WHY THE BEST PRICE IS NOT ALWAYS THE BEST DEAL.
by James Frangella
Written May 13, 2008 3:30pm PT: Posted July 31, 2008

A few months ago a gentlemen visited one of my open houses in Pacific Grove. He told me he was an investor and owned several properties. He was extremely proud of his most recent acquisition.

“I just bought a property for $150,000”, he puffed. Now mind you, this was in November of 2007 and I was duly impressed. This was about the lowest price for real estate in our area I had seen in a long while. I personally do not want to see housing prices on the Peninsula hit rock bottom.

“So, where did you buy this property?” I curiously asked.

“In Seaside”, he replied.

“Oh, how nice.” My response was dripping green with envy as I own a couple of houses in Seaside myself and I never paid that little for them. I probed a tad deeper.

“So, on what street?”

He told me. Now I won’t repeat the street’s name but I was then suddenly reminded of a cartoon scene from my youth. I can’t quite remember the cartoon character but I’m sure some of you will remember where the character suddenly transforms into a lollipop after doing something stupid or silly.

I imagined the investor as one big lollipop. He’s not alone. I, myself, have been a big lollipop so many times, I can’t remember which was my favorite flavor! I guess there’s a sucker born every minute. He spent $150,000 for a property in a not-so-desirable neighborhood.

To determine a neighborhood’s desirability is not an easy task. But its not rocket science either. We’ve all known which cities and towns are most desirable by just visiting and observing the scenery. Neighborhoods use the same concept except we would pay close attention to recent sold properties. Most importantly, we should seek the opinion of not just one REALTOR but a couple of them. That investor probably should have called me.

Warren Buffett has said he'd rather buy a good business at fair price than a fair business at a good price. What a great idea! No wonder he’s one of the most successful (and richest) people in the country.

This idea also applies with real estate. I’d rather buy a good house at a fair price than a fair house at a good price. Of course, I should add that the definition of a good house also means in a good and desirable location.

As prices of houses settle into the affordability range, we are going to see some wonderful opportunities. But we shouldn’t just jump in because the “numbers seem to work”. Plan before you land and look before you leap can be good advice. You are probably wondering what I mean about the affordability price range and “numbers seem to work”. This is a subject matter that I will go into more detail in one of my future commentaries. But for now, I’ll touch on it ever so lightly.

No body really knew what the word “affordability” meant back in the heady years of our hot and crazy market. Purchase money was practically free and there was no care in the world whether a borrower could afford it or not. Affordability pricing basically means … I’m actually shaking my head as I write this because it is really very simple. A fifth-grader should be able to figure this one out. It means pricing something so that a buyer can afford it. Whoa! Don’t rush to the bank yet, folks! There’s still more.

Location is of the utmost importance. As I’ve heard so many times before, you can always change the house but you can’t change the location. That investor did pay $150,000 but I really think he could have paid a whole lot less or better yet, I know of a couple of other properties in a much better location for about $50,000 or $75,000 more. Yes, I know that is a lot more money but, trust me when I tell you that he bought in a really, really not-so-desirable (I won’t use the word I really want to) location.  Besides, a better location would have given him much higher rental income.

As this market heats up (and yes, it will) with attractive pricing on homes, you could find some diamonds in the rough.  Just pay close attention to its location. You want your diamond to stand among other gemstones not with a bunch of plain ordinary rocks.  Otherwise, you'll be thinking of lollipops.