“Sometimes the best deal is paying retail.”
I've always loved that principal, and I've taken it upon myself to apply it to my everyday life … quite liberally in fact. Expensive clothing is justified by the fact that it may make the difference between me getting that listing and not. My fast sports car was justified because it gets me from here-to-there faster and makes me more productive because it saves me time commuting.
You get the picture.
Yet as an economics major I never applied the "retail" theory to life's bigger purchases or life's investments. While I could justify Gucci in my personal life, I could never feel like I was overpaying for a stock (Google, $600? No way! Facebook, post-IPO? Not when I know people who paid pennies a share!) or a piece of real estate.
In many luxury markets, real estate is back with a vengeance. Sales of Beverly Hills homes priced at $2 million and higher climbed 11 percent in the first quarter from a year earlier to 39, according to DataQuick, a San Diego-based provider of property information. In Brentwood they increased 56 percent to 25, and in Malibu they gained 64 percent to 23. Throughout the U.S., residential-property sales of $1 million and higher rose 7.2 percent in March from a year earlier.
These aren't just statistics. I'm seeing it in real life as well. In Los Angeles some properties have received a dozen or so offers. I'll show up to private showings with clients and they'll be so crowded we can't get in the front door. Open houses are often stuffed with over a hundred potential buyers. A high-end Hollywood Hills lease that I represented had a bidding war and it got to the point that I received an offer 25% over asking price ... that I turned down. In Palo Alto I can take my morning run without seeing a single For Sale sign. When I do, it generally says "Coming Soon," which means in fact it probably won't come on the market soon because it will be gobbled up by some tech guy long before that.
There are many reasons for the suddenly ebullient market. In my opinion, it's connected to three interrelated events. First, there was a pent-up demand for many years while people waited for the market to go down further. Yet people can only wait for so long. Unlike a stock, real estate is something that is lived in. Life changes often dictate a move, so eventually people are forced to buy. In addition, interest rates are at an all-time low, and prices are the lowest we've seen in years. As I mentioned in a previous article, this once-in-a-lifetime intersection is too hard for many buyers to pass up. And finally there is the well-documented lack of supply. There is little inventory, so Economics 101 would indicate that prices would go up accordingly.
Which brings me to: In the tricky case of real estate bidding wars, when do you overpay?
The pragmatic part of me tells my clients to figure out how much they would like to pay and then don't bid over that amount. Yet am I giving the right advice?
According to some economic principals I am. But according to the "Sometimes the best deal is paying retail" theory I'm not. The theory was tested recently when a friend was putting in an offer on a home that wasn't on the market. I was very personally invested in her home search, as she had been looking for a long time and I wanted her to find the perfect house. She had found her dream house and discovered someone else had offered $850,000 for it. My friend said she was going to offer $900,000. I asked her, hypothetically, if she found out if it sold for $910,000 if she would be upset. "Devastated," was her answer. "How about $920,000?" "Devastated," was her answer again. "$930,000?" "Devastated."
The conversation went the same way until we reached about $1 million. It was then that I realized something: Unlike clothing, food, or other items where we are given a price and will pay what it's worth to us, in the case of real estate often times we're trying to get a deal when really we should be paying retail or even slightly above retail. Are we negotiating the price of bananas at Whole Foods? Are we trying to chisel down the price of those have-to-have-them-for-that-date-with-the-private-equity-guy Louboutin stilettos at Barneys? No. This "Let's Make a Deal" approach to real estate worked in the lean, dry buyers' market years, where often times we could get a "deal." But in the case of real estate bidding wars, all bets are off. We could be trying to get a deal when, in actuality, what we really want is a house. A house, let's remember, is an emotional buy. It's where we live. It's where we raise our families, fall in love. It may even be where we fall out love and have to spend a lot of time alone with tequila, so we better like it there.
And so I've changed my advice on how to handle real estate bidding wars. I'm all for indecent proposals now. Of course I'm not for overpaying unnecessarily, but I am advising my clients now to ask themselves not "What is this property worth to me now?" but "If I find out this house sold for X and someone else got it for that price will I be disappointed?" They are two very different things. And often times the latter will be a higher price.
It's something to think about. After all, a house isn't Apple stock or a bond. Sure, it's an investment, but it's also an item that's worth paying retail for because if you don't there's a good chance someone else will.