The BS method of pricing real estate

The industry standard is to use “comparable sales” to calculate the listing price for a home. If house Z sold at $Z/sq ft then my similar house should roughly be worth $Z x my sq footage. (see that 8th grade algebra was gonna come in handy some day. 

Redfin is a great place to find historical data. I did a quick and dirty calculation based on sales of SFH under $1.5 mil in the past three months in El Segundo. 
21 sales
4 sales off market – remember my comments about the clique of agents in El Segundo?
Two sales were from Elin Pointe.  

The rough Average is $1.16 mil for 1717 sq ft – that translates to $673/ sq ft

The downfall of looking at a rough average is that it doesn’t take into consideration the differences in properties. Was it a remodeled flip? On a 8000 lot? A tear down?

The ironic thing is that both the high and the low in the past three months were tear downs. The high price went to 854 Loma Vista at $970/sq ft (a ONE BEDROOM ONE BATH 720 sq ft home). The low was 838 Hillcrest which is listed as a 2040 sq ft home but was some weirdly cobbled together, main unit, an illegal units and an in-laws unit. At $514 sq ft this was a bargain price on a price per square footage but the house.  The house was in such disrepair that it isn’t worth spending the money trying to put it back to normal.  (That place should be considered a tear down although some aspiring AirBnB house humper may see dollar signs in their head). 

Why is pricing based on comps bullshit? Because sales of real estate are made at the margin. That means that the sales price of a property is based on the max amount someone is willing to pay. That has nothing to do with true value. What buyer A is willing to pay may have additional circumstances involved in the decision process. People get carried away and get tired of losing in bidding wars so each time they increase their offer price. I had a neighbor who’s offer for a home would be contingent on construction loan for his other property. No seller likes contingent offers so the he sweetened the offer with extra 3%. The contingency was cleared and he overpaid by 3% to make sure he secured the new house. When you look at the sales data you don’t get to read about those types of details. On the record people see that someone paid $X for that house and mine is identical so it must also be worth $X. If it were identical it should be worth $X – 3%. That single decision (to overpay by 3% will have ramifications that spread throughout the neighborhood. Add to the emotional offers, the “I have to have this house” offer, the “I’m tired of living in that tiny apartment offer” and you have prices that are not based on the true vale of the asset. Prices in real estate are just what people are willing to pay.  Imagine if new cars were priced the same way. The price of a new prius is based on what a selection of previous people paid for the car. Do you think any car manufacturer would consider such an asinine pricing method?

When inventory is as low as it is locally a buyer doesn’t have very many choices.  Right now there are 9 homes under $1.5 in town. In a normal market there would be a ton of factors that would and should knock the price down of many of these homes. 

One car garage

• Proximity to the airport, chevron, hyperion

• Flag lot

• Smaller than average lot

• Busy street

• One bathroom

We are talking about one million dollars! And people tell themselves that spending ~$5,000/month for a home with one bath, one garage and has no room to grow is acceptable. 

So don’t let emotion nor the desire to participate in the “american dream” destroy your financial well being. 

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