Picture this: you’re a first-time home buyer just starting out on your house hunt. Your real estate agent has two houses for you to look at, and you’re excited at the thought that one of them might be your dream house.
However, when you step inside the first house, your heart sinks. It’s dark and cramped, it’s in poor repair, and it doesn’t have enough bedrooms or bathrooms. And to make matters worse, the asking price is at the very top of your price range. Is this really the best you can do on your budget?
Your dismay is visible to the agent, who tells you not to give up hope – take a look at the second house first. And when you see that one, your spirits start to rise. It’s better than the first in just about every way – more space, more rooms, and a better kitchen. And better still, it’s even cheaper than the first house! It looks like such an amazing deal that you’re ready to make an offer on the spot.
This, of course, is just what your real estate agent is counting on.
What is an Overpriced Turkey?
The first house your agent showed you was an overpriced turkey. That’s real estate lingo for a house that’s priced way above its real market value. There are a few overpriced turkeys in every housing market, and an experienced real estate agent can spot them easily.
By choosing to show you the overpriced home first, the agent was taking advantage of the anchoring effect. This is a scientific term for people’s tendency to put too much weight on the first piece of information they get in making decisions.
In this case, because the overpriced turkey was the first house you saw, its price became your first idea of what a house in your area was likely to cost. Once you had that price “anchored” in your mind, the second house looked like an unbeatable bargain by comparison.
Spotting an Overpriced Turkey
Showing a buyer an overpriced turkey first is a kind of dirty trick, and most real estate agents probably won’t do it. However, just in case, it’s a good idea to learn how to recognize an overpriced turkey when you see one.
The best way to do this is to gather data about your local housing market ahead of time, before you actually look at any homes. That way, instead of being “anchored” to the price of the first house you see, you’ll have lots of other information in your head about what homes in your area are really worth.
Browse Real Estate Ads
You can start researching your local real estate market by simply browsing the “homes for sale” listings in your local paper or a free real estate circular. This will give you an idea of what people are asking for houses in your area.
However, keep in mind that these ads show the asking prices, not the selling prices. Sellers often start out asking the highest price they think they can get, then lower it gradually until they’re able to hook a buyer. In certain markets, the price could also be listed below what the seller expects to sell the property for, in order to garner more demand and incite a bidding war. That means the price you see on a house isn’t necessarily the price you should expect to pay.
Check Online Listings
To get a somewhat more accurate picture of real estate prices in your chosen neighborhood, visit online real estate sites like Zillow and Trulia. Instead of just showing asking prices, these sites create price estimates for homes based on a bunch of factors. They look at tax assessments and sale prices of other houses in the area, then factor in the size and features of a particular house to see how that would push the value up or down.
These sites’ prices aren’t perfect, but they’re a fairly good approximation. Zillow says its cost estimates, called “Zestimates,” have a median error rate of 4.5 percent, meaning half the homes listed on Zillow end up selling for a price within 4.5 percent of the Zestimate.
Ask to See the Comps
The best way to judge real estate prices in your area is to look at the comps, which is short for comparable sales. This is a list of recently sold homes in an area that have the approximate size and features you want for your home.
Your real estate agent can use real estate databases such as the Multiple Listing Service (MLS) to generate a list of comps for your area based on actual sales prices. Ask to see these before you actually go out and start looking at houses. Armed with this information, you’ll be able to tell whether each house you view is an overpriced turkey – or a real prize catch.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.