Why would a seller expect over the valuation as a minimum?

Question

Hi! I am looking for my new primary residence rather than an investment property, although I do have another investment property which was bought without the wealth of knowledge on BP. I am in an ultra-HCOL country.

I found a house that I liked, a rehab project. It was on the MLS and I viewed it once when it was first listed, but wasn't ready to buy then. Six months later, I viewed it again and put in an offer.

I found comps and called contractors for quotes for repairs. I calculated that the ARV is $450,000 and that the repairs would be $100,000-ish - it doesn't have city water, air conditioning, or working appliances. It has several features which are unsafe as it stands but easy to fix and MUST be fixed for safety reasons.

The house was originally listed at $465,000, then reduced to $435,000 after 4 months on the market. Before they listed, they received a valuation of $400,000 as it stands now without any repairs.

We made an offer of $315,000, and it was promptly rejected, somewhat rudely, because the owners are expecting the valuation as a 'bare minimum'. They will not look at offers below the valuation, and want above it.

My question to the wonderful people on the Bigger Pockets forum is why would a seller think that the valuation is a reasonable starting point to move UP from? Why would someone buy a rehab project for above the valuation? The market is not very hot in this particular area due to traffic and it would be considered 'out of town'.

I would like to understand the seller's perspective on why the valuation is the 'bare minimum'. From my perspective, the valuation is the absolute maximum that one would pay. The sellers are apparently highly motivated to sell, but expect someone to pay more than the house is valued. They have not received any other offers in the 6 months it has been on the market.

Aaron Poling · Answer

It sounds like the seller has heard too many stories about homes getting multiple offers and selling higher than listing price. This does happen but typically for one of two reasons, the first when the property is listed for too low and the second when the property is in a really hot market and area. They fail to realize that when you list and your property doesn't sell for awhile then you don't fall into those categories. They are caught up in the myth and aren't really motivated to sell yet. The good news for you is that sometimes motivation changes and sellers come around. I suggest sticking to the numbers that work for you, but keep up with the property so you are the first buyer they think about when they become motivated.

Good Luck! Aaron

James Wise · Answer

If you ask me thinking that the valuation is the maximum one would pay makes the exact same amount of sense as the valuation being the minimum the seller wants to take. The value is the value guys. That's what the property is worth. As a buyer you want to go under & as a seller they want to go over. That's the business.

Now do all properties sell at their exact value? Not necessarily. Everyone has different levels of motivation at different times. The market goes up & down. So valuation itself is a moving target. I've sold the some of the same properties 2 or 3 times, all at different prices while they were in similar conditions. It is what it is. I wouldn't spend to much time worrying about why the other party is doing what they are doing. Make your best offers & they will either take them or they won't. If they don't move on to the next one. Can't expect everyone on the other side to use the same logic as you do.

Charlie MacPherson · Answer

@Lauren Do A couple of things.

First, you probably insulted them with such a lowball offer.  $120,000 below asking is a pretty serious lowball if you're in a seller's market, like much of the country is right now.  If it was 2009 when the market was crashing, that might make more sense.

Second, drill down on what that "valuation" was.  Where did it come from?  Is it reliable and accurate?

Obviously ,the property hasn't sold and if there haven't been any offers, it was most likely not an appraisal.  It's more likely comps, whether a formal CMA from a Realtor or the seller's own informal comps.

If it's from a tax assessment, those are far below true market value - at least around here.  So getting a handle on that "valuation" is critical.

For any of those reasons, the seller may still believe that it's worth $435,000.

Lauren Do · Answer

Thank you! I need one more month to sort out my financial situation a bit further (become a member of the credit union) and so we might try again to get it. The estate agent implied that the ARV was $500,000, so $50k more than my assumption. I don't trust that 100% but I know I was very conservative in my numbers.

Lauren Do · Answer

You are right, I probably did insult them. When I got the contractor quotes, then did the math and saw the offer number, I thought we would just move on and not put the offer in. The estate agent kept asking us to make and offer and saying that we should at least toss something into the ring. I wasn't trying to be ballsy, he pushed us when I was resisting, and then he did seem insulted.

I guess I edited it out of my post, but I'm not in the USA, I am in the Caribbean. It's a sellers' market for beach front and centrally located, but this is outside of town and not on the water. A nearby turnkey property was just reduced $45k to $499k. Other comps stayed on the market for 300 to 500 days. Unfortunately I can't find a true comp because this house is 2 storeys and nearly all surrounding houses are 1 storey.

I believe the valuation came from a RICS surveyor, but you make a number of valid points and I should find out what it is based on. I just know the number with none of the supporting data.

Why would a seller expect over the valuation as a minimum?

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