Buying Houses at Price-Per-Unit

I may be slow, but I finally figured it out: how to buy a house at price per unit, just like I buy my groceries.

No, I haven't actually bought the house yet, but I have several good candidates lined up.

Normally, people look at what a real estate agent or MLS has to offer, and go by the list price or asking price--this is the same as the shelf price in a grocery store. Smart shoppers don't look at this price, do they?

Smart shoppers look at price per unit, or how much this particular product costs compared to others in the same category. Prices per unit can be expressed in ounces, pounds, quarts, gallons, or even liters.

Prices per unit on houses are expressed in square feet.

We buy our groceries by the pound, the ounce, the number of loads, or even cost per serving, and we always check NADA or Kelley Blue Book before buying a car, so why aren't we buying our houses in the same way? This information is readily available to the public on Zillow. Agents will tell you that Zillow isn't accurate, but it is within a $5k +/- range of what a house is truly worth on the open market, which can be drastically different from the asking price.

I've seen some real lulus on my local MLS (multi-listing service)--houses overpriced by as much as $80k, and have been on the market for almost a year. Some have been sitting for over a year, and are STILL overpriced!

Where is the agent, and why haven't they had a heart-to-heart with the homeowner about correctly pricing the house closer to local comps? Where is the homeowner who wonders why the house hasn't sold? Where is the bank sitting on an overpriced foreclosure clogging up the market, preventing them from adding new offerings to the MLS?

I shake my head and continue to find houses listed in my area at an enormous "shelf price", yet I run them through Zillow, and find them quite affordable according to comps.

You are probably wondering why this is such a big deal to me--because houses aren't selling as quickly as they should, and for the reason I just described: these houses are overpriced, and bank appraisers cannot justify the asking prices, so banks won't loan money to buy these houses. They will loan up to comp value, but no more--anything more would be a risk, especially in this employment environment. The good old days of loaning 125% of value are long gone.

Maybe if we started expressing house prices in price-per-square foot rather than just an arbitrary number based on what is owed, or what is expected to come in after renovations are done, more houses would move, and it would be a darn sight easier to spot affordable ones. Then, it would be easier to stick to a "budget" by knowing how much home you could afford--LITERALLY! This would be a far better indicator than the banks, who don't take expenses into account when determining how much you can borrow for a house.

Now, back to Zillow for just a moment: you may be wondering just how to use Zillow as your aid in finding a home. Let's try an example (I'll pull one from my area):

845 Norman Ave., 23518--asking price is $165k. The house is a non-descript Cape Cod style, 862 square feet, and has 2 bedrooms and 1 bath, a detached 2-car garage, all kitchen appliances except a dishwasher (a luxury here because of narrow pipes), central heat/air, gas water heater, tile and wood floors, and is fenced in back. It's been on the market for about 20 days.

Now we go to Zillow and enter the address, then click on the house in question (it will come up in a bubble in the center of a map). Then we look over at the right margin of the screen (How This Home Stacks Up) where it lists price per square foot in that area. Multiply the price per square foot with the number of square feet in the house, and you get the true market value of the house in question.

If no data comes up, try the house number right next door--just make sure it has the same number of bedrooms and baths, same number of stories, and same (or roughly equivalent) amenities. This won't be dead accurate, but it will give a ballpark of a ballpark.

Back to 845 Norman Ave.--asking price $165k, and 862 square feet. Zillow's price per square foot in this neighborhood is $130, so 130 x 862 = $112,060 or rounded down to $112 even. This is the market price, +/- 5K, for the house on Norman St. So the range for comps is $107-117K, far below what the asking price is. Someone needs to have a chat with the owner!

Assuming I put in an offer of $112, and it gets accepted, I will have successfully spanked the owner for $53k--that's a $53,000 savings that I won't have to finance, pay taxes on, or insure.

This is how I put the power of market value to work for me--knowing what something's worth, and not paying a penny over the market value. I also have other tales of saving money.

Remember the formula: Zillow price per square foot x house square foot size = true market value +/- $5k

With houses, as with groceries and cars, sticker price means nothing. People want money out of them, either for equity, some distorted notion of what renovations are worth, some distorted notion of what location is worth (based on some 20-year old information), or because they themselves bought at too high a price, and now can't afford to keep it.

If you want to buy a house at a realistic price, a realistic value, and want a realistic chance of getting financing on it, go the Zillow price-per-square-foot route.

Just for fun, try this with your own house just to see what it's currently worth, and how much equity you gained or lost.

Some day...some day, I'll come up with a way to buy cars at cost per unit, but for now, all we have that I'm aware of is cost of ownership. I'd like to find a formula that'll help BEFORE you buy the car!

UPDATE: I did find this today.