House with words - why is that house so cheap“Why is that house so cheap?” asks the puzzled home buyer. Is there something wrong with it? Is it a trick to drive up the number of offers or the price? Is it a bad area? Is it too good to be true? Bargain hunting home buyers may delight in purchasing a home at a low price, feeling that they got a great deal.

Often, though, the great deal is a reflection of a defect of some sort – and the defect may or may not be easily fixable. When they go to sell that property, they may find that most buyers aren’t interested and that when it’s sold it’s a great deal for the next owner.

Today we’ll look at the 3 categories of reasons why certain properties get bargain basement prices and make consumers ask “why is that house so cheap?”

  1. strategic pricing by sellers and their agents only, nothing wrong (except a deceptive price)
  2. property problems (that can be mitigated)
  3. location problems (that cannot be mitigated)

Why is that house so cheap – when the list price is a marketing tactic only

We’ve written about the strategy of a price mirage here before. If you didn’t see that article, it comes down to this: a home is priced lower than it’s worth, lower than the seller will accept, in order to get a dozen or more offers that will drive the price sky high. It’s risky to underprice a home in a declining market especially. If the buyers don’t jump on it, it is not that easy to convince later home buyers that it’s worth more than that initial list price.  This can work but it is a gamble, and for that reason we don’t recommend it.

By the way, a tool which can sometimes be useful for pricing is Realtor.com. They offer 3 “auto comp” valuations on the listing page of homes for sale. If a property is close to a boundary (zip code, school district, area), it may be off because it seems to just pull sales from 1 mile in all directions. It can also be off if the home is in very poor or extremely excellent condition. Here’s more information on their system: Realtor.com estimates

Defects with the home can make the house so cheap when it sells that you may wonder what happened

A number of problems within the house or yard can cause the home to appeal to fewer buyers, and that will make the home sell for less  when it does sell. Since these are in the home or yard, though, they are likely fixable in most cases. Whenever you ask “why is that house so cheap?” you also want to ask “if I buy it, is the problem fixable?”

  • Some houses have been added onto awkwardly (sometimes several additions) and the flow is not so good. A house that was originally 1200 SF with 3 bedrooms won’t feel proportionate if the garage is converted to 2 bedrooms but the living areas of the home remain petite. It will be disproportionate.
    • Added square footage is not worth as much as original square footage to most buyers, unless the addition is both permitted / finaled and flows well with the property.
  • If the backyard is all pool, most home buyers will pass – they will prefer a yard that is more usable. (You could always buy the home and remove the pool.)
  • I once sold a house where the lot was quite large, but the level and useable area was mostly a pool and a little patio. Home buyers expecting a large and useable lot were disappointed. I told my buyers when they purchased it that this could be a selling issue. They got a “good deal”, but later when they wanted to sell, that was a huge obstacle.
  • Too strong of a style, either architecturally or in the home, may not appeal to a wide audience, particularly if it’s the more expensive rooms in the house, such as the kitchen or baths.
    • Once I saw a kitchen in which the cabinets and countertops were all mirrored glass. I wish I’d taken a photo. That house had a strong style throughout. When it was sold, the next owner bulldozed the house. The site was gorgeous, but the house bizarre. Had it only been the kitchen, the next owner might have remodeled that room and been happy.
  • Missing items may be an issue. I saw a luxury home with gorgeous cabinets in the kitchen but no oven to be found. The sellers didn’t use an oven so didn’t plan it in. Most home buyers, though, do want an oven! Some homes have no tubs. In those cases, if the shower is as wide as it would take to add a tub it’s not nearly as serious as the kitchen without an oven. I’ve seen homes worth more than $2 million with only one small dining area, a small breakfast nook. This isn’t proportional to the house and will be an objection for most home buyers.
  • Poor access to the garage will limit the pool of interested buyers. An attached garage cannot (should not) open to a bedroom as it’s unsafe and illegal. Most buyers want the garage to open directly to the kitchen, living room, entry hall, or some other living space. We see homes where the access is via the front or back yards, though. Not ideal.
  • Lack of maintenance on a home over time is an expensive that will make the home sell for much less when it does sell. Most houses need around 1% to 1.5% of the sale price in needed repairs and tweaks to the property condition, but some properties have not been kept up and may need 3x this amount. Buyers only have so much cash to spend after paying for the closing costs and the mortgage. The major fear is that the property will be a “money pit”. There are several gradients on neglected homes.
    • a cosmetic fixer means that the home has been maintained but it’s dated – perhaps it needs remodeling so that the kitchen and bathrooms come into the current century
    • a fixer suggests that the systems need upgrading (think electric panels, possibly wiring, plumbing, waste and sewer lines, foundation needing seismic improvements, etc.)
    • a tear down refers to dilapidated homes that don’t have enough right to warrant remodeling – these will appeal to contractors and flippers
  • Infestation by rodents, snakes, birds, or other critters that take up residence in your home will cause buyers to run, not walk, from your home. Did you read about the “snake house” in Idaho? Talk about a nightmare! DO get rid of the pests that will scare people, whether bugs like black widow spiders or larger creatures that have set up camp in your home or crawl space.

Area or location defects  – the ultimate cause of “why is that house so cheap”

The mantra of Realtors everywhere is location, location, location. While there is no perfect location, some areas will be more appealing than others. The problem with this category is that  you cannot fix what is wrong and what will negatively impact what your home is worth.

Here are some major location issues if they are too near:

  • high voltage power lines or power substations
  • freeways, highways, expressways, boulevards, main roads
    • these are noisy, but there are also health risks associated with being on or near a busy road
    • the North 40 is new construction next to 2 freeways – when homes are new, buyers sometimes overlook location issues, but someday these will be old with a problematic location
  • train tracks (light rail or BART not quite as bad since they are quieter)
  • schools
  • commercial buildings, hospital buildings, convenience stores
  • apartment buildings or any lesser value housing
    • for a house, it’s better to be adjacent to other houses, preferably more expensive is better
    • for a townhouse or condo, be adjacent to other similar types, but not next to apartments, mobile home parks, duplexes etc.
  • any multi story building that can look down into the home or yard
  • SuperFund sites or other environmental hazard sites, but especially the SuperFund ones
  • 100 year flood plains (your lender will require insurance)
  • other natural or environmental hazards, such as flooding from dam failure, SuperFund sites, liquefaction zones, fault zones, buildings on landfill such as close to the bay, areas with a high water table, landslide zones, et cetera
  • public schools with low scores on sites such as GreatSchools (anything under a 5 will be boycotted by a large chunk of financially capable buyers)
  • neighbors with unkept yards, too many vehicles, and homes that aren’t being maintained will be seen as eyesores and a turnoff to buyers who would rather be on a pretty street
  • if the home is a condo with poor finances, such a low reserve account, it can dramatically hurt a home’s sale price – no one likes getting a special assessment

 

Sometimes a house has a structural issue, such as a horizontal foundation crack. When there are multiple cracks, it may be worth asking what needs to be done so that this doesn’t keep happening. Often that may mean drainage work. Sometimes homes are built on landfill or high water table areas, and the issue may not be what’s happening on the surface, but underneath. A soils engineer might be able to shed light on that.

Foundation crack or other problem

Why is that house so cheap? Expensive foundation repairs could drive the price lower.

With our clients, Clair and I suggest buying with selling in mind. In a hot market, any home can sell. In a cooler ones,  it will take steeper and more painful price cuts to get a similar home with a location issue or significant defect under contract. You’ll want to find a house for sale that will have enduring value into the future and not cost a fortune to make and keep up.

If you find yourself asking “why is that house so cheap?” you might want to pause and ask yourself if it has a fixable flaw, or if what’s wrong will plague you when you want or need to sell in the future.

 

Why is that house so cheap – related reading

List of pricing articles on our various sites (page on popehandy.com)

Location research (on this site)