4 immutable laws of real estate

Although these truths might be difficult for buyers, sellers and their agents to accept, they are unyielding
 
 

Jay Thompson is a former brokerage owner who spent the past six years working for Zillow Group. He retired in August 2018 but can’t seem to leave the real estate industry behind. His weekly Inman column publishes every Wednesday.

You’ve got Newton’s laws of motion. You’ve got the laws of thermodynamics, the economic law of supply and demand, heck you’ve even got Murphy’s law.

Why aren’t there any laws of real estate?

Well, there are now.

First law of real estate: It doesn’t matter what the neighbors’ home sold for in the past.

Home prices are dynamic. They rise and fall, wax and wane, and they can change daily, seemingly on a whim. What a home was worth five years ago, last month or yesterday has no bearing on what it is worth today. This can be a difficult pill for homeowners to swallow.

Sellers need to stop thinking about “woulda, coulda and shoulda.” You didn’tsell your home two years ago when you could have gotten more for it, so getting upset about what it sells for today is simply a waste of energy.

You can’t go back in time (according to Einstein, a pretty sharp dude) and sell your home, so stop worrying about it.

Second law of real estate: A home is worth what a ready, willing and able buyer will pay for it.

In today’s market, “able” is usually the limiting factor. Blame the banks.

real estate agent can’t dictate what a home is worth. Automated valuation models (AVMs) certainly can’t tell you what a home is worth. A home appraiser can’t even tell you — though the bank will listen to an appraiser and not loan you more than what they claim the home is worth.

And before every appraiser on the planet beats me senseless, consider this: order five appraisals on a listing. You know what you’ll get? Five different valuations.

A real estate agent can provide a general idea of what a home might sell for. Some can get remarkably close; others, not so much.

Automated valuations are fun to play with and are reasonable ways to look at pricing trends, but they should never be relied on to price a home (the AVM providers will even tell you this, if you’ll listen to them).

And appraisers do very good work at drilling down into a home’s value. But the bottom line is, unless you find buyers who are ready, willing and able to buy the home — at the price they deem appropriate — it’s not going to sell. Ever. (With the possible exception of being “sold” back to the lender at foreclosure).

In short, it doesn’t matter what the homeowners think their home is worth. And it certainly doesn’t matter what the agent or owner wishes the home was worth. What matters is what a buyer thinks it’s worth — and in the case of a financed transaction, whether a lender will approve a loan at that amount.

Third law of real estate: Home improvements will not make a home value increase in an amount equal to or greater than what was paid for the improvements.

The corollary to the third law of real estate is that money spent on maintaining a home adds zero to the home’s value.

Have a $25,000 swimming pool installed, and a home’s value is not automagically increased by $25,000. Depending on the pool, the location, nearby amenities and the direction the prevailing wind blows, your $25,000 pool addition might add $5,000 or $10,000 to the value of the home. Or it might, in fact, add nothing.

Some improvements, especially kitchen and bathroom improvements, tend to have higher rates of payback than others. But rare is the improvement that adds equal or more value to a home than what it cost.

What about maintenance? That shiny new water heater installed last year, the pretty new roof or that $3,000 air conditioner compressor that was installed last week add zero dollars to your home’s value.

Sure, the fact the water heater, air conditioner and roof are newish will likely appeal to some buyers. That might well be what triggers their decision to buy your home versus another one, but they don’t make the home intrinsically more valuable.

Does it suck to dump $3,000 into an air conditioning repair on a home you’re not even going to live in? You bet it does. But try selling a home without air conditioning in places it gets over 80 degrees. Good luck selling a home anywhere without a water heater or a roof.

You’d have to discount the price of the home at a far greater amount than those repairs would cost to sell a home missing such basic functionality. And you’ll cut your potential buyer pool significantly without those mandatory “features.”

If fundamental repairs are needed, the owner is just going to have to suck it up and make them and not expect to recoup any of that money — or be prepared to discount the list price to compensate.

 

Fourth law of real estate: The odds of getting an offer on a listing increase exponentially if the listing agent goes out of town.

The buyer’s corollary to the fifth law of real estate is your dream home will come on the market 15 minutes after your agent boards a plane.

Seriously! Ask any agent what happens to their business when they go to a conference. Or on a vacation — whatever that means. They’ll tell you that business invariably increases when they leave town.

Usually in direct proportion to the level of inconvenience it requires to respond to offers, buyer inquiries, etc. So if you really want to get an offer on a listing, have your seller send you on a trip to Hawaii. It may cost them less than a price reduction, and it’ll work every time.

Jay Thompson is a real estate veteran and retiree in Seattle, as well as the mastermind behind Now Pondering. Follow him on Facebook or Instagram. He holds an active Arizona broker’s license with eXp Realty.