Using Data to optimize a home search and determine property Values
How can I find a two bedroom condo in JP?
Chip Case and David Shiller, of the Case-Shiller Index and the 2013 Nobel Prize in economics, began their now-legendary real estate analysis work by examining real estate markets in what was then a novel approach: bringing the analysis down to the zip code level instead of trying to address values and trends across economic regions. Even today real estate "news" is reported as variations in median prices for a town, but we find for our purposes....working with clients to find a property to purchase or determining the value of a property for either purchase or marketing, this data does not provide a useful tool or even give an accurate reflection of "market conditions".
Let's look at a simple search....a client wants to buy a two bedroom condo. When a buyer is looking to purchase a property, there are needs, a budget and a time frame. A buyer could be asking....can I find a two bedroom condo, for about $450k that is close to the T and close to the hospitals within 2 months? We can use precise sales data to determine the likelihood of success, or to suggest alterations to the search to make the buyer more successful.
For a seller, we need to present the property to the buyers so that when the property appears on the market it is the very best unit available at the price.
Two Bedroom units
We can use the sales data from the Multiple Listing Service to shape a search for a property. Let's look at only 2 bedroom units. Sure, two bedroom units have recently sold for less than $450k. Statisctically, 4.4 two bedroom units per month sell for less than $450k.
Keep in mind, this is "backward" looking. These are sale prices from 2017-May 2018, prices have been rising and you could expect to find fewer units under $450k currently than in the past. In most years we find that prices rise 5-10% per year in communities close to the city or in "school towns".
When we work with our clients and look at how many properties are available in a certain time frame....either 70 properties in 17 months, or 4.4 per month, we typically use a rule of thumb that about a third of them will interest any particular client. One third of them will be just awful in some way. In our market analysis we typically refer to these as the tragically flawed. For one third of them, the client just won't like them. There will be something that just doesn't work. Nothing is necessarily inherently wrong with the property, but it just isn't for that client. People like different things. So that typically leaves about a third of the available properties that would interest a client. Looking at this search, there would be 1-2 properties per month that might interest the client. If they need a to find a home within two months (not including the time to close on the property) then there should be 3-4 properties on the market that might interest them in that time frame.
From here, we ask the client....what is the most important detail of your search? Is there any flexibility with any parameters? Do you really need a place within 2 months? Do you need a 2 bedroom? Would you be open to looking at other communities? Would you consider expanding the price range to include more properties?
Two bed/Two bath with parking >1000sf
"So what I actually mean by a two bedroom is....a two bedroom unit with two bathrooms, parking and over 1000sf" Well, that is different. That is not the most common type of housing stock that we have in Boston and the price can go up substantially when limiting the search to certain features. On this chart there are 4 such properties, all listed last year. Likely, a buyer could not find this property for $450k. If you will also notice, there were over 250 two bedroom units sold in JP in those months, but less than 50 of them were 2 Bed/2Bath with parking.
If you expand the search to say that this is the property that you are looking to find, then ask....what would I need to spend to get these features?
From the data, most 2 bed/2 bath units with parking will be priced between $550-750k. What does that mean as I look at properties? What about the ones that are less than $550k? Or more than $750k? What do I get for moving from $550k to $700k?
We can give you some insight just from looking at this chart. Once the data set has been broken down to only 2 bed/2 bath, they all have parking, and they are all over 1000sf, the remaining variables are primarily location, condition, and outdoor space. We can reduce that even further to try to make the data reflect only condition.
If I look at this chart....the ones below $550k, I would expect to be in the less desirable locations, and not in the best condition. Perhaps they are not updated, they are next door to an industrial or commercial neighbor that is undesirable, they are not the best units that you will find, but they are priced accordingly. On the upper end, the ones above $750k....they need to be special to command that price. They are on the water front, high floors with views, a luxury building with garage and elevator, spectacular architecture. Between $550-750k, we find a range of "the norms" where closer to $550k would the units that have not been updated, and may be challenging for some buyers to stomach, but there is nothing wrong with the unit or the location. Ranging up to the units that are about $750k that are renovated as nicely as they can be, short of installing gold faucets. (I did have a buyer once tell me that copper plumbing was no good and that it should be gold. Wow. That is an upgrade that he would need to look into himself.)
I don't want to Pay over Asking Price
I encourage buyers to not dwell on this market dynamic. Market conditions and conventions vary over time. Today, our pricing conventions have listing prices set a good bit below market value. There is a bit of a mind game at work here, but it impacts sale prices. If I am going to sell a unit that is worth $450k and I put it on the market for $450k....buyers will automatically judge this property against $500-550k properties and say that it isn't worth that much. And it isn't. People make that comparison because many properties are selling 10-20% over their asking price. If I don't make that allowance in the pricing of a property that I am selling, people will not come to the property, or will come with inflated expectations.
For buyers....it doesn't matter what the list price of a property is. The important thing is to pay no more than a reasonable market price for a property, whether that is above or below the asking price. And even in this market, sometimes the market price is in fact less than the asking price.
For sellers it is important to attract the correct buyer with the correct expectations for the property.