Often, buyers ask their real estate agent what a seller had previously paid for the property. But what difference does it make if a seller paid $300k for their house in 2000 and is now asking $900k? The more relevant question is: “in the last three to six months, what have other homes of similar size, location and condition sold for?"
What I think the buyer is really asking is: “how much of a profit is the seller making and does that seem fair?”
Up until 2005 or so, at the peak of the seller’s market, people were selling homes after owning them for a year or two and making big bucks. No one was really asking if it was “fair” that a seller make a huge profit in a short period of time. Buyers just hoped that their luck would be just as good.
Of course, in hindsight, we now refer to this period as “THE BUBBLE.” When the bubble burst, literally millions of buyers across the country were left with properties worth far less than what they paid. As people started losing their homes in foreclosure, and the banks started looking for bailouts, thus began the “Great Recession.”
Now in 2011, is the question of what a seller paid for their house relevant? Or fair? In two specific cases, I think the answer is yes.
Yes if the house last sold in 2005 or later. While there are exceptions to the rule, the rule is still that the market has been in decline since 2005. If the seller is asking more than what they paid, or even anything close, it is valid to ask for a justification. Did they do a major remodel? Did they replace the foundation? There should be an explanation. None of the answers may matter though, because the only real metric of “current market value” is what has recently sold. It is completely possible that a seller spent $200k remodeling their house and it is still worth far less than what they paid at the peak.
The second case where I believe it valid to ask what a seller paid is when it was a really recent purchase, like within the last six to nine months. This kind of quick turnover is a sign of a “flipper.” Examples of flippers abound in the market right now, where professional investors purchase a property that has been foreclosed. I’ve seen many cases where the investor puts the property back on the market within days or weeks of his purchase at a much higher price, sometimes with just a new paint job but sometimes without making any repairs or improvements.
How is this justified?
Because the investor thinks he has “outsmarted” the market! He believes he saw value where no one else did.
Maybe it is just me, but I find that attitude pretty amazing. Of course, it could be that I dislike in others what I dislike in myself (arrogance?). From a buyer’s point of view, whether the seller is making a killing or taking a huge loss, it really doesn’t matter.
The asking price either makes sense in the current market or it doesn't.
Brett Weinstein is broker and co-founder of Realty Advocates, a full-service lower commission brokerage serving Berkeley since 1986. . Brett has also collected an archive of all the murals he's found within Berkeley. Click here to see his collection.