The Price of the Home Across the Street and Its Long Shadow

Image of Shadow

We were looking at a Silicon Valley estate sale which was "priced to sell" according to the listing, and when you're searching for tangible information, words like that (along with vague adjectives like "quaint" and "charming") eventually lose all their meaning!

Instead, they become signals of things to look out for: little tooltips that say, "Pay a little more attention to me," sometimes with an exclamation point.

In this case, it was a subtle alert to look very closely at comparable properties.  And the important data wasn't in the house were were about to look at --- it was in the house across the street which just went into contract...

Measuring the Potential of a Tired House

But first things first, that data doesn't mean much if the client doesn't like this house.  After all, we were doing a buyer tour.  The comparable house across the street already had a buyer in contract and making a backup offer on it would only add uncertainty to my client's search.

Besides, since we didn't believe that the listing agent had other suitable properties, listed or pocket (the reason for any equivocation), we wouldn't gain any usable brownie points for a backup offer either.

A good quality comparables comparison requires attention to detail.  This house, from the outside, looked like every other one in that part of the neighborhood.  Walking towards the lockbox, we were greeted by a plant whose flowers formed gentle rainbow-colored birds.  The entryway was welcoming and the deck beneath the doorway was in reasonable condition.

Outdoor Details

It sat opposite what was a small fenced Japanese garden which shielded the sitting room and its window from prying eyes.  That was appealing to my client who's never really understood houses without blinds or drapes facing the front.  His saying is, "Sure, I have nothing to hide but why advertise?"

Doing a quick walkaround, we noticed the yard had a healthy lemon tree and little touches, including a small but efficient toolshed and a garbage area covered with a shingled roof.

I fumbled with the front door lock for a second until we realized there was a deadbolt hidden away by the lockbox itself close to thigh-level.  Then a quick turn of a key revealed the kitchen immediately to the left, the corridor back to the four adjacent bedrooms, and the sitting room to the right.

Kitchen Quandry

The kitchen immediately caught my attention as a huge negative.  There was very little counter space and what space there could have been was taken by the embedded electric range, lined up against the wall towards the corridor.  I cook a lot and there wasn't enough space to have more than a few ingredients on that side.

The cabinets had been replaced from the originals drawing a striking contrast to the appliances, which were several decades old and looked completely out-of-place.  And, functionally, the oven would barely fit most roaster chickens, never mind a Thanksgiving turkey, and especially not one from Costco.

"Where Are the Bathrooms?"

It's not that either of us needed one.  The fact was: the second one was hard to find and the house was barely over 1,300 square feet!

The four bedrooms were all about the same size and located in the same part of the house.  Newer houses have one or two obvious master suites and often keep guest rooms separated to give the owner and visitors some privacy.  But this house had a configuration not atypical for its 50 year age.

There wasn't any distinct master suite but there was one bedroom with an attached bathroom.  The bathroom was technically a full bathroom with a toilet and a standing shower, but the entire room barely had room for its door to swing through and the shower was folded back behind the bathroom's entryway making it very easy to miss.

It reminded me of the bathroom in an efficiency suite and that significant deficiency would definitely decrease demand.

Is This a Bad House or Does It Have Potential?

The house does feel spacious for its size and I noted that if it were converted in-place to a three-bedroom house with an expanded the kitchen, it could be a strong property.

In fact, if you were to concentrate money on upgrading any part of a house (assuming there's not an incredible deficiency elsewhere), it should be the kitchens and the bathrooms: they generate the highest ROI and usually (but don't always) pay for themselves.  The bottom line is that the house has potential at the right price.

The House Across the Street Casts a Very Long Shadow

The asking price for the house we saw was listed at a little under $900,000.  For the Bay Area neighborhood we were in, that number --- ignoring the house --- isn't unreasonable.  But the house across the street was also listed at about $900,000 and had 400 more square feet, a lot 1,500 square feet larger, hardwood floors and granite counters in the kitchen, central air conditioning and both bathrooms renovated.

Comparing Asking Prices

If the house across the street is so much of a better value, how was the price for this house determined?  Here are a few possibilities:

1/  The actual sale price (not the asking price) of the house across the street was much higher than asking, justifying the difference between the kitchens, bathrooms, and other amenities.  (This is a possibility but is unlikely because the market comparables indicate a price reasonably close to the asking price.)

2/  The availability of homes at that price point in that area is much lower than demand.  (There are several houses on that block, some for sale by owner (FSBO).  The FSBO homes help inflate asking prices, but not necessarily market values.)

3/  The owner (or in this case estate) has unrealistic expectations.

4/  The owner or agent is chasing a long tail offer based on something "unique" about the property that will be highly valuable to a very small segment of the population.

5/  They are hoping for a buyer that is underrepresented or isn't well-informed about the local market.

Poor Initial Pricing Negatively Affects the Selling Price

The last three points fall into the "let's see what we can get" argument.  The rationale is that if you price the house high, someone will come in with a lower offer and you can always counter.  The problem with this methodology is that the seller signals these points to prospects, none of them good!

When sellers set the price too high, they signal to potential buyers one of five things:

1/  I'm greedy: I know you'll start negotiating by knocking 5% off my asking price so I'll raise the price we start from.

2/  I'm unreasonable: I want this amount of money no matter what the market dictates.

3/  I don't know the market: I really do think my house is worth that much more than the last few houses that sold.

4/  I'm delusional: My house is unique and you'll pay for the privilege of having it.

5/  I don't really want to sell: I set my wish list price and if I don't get it, so be it.

A good buyers agent will alert you to these possibilities and ensure you find properties that are better priced for the value you see in them.

Great Initial Pricing Causes Auctions

I analyzed a property in downtown Mountain View and when I was there, I saw a stack of business cards Kinko's would have been envious of.  The asking price was under $700,000 (a good value for that location and the quality of the property) and when they finished, the final price was over $100,000 more.

This happened because the below-market asking price caused an auction situation between multiple strong bidders.

In the Silicon Valley Real Estate market where there are people with very strong purchasing power, it makes more sense to cause a competitive situation with a lot of buzz than it does to eliminate prospects with unreasonable pricing.  But pricing depends on the details of each property and knowing how they affect the value of other properties in the area.

For both buyers and sellers, having an agent who knows how to accurately price homes is absolutely essential.

[ed. The properties and analysis in this story are real but the actual prices and locations have been obscured.]