A Broker Makes a Rational Offer for his Future Residence the Results

My wife and I have been looking for a home (for followers of my blog we sold our primary residence of just shy of 30 years back in April 2017). We have kept our eye on a listing in one of Denver’s most desirable and stable (concerning values over the long-term) neighborhoods. The home we expressed interest in is small (similar houses have been expanded), requires updating to present code including electrical, no garage and the basement shows evidence of past and more recent water damage.  Coupled with all the above information the most recent index by Beracha, Hardin & Johnson Buy vs. Rent Index suggests we would be better of renting than purchasing at present yet as brokers we too sometimes operate on emotion and we are looking longer-term.

While the index does somewhat influence my decision; being a logical broker I conducted my due diligence concerning comparable properties in the same block on the same side of the street. I went back a few years and extrapolated the comparable’s using an inflation calculator to justify our offer.

While I will not disclose the address, the asking based on above grade SF is approximately $625 Per Square Foot (PSF). The comparable properties all have similar lot size and as mentioned on the same side of the street on the same block:

  • Comp 1: Sold – 3/2018:

Sold for $459/PSF Above Grade

Inflation Factor: N/A

-This home is in meticulous shape including the architecturally designed addition on the rear with the expanded kitchen, family room with fireplace, 2-car garage and professionally landscaped front, rear and side.

  • Comp 2: Sold -10/2017

Sold for $417/PSF Above Grade

Inflation Factor: $429 PSF Above Grade

-While I have not seen the inside except from the exterior new lighting, new windows, architect-designed extensions on the rear, garage parking to match. It is a duplex and both sides sold together as one structure. Each 1/2 of the duplex has 3 bedrooms and 2.5 bathrooms, larger than the subject property.

  • Comp 3: Sold – 6/2017

Sold for $532/PSF Above Grade

Inflation Factor: $546 PSF Above Grade

-While used as a pied-a-terre the interior condition is similar. The kitchen was outdated however larger space, has a garage and deep south setback with a lot that is 1,000+ SF larger than subject property.

  • Comp 4: Sold – 7/2015

Sold for $395 PSF

Inflation Factor: $420 PSF Above Grade

The house is very similar to Comp 1 (next door) yet narrower lot and smaller size overall. Excellent design and layout. The rear and upper extension were beautifully designed and executed with functionality i.e. den w/ fireplace, expanded kitchen with breakfast area, 2 car garage made of brick to match the historic urban fabric coupled with a professionally landscaped yard.

Thus concerning the comparable properties using 2018 dollars the prices per square foot above grade range from $420 to $546. While 4 homes do not make a proper statistical average would be $463.50 PSF based on inflation with the $546/PSF sale skewing the average upward do to limited sample size. Of note the Median is $444/PSF.

Many of my peer brokers believe the peak of the market was 6-12 months prior as prices are beginning to slip, inventory is increasing coupled with rising mortgage interest rates.

Based on the $463 PSF average noted the house we made the offer upon should be priced at approximately $625,000 which may even be somewhat aggressive as the comparables are homes that have been extensively renovated or updated and all include alley access garages.

We offered $560 PSF or 20% above the comparable properties identified on a PSF basis.

Our offer was promptly rejected as the seller is asking $625 PSF.

While no fault of the out-of-state seller if /when the residence goes under contract and assuming there is an appraisal there may be a rude awakening. We could have offered full price and use the appraisal and inspection contingencies to eventually close at a lower market oriented price; however that is not our method of operation.

We made a viable offer, provided statistical pricing guidance and was subsequently rejected based on I assume emotion and/or irrational exuberance concerning valuation. I have been incorrect before and the residence may actually sell for asking (of note at present on the market almost two months and one price reduction to date); on this one we like it (we do not love it) however we willing to wait it out or pass altogether as inventory increases and pricing pressures are forecast to be in our (buyers) favor.

 

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