From Kim Kardashian’s wails that she lost a $75,000 earring in the ocean, to Real Housewives of Beverly Hills’ Dana Wilkey’s boasts that she dropped $25K on sunglasses, reality TV starlets seem to get a rush out of broadcasting how much they paid for their bling. In this way, they are contrarians — not their usual trendsetting selves — because bragging about how much we’ve saved on everything from our clothes to appliances to our phone services has become a new American pastime.
The bigger the purchase, the bigger the bargain potential — so when it comes to the biggest purchase of all, our homes, the deal potential is especially enticing. But home purchases are much more complex than everyday retail transactions, so it can be much tougher to know whether you’re actually getting a good deal on your home, or not.
Here are three steps to take to determine whether you’re getting a good deal on your home:
1. Check the comps. It’s impossible to truly know whether you’re getting a good price on your particular home without checking the “comps,” real estate shorthand for comparable sales. Most major real estate websites will surface recent sales prices of similar, nearby homes when you enter an address; buyer’s agents also often offer comparable sales data.
You know you’re getting a good deal for a home if you’re paying a price near or below the recent sales prices of the “comps.” But it’s important to make sure you’re comparing apples to apples when you compare your price to the comps:
- look for ‘sold’ prices, not just list prices of comparable properties;
- check to be sure you’re comparing your deal with similar transaction types — foreclosures to foreclosures, short sales to short sales, “regular” equity sales to the same; and
- make sure that the “comps” are actually similar in terms of bedrooms, bathrooms, square footage, location and condition.
2. Check the list price-to-sale price ratio (LP:SP). One measure of a good deal is how much of a discount you were able to negotiate off the list price — especially relative what negotiating power is typical for buyers in your area. Your agent can help you calculate the typical LP:SP ratio for the comps. If you’re in a very depressed market, it’s normal to see an LP:SP ratio over 1 (meaning that homes sell for below their list price) and vice versa — in those rare seller’s markets that do still exist, it’s normal to see an LP:SP ratio below 1 (meaning that homes sell for more than their asking prices, on average).
To determine whether your deal is a good deal, do the math! Divide your home’s list price by the sale price, and see what ratio results. Ideally, your LP:SP ratio should be no lower than average; the higher it is, the more likely it is that you negotiated well.
3. Can you afford it? Ultimately, you can negotiate an amazing price and get all sorts of incentives thrown in, but if you are overextending yourself beyond the bounds of your personal budget, then even the best deal is just not a good deal. Some buyers have a tendency to start out with a conservative personal price limit that is lower than the max they are approved for, then to let their “top dollar” creep up throughout the house hunt.
The best way to prevent that is to (a) have clarity on the max housing costs your personal finances can bear before you start looking at homes, then (b) to double-check with your mortgage pro on what your down payment, monthly payment and closing costs will be before you submit an offer or agree to a price.