplace & a private patio for entertaining. Spacious master bedroom w/ walk-in closet, private balcony, & large bathroom w/ dual sinks. All bedrooms have vaulted ceilings. Inside laundry, lots of storage space, EXTRA storage room, plus 2 car ATTACHED garage.

A two car “ATTACHED” garage? As in, attached to the home so as to provide direct access? If that’s true, it’s a significant advantage over #13. Bathroom cabinets aside, this place looks to be nearly identical to the first, yet this one doesn’t make the laughable claim of being “COMPLETELY REMODELED.” Hmmmm…

Not to mention this property is asking $40,000 less for a nearly identical product. Can you say, comp killer?

Here is where it gets interesting. This second unit was purchased eight months after Unit #13 for $415,000 (wow, 85 Grand more than #13 paid in just 9 months! Either #13 was an absolute dump, or the price bubble was out of control that summer). Assuming #8 gets their asking price, this seller stands to lose nearly $40,000! Ouch!

The fact is, this second property will not sell for $399,000. The original asking price for #8 was $429,000—a clear attempt to break even—and no bites. They chopped another $30,000 but as the basic calculations show, it's still overpriced.

But just for fun, let’s suppose #8 sells for $399,000. Like magic, the new comp for the building would now be $399,000. That means, the owner of #13, who has been languishing on the market with his wishing price, will have to slash his price by another $15,000 instantly if he hopes to sell.

Or, let’s think about the more realistic scenario: Unit #8, who seems to be more in touch with reality (or is simply more desperate to get out), keeps dropping his asking price faster than Britney Spears' chances of gaining full custody. What will get this place sold? Another $20,000, $30,000, $50,000?

Either way, Unit #13 will have no choice but to lower his price accordingly. This is called “chasing the bottom down” and when one neighbor attempts to undercut everyone else in the neighborhood, you can imagine conversations at the mailbox are a little tense.

So not only will these two sellers compete with each other in the building, they will have to compete with all of the neighborhood comps, foreclosures, and short sales as well.

CONCLUSION:
Right now the real estate market is in a psychological stand-off.

Sellers refuse to accept that the property they paid top dollar for just years earlier is now worth 10, 20, or 30% less.

Buyers refuse to buy because of the widespread perception “prices will come down” and won’t pay inflated prices that don’t meet economic fundamentals—regardless of what some sucker paid 24 months ago.

But eventually the buyers will win. It’s becoming increasingly more common to read articles about sellers who rejected what they viewed as “bottom-feeding” offers, only to capitulate to reality a year or two later and accept less than the “offensive” low-ball offer.

When the market was hot, buyers were told, “You don’t want to get priced out forever.” Now that the market is collapsing, sellers are waking up to the prospect of being “priced in forever.”

You could criticize both sides for their stubbornness, but unfortunately for sellers, the broader economic factors at play will force a psychological change from Denial to one of Acceptance, whether they like it or not.