As of June 14, a payment plan is now available! I have already decided that I am not interested in simply renting this property. Nor will I be offering any rent to own or rent with the option to buy contracts.
What I am now offering is owner financing. With owner financing, the buyer gets a mortgage and takes ownership of the property right from the issuance of the mortgage and the close of the sale. The mortgage in this case is issued by the seller, which would be me, instead of by a bank, which saves both the buyer and the seller a fairly annoying list of hassles.
As with a bank mortgage, there is a lien on the property that goes away when the promissory note associated with the mortgage is paid up. If the buyer failed to pay the mortgage note, I would have to file a foreclosure exactly as a bank would, and then I would reclaim ownership and get the deed back.
I have a company identified that can handle all the documents and all the details of a seller financing with a mortgage type of transaction. That same company can then process the payments and will make sure that the buyer's credit record reflects the payments made on the mortgage.
Here are the 7 basic requirements that a buyer must meet and agree to for him or her to be a suitable buyer under the plan:
(1)The price of the property will be $23,500.
(2)The minimum down payment will be $5,000 and a larger down payment is recommended.
(3)The buyer must be able to document income, but any kind of income is acceptable.
(4)The buyer must not have bad credit.
(5)When the mortgage payment, the mortgage servicing charge, the property tax, and the insurance premium is added up, the buyer must be able to make payments of approximately $500 per month.
(6)The buyer must agree that there will be a $19 per month mortgage servicing charge, which is the amount the company I am using to set up and service the mortgage charges for all the work they do and all the assistance they provide to both the buyer and the seller. For example, this company will see to it that the buyer's credit record is improved by the inclusion of his or her payments on this mortgage.
(7)The buyer must understand and agree that he or she is not merely renting the property but is owning the property.
If you can not meet and agree to each of these, it would make no financial or economic sense for you to buy this property.
If you do meet and agree to the above seven items, here are the specific details regarding the mortgage and the small but required tax and insurance payments:
Purchase Price: 23,300
Minimum Down Payment: 5,000
Loan Amount: 18,300
Payment Frequency: Monthly
Loan Period in Months: 48
Loan Period in Years: 4
Interest Rate on Principal: 5.00%
Payment for Principal and Interest per month: 421.44
Mortgage Service Charge per month: 19.00
Total Payment for Property per month: 440.44
Other Required Ownership Costs:
Property Taxes per month: 32.00
Property Insurance per month (estimated) 30.00
Estimate of the Total of Monthly Payments to Own Property: 502.44
Full ownership (free and clear) of the Property in: 4.0 years
Note: The insurance might be as little as 15.00 per month, or could be higher than 30.00 per month, depending on the insurance company and policy specifications offered by the insurance company and/or chosen by the buyer.
In the case of more than one buyer asking for the mortgage option, the one who offers the higher down payment will be selected. If the down payment is more than $5,000, the buyer can choose a shorter term with a similar monthly payment, or else the same term with a lower monthly payment.
As always, anyone who has questions should either email me or give me a telephone call. The contact info is on the main page and on the right margin of this page.
Saturday, June 14, 2008
Friday, June 13, 2008
What the House is Really Selling for: a Song!
THE HOUSE IS PRICED AT WHOLESALE, AT FORECLOSURE, AT SUPER BARGAIN, AT DISTRESS, HOWEVER YOU WANT TO PUT IT...
The amount of land being sold with this property is 2.55 acres. The Western Pawnee County land being sold has been selling recently for about $2,530 per acre. It's actually some amount higher than that right now, because that evaluation was done about 2 years ago, and the price of land in Kansas has been rising relatively rapidly in the 2 1/2 years I have owned this property. But I will conservatively use the cost researched in 2006 in the following calculations.
The vast majority of house lots around the country range in size from about .1 acre at the small extreme to about 1 acre at the large extreme. We can calculate what this property would be selling for if it consisted of just the house and various typical amounts of land. In other words, we can look at what the price would be if there were not an extra 2 acres or so of land, a 2,800 sq. ft. building, and several other outbuildings included.
House and .10 acre extremely small lot: $8,453
House and .20 acre very small lot: $8,706
House and .30 acre small lot: $8,959
House and .40 acre medium lot: $9,212
House and .50 acre large lot: $9,465
House and .60 acre large lot plus: $9,718
House and .70 acre very large lot: $9,971
House and .85 acre very large lot plus: $10,351
House and 1.00 acre extremely large lot: $10,730
So this shows you that the house is beihg sold as if it was a foreclosure or a distress sale. But unlike actual foreclosure and distress sales of houses where the price is less than $10,000:
WHAT REAL DISTRESS FORECLOSURE HOUSES FREQUENTLY HAVE AS NEGATIVES BUT THIS HOUSE DOES NOT:
1. This house is livable as is. The electrical and plumbing systems are in good working order, and the kitchen and bathroom fixtures are as well. The heating system, however, is limited and needs to be upgraded with heating units that cost a few hundred dollars at Home Depot.
2. The most important basics of the house are in solidly good condition, including the foundation, the roof, the siding, the floors, and the interior walls. There is no fire damage, holes in walls, holes in ceilings, or holes in floors. There is a small 8 foot square area of missing kitchen ceiling tiles.
3. The property tax for this property is less than $400 per year, less than what it is for most other super bargain foreclosures.
4. The cost of electricity at this property is 9-11 cents per kilowatt hour, versus 15-20 cents per kilowatt for many or most other super bargain foreclosures.
5. Whoever buys this house does NOT have to have the house inspected by and follow any orders of local government employees before they can occupy the premises because that type of regulation does not exist in Pawnee County.
6. Moreover, whoever buys this can update and upgrade as little as or as much as they want free of prohibitions, permit requirements, permit fees, fines, penalties, and so forth because, once again, those mechanisms that add large amount of time and cost to upgrades of housing, for all practical purposes, do not exist in Pawnee County. To sum it up simply, unlike with most other ultra low priced properties around the country, you can do as much as or as little as you want to this property without government interference and without government fees.
7. This house is in an extremely low crime area, whereas most foreclosure super bargains in states such as Michigan and Ohio are located in areas that have far higher burglary and other crime rates.
The fact is, this house is one of the most outstanding bargains in the entire United States being sold in 2008. But in order to take advantage of the house deal, you have to be willing to pay a few thousand dollars for the excess land and a few thousand dollars for the quonset building and the other outbuildings in order to take advantage of the house price.
If you have no current, practical use for the land in mind, consider the peace, privacy, and freedom that comes from owning it. Consider also that you may learn how to garden in the months and years after you buy the land.
Similarly, even if you currently have no practical use for the quonset building in mind, consider that you might have a practical use for it some months in the future. For example, you can start and grow an ebay business and use the building for inventory. With the type of room you have in the quonset building, in fact, you could have a business servicing existing ebay businesses by fulfulling orders for whatever you want to buy and store in the building. Because remember that most ebay sellers do not actually have and ship the items that they sell. So from where do sellers ship the merchandise that their buyers buy? Some ebay sellers could get whatever merchandise you choose to specialize in from your quonset building.
With that business plan, you would avoid the task of developing a retail ebay business from scratch yourself.
As for me, I could theoretically have such a business, but I have a computer/writing career ongoing which takes up all my time.
The amount of land being sold with this property is 2.55 acres. The Western Pawnee County land being sold has been selling recently for about $2,530 per acre. It's actually some amount higher than that right now, because that evaluation was done about 2 years ago, and the price of land in Kansas has been rising relatively rapidly in the 2 1/2 years I have owned this property. But I will conservatively use the cost researched in 2006 in the following calculations.
The vast majority of house lots around the country range in size from about .1 acre at the small extreme to about 1 acre at the large extreme. We can calculate what this property would be selling for if it consisted of just the house and various typical amounts of land. In other words, we can look at what the price would be if there were not an extra 2 acres or so of land, a 2,800 sq. ft. building, and several other outbuildings included.
House and .10 acre extremely small lot: $8,453
House and .20 acre very small lot: $8,706
House and .30 acre small lot: $8,959
House and .40 acre medium lot: $9,212
House and .50 acre large lot: $9,465
House and .60 acre large lot plus: $9,718
House and .70 acre very large lot: $9,971
House and .85 acre very large lot plus: $10,351
House and 1.00 acre extremely large lot: $10,730
So this shows you that the house is beihg sold as if it was a foreclosure or a distress sale. But unlike actual foreclosure and distress sales of houses where the price is less than $10,000:
WHAT REAL DISTRESS FORECLOSURE HOUSES FREQUENTLY HAVE AS NEGATIVES BUT THIS HOUSE DOES NOT:
1. This house is livable as is. The electrical and plumbing systems are in good working order, and the kitchen and bathroom fixtures are as well. The heating system, however, is limited and needs to be upgraded with heating units that cost a few hundred dollars at Home Depot.
2. The most important basics of the house are in solidly good condition, including the foundation, the roof, the siding, the floors, and the interior walls. There is no fire damage, holes in walls, holes in ceilings, or holes in floors. There is a small 8 foot square area of missing kitchen ceiling tiles.
3. The property tax for this property is less than $400 per year, less than what it is for most other super bargain foreclosures.
4. The cost of electricity at this property is 9-11 cents per kilowatt hour, versus 15-20 cents per kilowatt for many or most other super bargain foreclosures.
5. Whoever buys this house does NOT have to have the house inspected by and follow any orders of local government employees before they can occupy the premises because that type of regulation does not exist in Pawnee County.
6. Moreover, whoever buys this can update and upgrade as little as or as much as they want free of prohibitions, permit requirements, permit fees, fines, penalties, and so forth because, once again, those mechanisms that add large amount of time and cost to upgrades of housing, for all practical purposes, do not exist in Pawnee County. To sum it up simply, unlike with most other ultra low priced properties around the country, you can do as much as or as little as you want to this property without government interference and without government fees.
7. This house is in an extremely low crime area, whereas most foreclosure super bargains in states such as Michigan and Ohio are located in areas that have far higher burglary and other crime rates.
The fact is, this house is one of the most outstanding bargains in the entire United States being sold in 2008. But in order to take advantage of the house deal, you have to be willing to pay a few thousand dollars for the excess land and a few thousand dollars for the quonset building and the other outbuildings in order to take advantage of the house price.
If you have no current, practical use for the land in mind, consider the peace, privacy, and freedom that comes from owning it. Consider also that you may learn how to garden in the months and years after you buy the land.
Similarly, even if you currently have no practical use for the quonset building in mind, consider that you might have a practical use for it some months in the future. For example, you can start and grow an ebay business and use the building for inventory. With the type of room you have in the quonset building, in fact, you could have a business servicing existing ebay businesses by fulfulling orders for whatever you want to buy and store in the building. Because remember that most ebay sellers do not actually have and ship the items that they sell. So from where do sellers ship the merchandise that their buyers buy? Some ebay sellers could get whatever merchandise you choose to specialize in from your quonset building.
With that business plan, you would avoid the task of developing a retail ebay business from scratch yourself.
As for me, I could theoretically have such a business, but I have a computer/writing career ongoing which takes up all my time.
Wednesday, June 4, 2008
How the Price Was Set and Why it is Very Fair to the Buyer
HOW THE PRICE WAS SET AND WHY IT IS VERY FAIR TO THE BUYER AND ALSO FAIR TO THE SELLER
INTRODUCTION AND BACKGROUND
I used to manage my own retail store, and plus I have a degree in economics, and I have always prided myself on having the right price on everything I sell. In this case, my objective was to set a price that was without a doubt very fair to the buyer, without being substantially unfair to me, the seller.
But no matter how low the price of a property is, there are always going to be a number of folks who believe that the value of it is even less. And in the current bad real estate and real estate financing markets, that number of folks is going to tend to be a bigger number than usual.
Why are there always going to be people who think the value of a property is less than the fair value of it? Economics gives us the answer. According to universally accepted economic theory, for every item that exists and that can be sold, if the sale is a normal free market sale, the price is such that supply and demand is in equilibrium. Of course, this rule generally applies to real estate. But this means in the case of a single, unique item, that most prospective buyers are going to value the property at less than it’s true fair price; only the actual buyer, by definition, will agree completely with the true fair price.
For the great majority of properties, no single property is really all that unique. In every town and city of any size, there are other houses that are quite similar to a house that someone was considering buying. But in the case of a unique property being sold, such as this Kansas property being sold with the assistance of this web site, the supply is technically one unit. There are roughly similar properties and there may be a few somewhat similar properties for sale in the region of the country where this property is, but there are probably no extremely similar properties or essentially identical properties available for sale right now, particularly if you limit the consideration to Kansas or to Kansas and surrounding states. In fact, because of it’s unusual characteristics, including the peaceful, private, rural location, the extremely low price, the freedom from zoning hassles, the combination of outbuildings and house, and the much larger than usual lot size, this property has in theory very few that are close to identical to it anywhere.
But there has to be a price for this property, and the basic law of economics still applies. Fortunately, there was an excellent place to start the calculation of what is the true fair price for this property.
THE STARTING POINT AND WHY IT IS A GOOD ONE
The starting point or base for determining the market value of this property is the Pawnee County assessment value, which is the County’s best estimate of the true market value of this property. Every year the County declares what it believes the market value of every property in the County is. Every year, in late winter, the County sends a “Valuation Notice” to every property owner, which among other things lists the ‘Total Appraised Value” of the property in question. The Total Appraised Value is the best estimate of the market value of the property, that is, what it would sell for if it were being sold right now, and assuming that the uninspected details of the property worked out to be average among the comparable properties.
In order to make these values accurate reflections of reality, there are two processes that are followed by the County. First, an appraiser/assessor visits the property every so often and inspects all of the land and the structures, paying especially careful attention to the overall structural soundness of the house and the outbuildings, including of course the foundation of the house. (If a house is shifting on its foundation, that is obviously a very bad thing, and the market value of such a property is much lower than when there is no foundation problem.) Second, the property is conceptually placed into a class or category or generic type, defined by the part of the County the property is in, by whether the property is in town or not, and by the primary structures and the amount of land. Then all recent sale prices of other properties in that same category are researched and averaged out. In some but not in all years when an appraiser does not visit the property, the County can do a new comparable analysis, thus updating the Total Appraised Value or estimated market value to reflect up to the minute market conditions.
The properties in the category are all going to be a little different from each other in a rural area like this. Some will have a larger house and smaller outbuildings. Others will have a smaller house but more outbuildings. Others will have a similar house and similar outbuildings, but maybe 1 acre of land instead of 2 ½ acres. But the differences in the primary characteristics of the different properties in the category offset one another for the most part, or else the differences are relatively small when you look at the universe of all properties.
However, just because the County says a property is worth $26,000 does not automatically mean that it is definitely going to sell for $26,000 or even extremely close to that. Why? Simply because the details of the inside of the house are not inspected.
But the County figure gives you a base or starting point from which you can proceed to determine the fair price. The true fair market price is most likely going to be in a range of, say 75% of $26,000 at the very least to 125% of $26,000 at the very most, with the specific correct amount depending on the details of the condition of the inside of the house. Because the County does not inspect the inside of the house and does not know, when the market value is estimated, to what extent the inside of the house is updated.
The property being sold has a 1,200 sq. ft. house, a 2,800 sq. ft. Quonset building, a barn estimated to be about 1,000 sq. ft., a small workshop that is about 120 sq. ft, 2 small circular storage buildings, that used to be “potato sheds” or grain bin sheds of about 200 sq. ft. and 107 sq. ft., and 2 1/2 acres of land. These are the obvious, primary features of the property that are what the County starts with when it looks around for similar properties so that it can estimate the market value. The County does a thorough inspection of the outside features of all structures. For the house, this would include the siding, the paint, the roof, the foundation, the porch, the chimneys, the windows, and the window sills. The County uses specialized equipment to verify that the house has not begun to shift on it’s foundation so as to make sure the house is structurally sound and does not need any foundation repair work. The house being sold was so inspected in May 2006, a few months after I bought it, and was found to be structurally sound in all respects.
But to reiterate, the County makes no attempt to inspect the component parts of the insides of houses that make houses livable and that make houses comfortable and that make houses places that you can show off to your friends and relatives. So in other words the County does not attempt to adjust the root market value, based on overall, large scale features, for interior components of the house. The costs of doing so would be ridiculously higher than would be the benefits.
Even an inside of a house that needs a total makeover including not only cosmetic upgrades but also plumbing and/or electrical work, in other words, the worst possible house you could imagine, would need at most roughly $10,000 of work to make it average among the comparable properties. So theoretically, there might be a property that the County claims is worth, say, $30,000 that is really only worth $20,000, because the house is a disaster area on the inside where nothing works and everything needs updating
So getting back to the property being sold we know that the property is said to have a market value of $26,000 by Pawnee County. In other words, it is similar overall and outwardly to properties that have recently sold for an average price of $26,000 in Western Pawnee County.
Here is a record of what the County estimated market values were for this property in recent years.
2006 23,200
2007 26,000
2008 26,000
There was no change for 2008 apparently because no comparative analysis update was done for this year.
After I bought this property in late 2005, an assessment was done on it for the first time in many years. Notice that there have been two reassessments done since I purchased the property in late 2005: one in 2006 and one in 2007. Each time, recent sales of comparable properties were taken into account. The 2007 reassessment acts as a confirmation of the accuracy of the 2006 assessment. Thus, one can have a high degree of confidence that the $26,000 figure is an accurate starting point for determining the real market value of this property.
Remember that the property has 3 major components: (1) the land, (2) the outbuildings: Quonset building, barn, two circular grain bin buildings, a small workshop, and (3) the house.
The value of the 2 1/2 acres of land being sold is separately tracked by the County. The land component is estimated to have a market value of $6,450 by the County, so the other two components combined have a market value of $19,550. Unfortunately, the county does not break down the outbuildings from the house, so someone making a customized fair market value estimate for this property has to do his or her best to do that breakdown to start off the effort. The quonset building has to have a substantial value considering its size and structural strength. I have prospective buyers who are more interested in the quonset building than they are in the house, so for them the following breakdown would be way too low for the quonset building and way too high for the house. On the other hand, for those not much interested in the quonset building, the breakdown is going to tend to be way too high for the quonset building and too low for the house.
The point is, everyone is going to have a different breakdown in mind, so all I can do is come up with my best estimate of the average breakdown among all prospective buyers. So I did this:
BASE VALUATION AMOUNTS
Land: $6450
Quonset Building: $6,200
House: $11,700
Barn: $750
Grain Bin Buildings $600
Small Workshop: $300
TOTAL: $26,000
REPAIRS AND UPGRADES
Now the next thing to consider are the repairs and upgrades needed now or in the next few years on items that were not inspected by nor known by the assessor during his personal visits and during the analysis of the actual sale prices of the comparable properties in this part of the County that led to the $26,000 valuation. There are several questions that had to be answered:
1. What are the repairs and upgrades that can be identified, some percentage of which would be needed to make this property average among the comparable properties?
2. What is the estimated costs of all of the repairs and upgrades, most of which did not factor into the County assessment?
3. How many of these identified desirable repairs and upgrades would be needed to bring this property up to the average status among the comparable properties? I have long since realized that this property is below average to one extent or another in terms of the amount of repair and upgrading needed compared with the other properties that went into the comparison analysis for the market value estimate done by the County. The question was by how much and the devil was in the details as always in microeconomics.
The relevant question is not what the combined cost of repairs and upgrades needed to make this property the best or one of the best properties in the comparison group is. Rather, the relevant question is: what is the combined cost of repairs and upgrades needed to make this property average among the comparable properties? Because if and only if it is average among them, this property would be worth about $26,000. If it were above average, it would be worth more; the best properties in the comparable property group could be expected to sell for roughly 25% more, or $32,500.
So I proceeded to do all of the following:
1. I broke down the market value into the major component parts (see above).
2. I made a list of every substantial desirable repair and upgrade on the property that was not inspected or known by the County when it made the market value estimate. These items were categorized into the component parts of the property.
3. I made estimates of the cost of getting all the items in (2) repaired or upgraded. All of the estimates were assuming that each job would be contracted out, which produced substantially higher dollar amounts in most cases than if the jobs were partly or totally done by the new owner. In other words, I did not cheat the next owner by assuming that he will save money by doing work him or herself, even though it is quite likely that the actual next owner will in fact do some work himself or herself. Estimates were done by extensive internet research and were aided by my degrees in economics and another degree I have in accounting. Moreover, wherever possible, estimates from contractors who would actually do the work were given a very large amount of weight, especially where the estimate was going to be tough for me to do accurately.
4. I added up the contracted out costs for each component part of the property that might get an update, and of course I came up with a grand total of all proposed repairs and updates.
5. As explained above, the trickiest part is to, after you have your grand total of proposed repairs and upgrades, make an estimate of how many of the repairs and upgrades need to be done in order to make the property average among the comparable group of properties that were used to come up with the $26,000 County estimate. Because if you knew exactly what was needed to make the property average, you would then have an excellent idea of what the exact market value of the property in its current state is. It would be $26,000 minus the sum of the costs of all the repairs and upgrades needed to make it average.
6. Since I would have to gain access to and spend several hundred hours inspecting the comparable properties in order to see how they compare in detail to this one, and since that is obviously not possible, all I could then do was to make the best estimate possible of the correct percentage of all possible repairs and upgrades that would be needed to make this property average. Unfortunately for me, to avoid cheating the buyer, I had to be as generous as possible with my estimate without unreasonably overestimating how wonderful the comparable properties are.
7. Since the exact percentage (amount of repairs and upgrades) can not be known, you need to come up with a reasonable range. When that is done, the following results become known:
CORRECT CURRENT MARKET VALUE OF PROPERTY BEING SOLD BY % OF THE COST OF ALL REASONABLE REPAIRS AND UPGRADES NEEDED TO MAKE THE PROPERTY AVERAGE AMONG PROPERTIES COUNTY CONSIDERS COMPARABLE
40% $23,200
50% $22,500
60% $21,800
70% $21,100
75% $20,750
THE FINAL ANALYSIS
As anyone who understands this and who is good at math can determine, the sum total of the cost of all repairs and upgrades identified for this property, some percentage of which would be needed to make it comparable to other properties, was almost exactly $7,000. Even in 2008, that amount of money is enough to make a lot of repairs and upgrades to a property, especially when low western Kansas labor rates are involved. To see how the resulting prices are calculated, consider for example the 60% level. 60% of $7,000 is $4,200. And $26,000 minus $4,200 is $21,800, which is the price you see above next to 60%.
Since I believe that the correct percentage of all possible repairs and upgrades to bring this property to average is somewhere between 40% and 75%, and the cost of all of them with virtually no do it yourself labor is very close to $7,000, my best estimate is that the exact, true, correct market value of the property right now is between about $20,750 and $23,200.
My current price of $22,000 is in the middle of that range, but an argument can be made that I should be ready to sell for as little as $20,750, since I don’t know what the real, true correct percentage is within the range shown. When all is said and done, it is impossible for me to be more exact about the true price than to specify it as a range that spans about $2,500, from $20,750 to $23,200. Any price in this range is just as fair as any other one, really.
I have buyers who want to buy at $22,000, but they have been delayed by banks refusing to make them loans that they would have made to them as recently as about 12-18 months ago. This is no surprise, because currently, most banks have overly restrictive loan policies. Due to these policies, which everyone expects and hopes will be temporary, there has been a delay in selling this property, exactly what all of my efforts were supposed to prevent. Under normal housing market conditions, I would not want to consider selling this property for less than $21,975, the midpoint of the correct price range. However, these are not ordinary conditions, and I may possibly have to seriously consider selling the property for as little as $20,750 at some point in the future, if banks keep preventing potential buyers from getting financing, and if potential buyers keep having a lot of trouble selling their current real estate, and if no one else who has cash on hand steps forward to buy the place.
Next, we will break down the property by its components and see what I am really selling each component for. We will start with the base amounts, the ones that add to the County value of $26,000, and then we will see what the effective price of each component is assuming the property is sold for $22,000.
BASE VALUATION AMOUNTS:
Land: $6450
Quonset Building: $6,200
House: $11,700
Barn: $750
Grain Bin Buildings $600
Small Workshop: $300
TOTAL: $26,000
BREAKDOWN OF SALE
This shows the price that the buyer will be paying broken down by component. Remember, this is a package deal; legally I have to sell all of these components at once. When you look at the price breakdown, you can quickly see what a bargain this property is. You get a livable house for $8,500, a 2,800 sq. ft. strong quonset building for $5,600, and more as broken down here:
1. House, 1180 sq. ft. $8,500 ($11,700 county value minus $3,200 upgrade allowance)
2. Land, 2.55 acres $6,450 (Listed County market value)
3. Quonset Building, 2,800 sq. ft. $5,800 ($6,300 county value minus $500 upgrade allowance)
4. Barn, approx. 1,000 sq. ft. $750 (estimated County market value; roof damage factored into county value)
5. Two Circular Grain Bin Buildings, 110 sq. ft. and 175 sq. ft. $200 ($500 minus $300 for junk removal)
6. Work Shed, approx. 120 sq. ft. Free (due to roof repair needed from recent roof damage)
7. Furniture and Appliances $300
Note that if I was selling just the land and the house, the price would be about $14,950, which would more than accurately reflect the extremely low real estate prices of the area for houses that have not been updated in recent years and would also accurately reflect the very reasonable price of land.
SUMMARY OF SALE
TOTAL COUNTY MARKET VALUE: $26,000
Minus total of allowances for upgrades and repairs to make the property average in its comparable class: $4,300
Plus conservative estimate of value of furniture and appliances included: $300
SALE PRICE: $22,000 firm and not now negotiable. However, offers for less than $22,000 will be filed and considered at a later date if and when I have to lower the price a little more.
It is possible due to the economic situation that I will have to lower the current price to $21,500. It is unlikely that I will ever have to lower the price to $21,000. It is very unlikely that I will ever have to lower the price to $20,500. It is extremely unlikely that I will ever have to lower the price to $20,000. It is virtually impossible that I will ever have to lower the price below $20,000.
As you can see, the house is being sold for $8,500. The house and the land are being sold for $14,950.
The 2,800 sq. ft. quonset building is being sold for $5,800.
The small workshop is being sold for nothing or very close to nothing, because the estimated cost of putting on a new roof is roughly equal to the estimated market value of the workshop in its current state without a roof. Similarly, the two circular grain bin buildings are incredibly cheap. Both of these buildings have lockable doors and can be used to store anything. One is about 175 sq. ft. and the other is about 110 sq. ft. They are being sold for just $300 for both! They would normally go for $600, but unlike the quonset building, which is completely cleared of all property and is wide open space ready for the new owner, the two grain bin buildings have some junk in them that needs to be hauled to the Pawnee County landfill, a job that will require no more than $300, so this amount is deducted from the $600. Incidentally, there is never a charge for leaving any type of junk at the Pawnee County landfill.
The barn is being sold for $750 as my best estimate of what it is worth with about 1/12 of its roof missing. The cost of repairing the roof of the barn, or of putting a whole new roof on the barn, is not among the possible repairs that add to $7,000, because the assessment of the property as a $26,000 property was done after taking into consideration the overall outward condition of the barn, including the fact that 1/12 of the roof is missing. So the price of the barn is fixed at $750 and it does not change under various repair/upgrade percentages because there are no barn repairs or upgrades that are relevant. The barn is structurally sound and the roof problem is the only substantial problem with the barn.
Incidentally, if my breakdown between house and building is incorrect, the odds are I have the quonset building a little too low. If the quonset building were located in a more populated area, it would obviously be worth far more than $5,800. But since this property is served by Fed Ex and by UPS, and since high speed DSL internet service is available as well, this building could be used in a business not open to the public in the same way it could if it were in a town or a city! In any event, if even considering where it is my estimate of the value of the quonset building is too low, then my unadjusted market value estimate for the house is too high, and so the real selling price of the house would be less than $8,500!
Furthermore, and more broadly, for those who have a valuable use for the Quonset building, there is no doubt that they will value it as worth much more than $6,200. For those prospective buyers, the effective cost of the house could easily end up being a trivial amount, or even free.
VALUATION VARIATIONS OF DIFFERENT POSSIBLE BUYERS
Let me move on to another important subject regarding the price of this property. There are actually numerous ways that someone might incorrectly believe that the property as a whole is worth even less than $21,000:
1. He or she might be mostly interested in the house and place very little value in the quonset building. If 75% of all repairs and upgrades is the correct percentage to use, than the correct current value of the house alone is a shockingly low $7,600. And that is actually within the realm of possibility. But the total value of the property is nevertheless still at least $21,000, because the land in that case is worth about $6,450, the quonset building in that case is worth about $5,600, the other outbuildings are worth about $1,050, and the furniture and appliances being sold are worth at least $300.
2. He or she might be mostly interested in the quonset building and place very little value in the house. This is the flipside cousin of (2). Clearly, a buyer needs to desire the house, the quonset building, and the land in order to fully agree about the value. Or, at the very least, the buyer has to realize that he or she will have to pay a few thousand dollars extra to get something he doesn't put much value in, (house or quonset building) and not be able to get a refund on that until he or she resells the property, or until he or she makes a few thousand dollars from the use of the quonset building..
3. He or she might believe that even more than 75% of all possible repairs and upgrades are necessary to make the house average among properties that were considered comparable when the $26,000 assessment was done. I would have to disagree with that.
4. He or she might overestimate the costs of the repairs and the upgrades that seem necessary or desirable. Also, he or she might overestimate the hypothetical deadline for effecting certain repairs in order to head off hypothetical increased damage from delay.
5. He or she might be too pessimistic about future maintenance and repairs, and so he or she might overestimate the cost of unknown maintenance and repair items in the future. You can not be overly pessimistic about the future of a country property that has numerous component parts to it like this one does, or you will undervalue it in the here and now.
In summary, I have spent several dozen hours researching by internet, researching by phone, and making various calculations, to come up with the correct current market value of this property. Most would claim I was foolish for buying this place for that reason alone: that it took so much work to figure out what it is really worth!
Fortunately for me, I do not need to cheat the buyer in order to avoid a loss; I uncannily, mostly by luck, if the truth were told, paid at the high end but within the correct, fair value range.
INVESTING IN THIS PROPERTY
If someone buys this property for $22000 and invests the whole $7,000 needed to do every upgrade, they would most likely get a profit of between $2,000 to $5,000, because the resulting fair market value would be between $31,000 and $34,000. This would be a very good return on investment, although it would not be the type of “killing” that real estate speculators like to make. Since the location of this property is very insulated from poor housing market and credit market conditions elsewhere, the economy would have to sink into a full scale 1930’s style depression for the return on a $7,000 investment to be lost completely.
As for buying this property and making little or no investment in it at all, you can also do that safely, because I have done all the research and analysis needed to make that a safe thing to do. And unlike many, many other locations, there are no regulations in this County concerning how upgraded the property needs to be before the County starts trying to fine the owner for not meeting those standards. As I like to say about a property like this: you can do as much as you want, or as little as you want, and no matter how much or how little you do, you are not going to be harassed, charged permit fees, or penalized by the County. Compared with most other areas, there are far fewer zoning regulations here, and far fewer fees and penalties assessed.
Whether you do almost nothing at one extreme, or all of the potential upgrades at the other extreme, or spend any amount in between those extremes, you are not going to lose a substantial amount of money on this property, as my research and analysis demonstrates. The only way there could be a loss would be if the country sinks into a 1930’s style depression, in which case you might lose a small amount, while owners elsewhere lose big. Even in that extreme event, a Depression, that no one expects, your loss would be much less in dollar terms, and less in percentage terms, than would be the loss that real estate owners elsewhere would have.
INTRODUCTION AND BACKGROUND
I used to manage my own retail store, and plus I have a degree in economics, and I have always prided myself on having the right price on everything I sell. In this case, my objective was to set a price that was without a doubt very fair to the buyer, without being substantially unfair to me, the seller.
But no matter how low the price of a property is, there are always going to be a number of folks who believe that the value of it is even less. And in the current bad real estate and real estate financing markets, that number of folks is going to tend to be a bigger number than usual.
Why are there always going to be people who think the value of a property is less than the fair value of it? Economics gives us the answer. According to universally accepted economic theory, for every item that exists and that can be sold, if the sale is a normal free market sale, the price is such that supply and demand is in equilibrium. Of course, this rule generally applies to real estate. But this means in the case of a single, unique item, that most prospective buyers are going to value the property at less than it’s true fair price; only the actual buyer, by definition, will agree completely with the true fair price.
For the great majority of properties, no single property is really all that unique. In every town and city of any size, there are other houses that are quite similar to a house that someone was considering buying. But in the case of a unique property being sold, such as this Kansas property being sold with the assistance of this web site, the supply is technically one unit. There are roughly similar properties and there may be a few somewhat similar properties for sale in the region of the country where this property is, but there are probably no extremely similar properties or essentially identical properties available for sale right now, particularly if you limit the consideration to Kansas or to Kansas and surrounding states. In fact, because of it’s unusual characteristics, including the peaceful, private, rural location, the extremely low price, the freedom from zoning hassles, the combination of outbuildings and house, and the much larger than usual lot size, this property has in theory very few that are close to identical to it anywhere.
But there has to be a price for this property, and the basic law of economics still applies. Fortunately, there was an excellent place to start the calculation of what is the true fair price for this property.
THE STARTING POINT AND WHY IT IS A GOOD ONE
The starting point or base for determining the market value of this property is the Pawnee County assessment value, which is the County’s best estimate of the true market value of this property. Every year the County declares what it believes the market value of every property in the County is. Every year, in late winter, the County sends a “Valuation Notice” to every property owner, which among other things lists the ‘Total Appraised Value” of the property in question. The Total Appraised Value is the best estimate of the market value of the property, that is, what it would sell for if it were being sold right now, and assuming that the uninspected details of the property worked out to be average among the comparable properties.
In order to make these values accurate reflections of reality, there are two processes that are followed by the County. First, an appraiser/assessor visits the property every so often and inspects all of the land and the structures, paying especially careful attention to the overall structural soundness of the house and the outbuildings, including of course the foundation of the house. (If a house is shifting on its foundation, that is obviously a very bad thing, and the market value of such a property is much lower than when there is no foundation problem.) Second, the property is conceptually placed into a class or category or generic type, defined by the part of the County the property is in, by whether the property is in town or not, and by the primary structures and the amount of land. Then all recent sale prices of other properties in that same category are researched and averaged out. In some but not in all years when an appraiser does not visit the property, the County can do a new comparable analysis, thus updating the Total Appraised Value or estimated market value to reflect up to the minute market conditions.
The properties in the category are all going to be a little different from each other in a rural area like this. Some will have a larger house and smaller outbuildings. Others will have a smaller house but more outbuildings. Others will have a similar house and similar outbuildings, but maybe 1 acre of land instead of 2 ½ acres. But the differences in the primary characteristics of the different properties in the category offset one another for the most part, or else the differences are relatively small when you look at the universe of all properties.
However, just because the County says a property is worth $26,000 does not automatically mean that it is definitely going to sell for $26,000 or even extremely close to that. Why? Simply because the details of the inside of the house are not inspected.
But the County figure gives you a base or starting point from which you can proceed to determine the fair price. The true fair market price is most likely going to be in a range of, say 75% of $26,000 at the very least to 125% of $26,000 at the very most, with the specific correct amount depending on the details of the condition of the inside of the house. Because the County does not inspect the inside of the house and does not know, when the market value is estimated, to what extent the inside of the house is updated.
The property being sold has a 1,200 sq. ft. house, a 2,800 sq. ft. Quonset building, a barn estimated to be about 1,000 sq. ft., a small workshop that is about 120 sq. ft, 2 small circular storage buildings, that used to be “potato sheds” or grain bin sheds of about 200 sq. ft. and 107 sq. ft., and 2 1/2 acres of land. These are the obvious, primary features of the property that are what the County starts with when it looks around for similar properties so that it can estimate the market value. The County does a thorough inspection of the outside features of all structures. For the house, this would include the siding, the paint, the roof, the foundation, the porch, the chimneys, the windows, and the window sills. The County uses specialized equipment to verify that the house has not begun to shift on it’s foundation so as to make sure the house is structurally sound and does not need any foundation repair work. The house being sold was so inspected in May 2006, a few months after I bought it, and was found to be structurally sound in all respects.
But to reiterate, the County makes no attempt to inspect the component parts of the insides of houses that make houses livable and that make houses comfortable and that make houses places that you can show off to your friends and relatives. So in other words the County does not attempt to adjust the root market value, based on overall, large scale features, for interior components of the house. The costs of doing so would be ridiculously higher than would be the benefits.
Even an inside of a house that needs a total makeover including not only cosmetic upgrades but also plumbing and/or electrical work, in other words, the worst possible house you could imagine, would need at most roughly $10,000 of work to make it average among the comparable properties. So theoretically, there might be a property that the County claims is worth, say, $30,000 that is really only worth $20,000, because the house is a disaster area on the inside where nothing works and everything needs updating
So getting back to the property being sold we know that the property is said to have a market value of $26,000 by Pawnee County. In other words, it is similar overall and outwardly to properties that have recently sold for an average price of $26,000 in Western Pawnee County.
Here is a record of what the County estimated market values were for this property in recent years.
2006 23,200
2007 26,000
2008 26,000
There was no change for 2008 apparently because no comparative analysis update was done for this year.
After I bought this property in late 2005, an assessment was done on it for the first time in many years. Notice that there have been two reassessments done since I purchased the property in late 2005: one in 2006 and one in 2007. Each time, recent sales of comparable properties were taken into account. The 2007 reassessment acts as a confirmation of the accuracy of the 2006 assessment. Thus, one can have a high degree of confidence that the $26,000 figure is an accurate starting point for determining the real market value of this property.
Remember that the property has 3 major components: (1) the land, (2) the outbuildings: Quonset building, barn, two circular grain bin buildings, a small workshop, and (3) the house.
The value of the 2 1/2 acres of land being sold is separately tracked by the County. The land component is estimated to have a market value of $6,450 by the County, so the other two components combined have a market value of $19,550. Unfortunately, the county does not break down the outbuildings from the house, so someone making a customized fair market value estimate for this property has to do his or her best to do that breakdown to start off the effort. The quonset building has to have a substantial value considering its size and structural strength. I have prospective buyers who are more interested in the quonset building than they are in the house, so for them the following breakdown would be way too low for the quonset building and way too high for the house. On the other hand, for those not much interested in the quonset building, the breakdown is going to tend to be way too high for the quonset building and too low for the house.
The point is, everyone is going to have a different breakdown in mind, so all I can do is come up with my best estimate of the average breakdown among all prospective buyers. So I did this:
BASE VALUATION AMOUNTS
Land: $6450
Quonset Building: $6,200
House: $11,700
Barn: $750
Grain Bin Buildings $600
Small Workshop: $300
TOTAL: $26,000
REPAIRS AND UPGRADES
Now the next thing to consider are the repairs and upgrades needed now or in the next few years on items that were not inspected by nor known by the assessor during his personal visits and during the analysis of the actual sale prices of the comparable properties in this part of the County that led to the $26,000 valuation. There are several questions that had to be answered:
1. What are the repairs and upgrades that can be identified, some percentage of which would be needed to make this property average among the comparable properties?
2. What is the estimated costs of all of the repairs and upgrades, most of which did not factor into the County assessment?
3. How many of these identified desirable repairs and upgrades would be needed to bring this property up to the average status among the comparable properties? I have long since realized that this property is below average to one extent or another in terms of the amount of repair and upgrading needed compared with the other properties that went into the comparison analysis for the market value estimate done by the County. The question was by how much and the devil was in the details as always in microeconomics.
The relevant question is not what the combined cost of repairs and upgrades needed to make this property the best or one of the best properties in the comparison group is. Rather, the relevant question is: what is the combined cost of repairs and upgrades needed to make this property average among the comparable properties? Because if and only if it is average among them, this property would be worth about $26,000. If it were above average, it would be worth more; the best properties in the comparable property group could be expected to sell for roughly 25% more, or $32,500.
So I proceeded to do all of the following:
1. I broke down the market value into the major component parts (see above).
2. I made a list of every substantial desirable repair and upgrade on the property that was not inspected or known by the County when it made the market value estimate. These items were categorized into the component parts of the property.
3. I made estimates of the cost of getting all the items in (2) repaired or upgraded. All of the estimates were assuming that each job would be contracted out, which produced substantially higher dollar amounts in most cases than if the jobs were partly or totally done by the new owner. In other words, I did not cheat the next owner by assuming that he will save money by doing work him or herself, even though it is quite likely that the actual next owner will in fact do some work himself or herself. Estimates were done by extensive internet research and were aided by my degrees in economics and another degree I have in accounting. Moreover, wherever possible, estimates from contractors who would actually do the work were given a very large amount of weight, especially where the estimate was going to be tough for me to do accurately.
4. I added up the contracted out costs for each component part of the property that might get an update, and of course I came up with a grand total of all proposed repairs and updates.
5. As explained above, the trickiest part is to, after you have your grand total of proposed repairs and upgrades, make an estimate of how many of the repairs and upgrades need to be done in order to make the property average among the comparable group of properties that were used to come up with the $26,000 County estimate. Because if you knew exactly what was needed to make the property average, you would then have an excellent idea of what the exact market value of the property in its current state is. It would be $26,000 minus the sum of the costs of all the repairs and upgrades needed to make it average.
6. Since I would have to gain access to and spend several hundred hours inspecting the comparable properties in order to see how they compare in detail to this one, and since that is obviously not possible, all I could then do was to make the best estimate possible of the correct percentage of all possible repairs and upgrades that would be needed to make this property average. Unfortunately for me, to avoid cheating the buyer, I had to be as generous as possible with my estimate without unreasonably overestimating how wonderful the comparable properties are.
7. Since the exact percentage (amount of repairs and upgrades) can not be known, you need to come up with a reasonable range. When that is done, the following results become known:
CORRECT CURRENT MARKET VALUE OF PROPERTY BEING SOLD BY % OF THE COST OF ALL REASONABLE REPAIRS AND UPGRADES NEEDED TO MAKE THE PROPERTY AVERAGE AMONG PROPERTIES COUNTY CONSIDERS COMPARABLE
40% $23,200
50% $22,500
60% $21,800
70% $21,100
75% $20,750
THE FINAL ANALYSIS
As anyone who understands this and who is good at math can determine, the sum total of the cost of all repairs and upgrades identified for this property, some percentage of which would be needed to make it comparable to other properties, was almost exactly $7,000. Even in 2008, that amount of money is enough to make a lot of repairs and upgrades to a property, especially when low western Kansas labor rates are involved. To see how the resulting prices are calculated, consider for example the 60% level. 60% of $7,000 is $4,200. And $26,000 minus $4,200 is $21,800, which is the price you see above next to 60%.
Since I believe that the correct percentage of all possible repairs and upgrades to bring this property to average is somewhere between 40% and 75%, and the cost of all of them with virtually no do it yourself labor is very close to $7,000, my best estimate is that the exact, true, correct market value of the property right now is between about $20,750 and $23,200.
My current price of $22,000 is in the middle of that range, but an argument can be made that I should be ready to sell for as little as $20,750, since I don’t know what the real, true correct percentage is within the range shown. When all is said and done, it is impossible for me to be more exact about the true price than to specify it as a range that spans about $2,500, from $20,750 to $23,200. Any price in this range is just as fair as any other one, really.
I have buyers who want to buy at $22,000, but they have been delayed by banks refusing to make them loans that they would have made to them as recently as about 12-18 months ago. This is no surprise, because currently, most banks have overly restrictive loan policies. Due to these policies, which everyone expects and hopes will be temporary, there has been a delay in selling this property, exactly what all of my efforts were supposed to prevent. Under normal housing market conditions, I would not want to consider selling this property for less than $21,975, the midpoint of the correct price range. However, these are not ordinary conditions, and I may possibly have to seriously consider selling the property for as little as $20,750 at some point in the future, if banks keep preventing potential buyers from getting financing, and if potential buyers keep having a lot of trouble selling their current real estate, and if no one else who has cash on hand steps forward to buy the place.
Next, we will break down the property by its components and see what I am really selling each component for. We will start with the base amounts, the ones that add to the County value of $26,000, and then we will see what the effective price of each component is assuming the property is sold for $22,000.
BASE VALUATION AMOUNTS:
Land: $6450
Quonset Building: $6,200
House: $11,700
Barn: $750
Grain Bin Buildings $600
Small Workshop: $300
TOTAL: $26,000
BREAKDOWN OF SALE
This shows the price that the buyer will be paying broken down by component. Remember, this is a package deal; legally I have to sell all of these components at once. When you look at the price breakdown, you can quickly see what a bargain this property is. You get a livable house for $8,500, a 2,800 sq. ft. strong quonset building for $5,600, and more as broken down here:
1. House, 1180 sq. ft. $8,500 ($11,700 county value minus $3,200 upgrade allowance)
2. Land, 2.55 acres $6,450 (Listed County market value)
3. Quonset Building, 2,800 sq. ft. $5,800 ($6,300 county value minus $500 upgrade allowance)
4. Barn, approx. 1,000 sq. ft. $750 (estimated County market value; roof damage factored into county value)
5. Two Circular Grain Bin Buildings, 110 sq. ft. and 175 sq. ft. $200 ($500 minus $300 for junk removal)
6. Work Shed, approx. 120 sq. ft. Free (due to roof repair needed from recent roof damage)
7. Furniture and Appliances $300
Note that if I was selling just the land and the house, the price would be about $14,950, which would more than accurately reflect the extremely low real estate prices of the area for houses that have not been updated in recent years and would also accurately reflect the very reasonable price of land.
SUMMARY OF SALE
TOTAL COUNTY MARKET VALUE: $26,000
Minus total of allowances for upgrades and repairs to make the property average in its comparable class: $4,300
Plus conservative estimate of value of furniture and appliances included: $300
SALE PRICE: $22,000 firm and not now negotiable. However, offers for less than $22,000 will be filed and considered at a later date if and when I have to lower the price a little more.
It is possible due to the economic situation that I will have to lower the current price to $21,500. It is unlikely that I will ever have to lower the price to $21,000. It is very unlikely that I will ever have to lower the price to $20,500. It is extremely unlikely that I will ever have to lower the price to $20,000. It is virtually impossible that I will ever have to lower the price below $20,000.
As you can see, the house is being sold for $8,500. The house and the land are being sold for $14,950.
The 2,800 sq. ft. quonset building is being sold for $5,800.
The small workshop is being sold for nothing or very close to nothing, because the estimated cost of putting on a new roof is roughly equal to the estimated market value of the workshop in its current state without a roof. Similarly, the two circular grain bin buildings are incredibly cheap. Both of these buildings have lockable doors and can be used to store anything. One is about 175 sq. ft. and the other is about 110 sq. ft. They are being sold for just $300 for both! They would normally go for $600, but unlike the quonset building, which is completely cleared of all property and is wide open space ready for the new owner, the two grain bin buildings have some junk in them that needs to be hauled to the Pawnee County landfill, a job that will require no more than $300, so this amount is deducted from the $600. Incidentally, there is never a charge for leaving any type of junk at the Pawnee County landfill.
The barn is being sold for $750 as my best estimate of what it is worth with about 1/12 of its roof missing. The cost of repairing the roof of the barn, or of putting a whole new roof on the barn, is not among the possible repairs that add to $7,000, because the assessment of the property as a $26,000 property was done after taking into consideration the overall outward condition of the barn, including the fact that 1/12 of the roof is missing. So the price of the barn is fixed at $750 and it does not change under various repair/upgrade percentages because there are no barn repairs or upgrades that are relevant. The barn is structurally sound and the roof problem is the only substantial problem with the barn.
Incidentally, if my breakdown between house and building is incorrect, the odds are I have the quonset building a little too low. If the quonset building were located in a more populated area, it would obviously be worth far more than $5,800. But since this property is served by Fed Ex and by UPS, and since high speed DSL internet service is available as well, this building could be used in a business not open to the public in the same way it could if it were in a town or a city! In any event, if even considering where it is my estimate of the value of the quonset building is too low, then my unadjusted market value estimate for the house is too high, and so the real selling price of the house would be less than $8,500!
Furthermore, and more broadly, for those who have a valuable use for the Quonset building, there is no doubt that they will value it as worth much more than $6,200. For those prospective buyers, the effective cost of the house could easily end up being a trivial amount, or even free.
VALUATION VARIATIONS OF DIFFERENT POSSIBLE BUYERS
Let me move on to another important subject regarding the price of this property. There are actually numerous ways that someone might incorrectly believe that the property as a whole is worth even less than $21,000:
1. He or she might be mostly interested in the house and place very little value in the quonset building. If 75% of all repairs and upgrades is the correct percentage to use, than the correct current value of the house alone is a shockingly low $7,600. And that is actually within the realm of possibility. But the total value of the property is nevertheless still at least $21,000, because the land in that case is worth about $6,450, the quonset building in that case is worth about $5,600, the other outbuildings are worth about $1,050, and the furniture and appliances being sold are worth at least $300.
2. He or she might be mostly interested in the quonset building and place very little value in the house. This is the flipside cousin of (2). Clearly, a buyer needs to desire the house, the quonset building, and the land in order to fully agree about the value. Or, at the very least, the buyer has to realize that he or she will have to pay a few thousand dollars extra to get something he doesn't put much value in, (house or quonset building) and not be able to get a refund on that until he or she resells the property, or until he or she makes a few thousand dollars from the use of the quonset building..
3. He or she might believe that even more than 75% of all possible repairs and upgrades are necessary to make the house average among properties that were considered comparable when the $26,000 assessment was done. I would have to disagree with that.
4. He or she might overestimate the costs of the repairs and the upgrades that seem necessary or desirable. Also, he or she might overestimate the hypothetical deadline for effecting certain repairs in order to head off hypothetical increased damage from delay.
5. He or she might be too pessimistic about future maintenance and repairs, and so he or she might overestimate the cost of unknown maintenance and repair items in the future. You can not be overly pessimistic about the future of a country property that has numerous component parts to it like this one does, or you will undervalue it in the here and now.
In summary, I have spent several dozen hours researching by internet, researching by phone, and making various calculations, to come up with the correct current market value of this property. Most would claim I was foolish for buying this place for that reason alone: that it took so much work to figure out what it is really worth!
Fortunately for me, I do not need to cheat the buyer in order to avoid a loss; I uncannily, mostly by luck, if the truth were told, paid at the high end but within the correct, fair value range.
INVESTING IN THIS PROPERTY
If someone buys this property for $22000 and invests the whole $7,000 needed to do every upgrade, they would most likely get a profit of between $2,000 to $5,000, because the resulting fair market value would be between $31,000 and $34,000. This would be a very good return on investment, although it would not be the type of “killing” that real estate speculators like to make. Since the location of this property is very insulated from poor housing market and credit market conditions elsewhere, the economy would have to sink into a full scale 1930’s style depression for the return on a $7,000 investment to be lost completely.
As for buying this property and making little or no investment in it at all, you can also do that safely, because I have done all the research and analysis needed to make that a safe thing to do. And unlike many, many other locations, there are no regulations in this County concerning how upgraded the property needs to be before the County starts trying to fine the owner for not meeting those standards. As I like to say about a property like this: you can do as much as you want, or as little as you want, and no matter how much or how little you do, you are not going to be harassed, charged permit fees, or penalized by the County. Compared with most other areas, there are far fewer zoning regulations here, and far fewer fees and penalties assessed.
Whether you do almost nothing at one extreme, or all of the potential upgrades at the other extreme, or spend any amount in between those extremes, you are not going to lose a substantial amount of money on this property, as my research and analysis demonstrates. The only way there could be a loss would be if the country sinks into a 1930’s style depression, in which case you might lose a small amount, while owners elsewhere lose big. Even in that extreme event, a Depression, that no one expects, your loss would be much less in dollar terms, and less in percentage terms, than would be the loss that real estate owners elsewhere would have.
Thursday, May 15, 2008
Questions About the Price, the Tax & the Title
LAST UPDATED MAY 1, 2008
Q: What is the discounted full cash purchase price?
A: Just $22,500 cash buys this property immediately. This is what I paid. I made a fantastic deal on my new residence, and for this and other reasons I honestly don't care about the fact that I will not make a profit on this. When I bought it, it was dirty in spots, it needed some minor fix-ups, and there was a lot of junk on the property. All three of these issues have been resolved. I have cleaned it up, fixed it up to make sure there can be no dispute that it is livable, and most of the junk that was lying around has been removed.
The County estimated market value is $26,000, so at a price of $22,500, you have a $3,500 discount off of that that you could use to make it nicer and/or more updated on the inside of the house, and/or to improve the grounds.
Q: This seems too cheap. Is this a scam?
A: It is not a scam, just a bargain due mostly to the following:
1. This area has always had low cost real estate.
2. This area is lightly populated.
3. This property has not had any extensive and expensive full scale room updates in the last 25-30 years. For example, it does not have a recently updated, fully modern kitchen.
Q: Is the current cash price of $22,500 the absolute minimum price right now?
A: Yes, I will not accept anything less than this right now. The price has been set so that the property should sell quickly. Since the price is so low compared with most other areas of the country and since I am in a relative hurry to sell it, I decided to not bother with trying to squeeze out a few hundred extra dollars by having a spread between the stated price and the actual price I would accept. In other words, I am selling this as if it was a used car, with a firm price on it in the want ads.
Q: Is the current cash price of $22,500 going to be reduced if the property does not sell in a certain number of months?
A: The amount I will accept will go up $1,000 to $23,500 as of July 1 if the property has not sold by then, because a realtor will have to become involved. The realtor, incidentally, thinks the property should be listed at $27,500 and sold for about $25,000. If the property does not sell by the end of September 2008, the amount I will accept will begin to come down at a slow, steady rate. The amount I will accept will come back down to $22,500 no later than July 2009. If the property does not sell by July 31, 2009, the amount I will accept will start dropping at a somewhat faster rate.
Having said all that, I would like to inform anyone who thinks that this property can be purchased for far below the County market value of $26,000 for any reason or set of reasons that he or she is not going to be able to do that. I appreciate the interest in the property, but I simply am not able to in effect throw money out the window by accepting a price far below what this property is expected to sell for, simply because it is in a rural area or simply because the overall national market is tough.
True, the rural spot this property is in makes it relatively hard to sell by definition, but I am working hard to offset and overcome that problem. And although the overall housing market is obviously in bad shape, the area where this property is never experienced rapid and wild price increases in real estate, so prices will not be coming down around here anywhere near as much as they will be coming down in many major metropolitan areas. The person who buys this property will NOT have to worry about the value of this property dropping rapidly after his or her purchase due to the national real estate slump, because that slump is going to have at the most a very small impact in the area where this property is. Buying in this area shelters the buyer from rapid, additional declines in the price of his purchased property that he or she would face in many other markets.
To sum it up, although I have already thrown in the towel on getting what the County thinks it is worth, which is $26,000, I know for a fact that those who think they might be able to buy it for less than about 77% of that amount or $20,000 are mistaken. In other words, the absolute worst case scenario for me is that I will have to sell it for about $20,000, but I will not feel I am forced to do that for very many months.
Furthermore, I already as I write this have payment plan and rent to own offers on this house, a few of which appear to be rock solid, so before I would sell the place at a massive discount, I would probably be forced to accept one of those payment plans. I say "forced to," because my objective is to make a clean break with this property by selling it outright and immediately, and not to have to be worrying about payments over several ensuing years.
Q: Is the deed free and clear?
A: Yes
Q: Is there a deed warranty available?
A: I have title insurance and the new owner will get it as well. It's probably required under Kansas law, and the title company most likely requires it if they are to close the property.
New Questions and Answers as of April 30
Q: What is the total of taxes per year?
A: The only tax is the property tax. The property tax is $380 per year, or about $1 per day.
Q: What is the assessed value of this property?
A: The assessed value, which is the best estimate possible of the market value, is $26,000. That value was determined in 2007 by an evaluation of at least half a dozen recent sales of properties similar to this one in the same part of the county that this property is in, namely, western Pawnee County. Not one but two assessments were done recently, one in 2006 and one in 2007, with the latter one confirming the accuracy of the prior one.
Also, this property is on the border between Pawnee County and Hodgeman County. A Hodgeman County realtor did his own evaluation of what the market value of this property is, and his determination was exactly in agreement with that of the County; he too concluded that the market value of this property is about $26,000.
Q: What is the discounted full cash purchase price?
A: Just $22,500 cash buys this property immediately. This is what I paid. I made a fantastic deal on my new residence, and for this and other reasons I honestly don't care about the fact that I will not make a profit on this. When I bought it, it was dirty in spots, it needed some minor fix-ups, and there was a lot of junk on the property. All three of these issues have been resolved. I have cleaned it up, fixed it up to make sure there can be no dispute that it is livable, and most of the junk that was lying around has been removed.
The County estimated market value is $26,000, so at a price of $22,500, you have a $3,500 discount off of that that you could use to make it nicer and/or more updated on the inside of the house, and/or to improve the grounds.
Q: This seems too cheap. Is this a scam?
A: It is not a scam, just a bargain due mostly to the following:
1. This area has always had low cost real estate.
2. This area is lightly populated.
3. This property has not had any extensive and expensive full scale room updates in the last 25-30 years. For example, it does not have a recently updated, fully modern kitchen.
Q: Is the current cash price of $22,500 the absolute minimum price right now?
A: Yes, I will not accept anything less than this right now. The price has been set so that the property should sell quickly. Since the price is so low compared with most other areas of the country and since I am in a relative hurry to sell it, I decided to not bother with trying to squeeze out a few hundred extra dollars by having a spread between the stated price and the actual price I would accept. In other words, I am selling this as if it was a used car, with a firm price on it in the want ads.
Q: Is the current cash price of $22,500 going to be reduced if the property does not sell in a certain number of months?
A: The amount I will accept will go up $1,000 to $23,500 as of July 1 if the property has not sold by then, because a realtor will have to become involved. The realtor, incidentally, thinks the property should be listed at $27,500 and sold for about $25,000. If the property does not sell by the end of September 2008, the amount I will accept will begin to come down at a slow, steady rate. The amount I will accept will come back down to $22,500 no later than July 2009. If the property does not sell by July 31, 2009, the amount I will accept will start dropping at a somewhat faster rate.
Having said all that, I would like to inform anyone who thinks that this property can be purchased for far below the County market value of $26,000 for any reason or set of reasons that he or she is not going to be able to do that. I appreciate the interest in the property, but I simply am not able to in effect throw money out the window by accepting a price far below what this property is expected to sell for, simply because it is in a rural area or simply because the overall national market is tough.
True, the rural spot this property is in makes it relatively hard to sell by definition, but I am working hard to offset and overcome that problem. And although the overall housing market is obviously in bad shape, the area where this property is never experienced rapid and wild price increases in real estate, so prices will not be coming down around here anywhere near as much as they will be coming down in many major metropolitan areas. The person who buys this property will NOT have to worry about the value of this property dropping rapidly after his or her purchase due to the national real estate slump, because that slump is going to have at the most a very small impact in the area where this property is. Buying in this area shelters the buyer from rapid, additional declines in the price of his purchased property that he or she would face in many other markets.
To sum it up, although I have already thrown in the towel on getting what the County thinks it is worth, which is $26,000, I know for a fact that those who think they might be able to buy it for less than about 77% of that amount or $20,000 are mistaken. In other words, the absolute worst case scenario for me is that I will have to sell it for about $20,000, but I will not feel I am forced to do that for very many months.
Furthermore, I already as I write this have payment plan and rent to own offers on this house, a few of which appear to be rock solid, so before I would sell the place at a massive discount, I would probably be forced to accept one of those payment plans. I say "forced to," because my objective is to make a clean break with this property by selling it outright and immediately, and not to have to be worrying about payments over several ensuing years.
Q: Is the deed free and clear?
A: Yes
Q: Is there a deed warranty available?
A: I have title insurance and the new owner will get it as well. It's probably required under Kansas law, and the title company most likely requires it if they are to close the property.
New Questions and Answers as of April 30
Q: What is the total of taxes per year?
A: The only tax is the property tax. The property tax is $380 per year, or about $1 per day.
Q: What is the assessed value of this property?
A: The assessed value, which is the best estimate possible of the market value, is $26,000. That value was determined in 2007 by an evaluation of at least half a dozen recent sales of properties similar to this one in the same part of the county that this property is in, namely, western Pawnee County. Not one but two assessments were done recently, one in 2006 and one in 2007, with the latter one confirming the accuracy of the prior one.
Also, this property is on the border between Pawnee County and Hodgeman County. A Hodgeman County realtor did his own evaluation of what the market value of this property is, and his determination was exactly in agreement with that of the County; he too concluded that the market value of this property is about $26,000.
Why the Price is Not Too Low
Some people who have emailed have suggested that they think the price is missing a "0", so that the real price is $233,000 instead of $23,300. Or else they think the house must be unlivable, and/or the outbuildings are junk. Or else they think the whole thing is some kind of a scam. I am here to inform everyone that none of those hypothetical catches are accurate, and that this is a real opportunity to buy a big chunk of real estate for a small chunk of money.
By far the most important reason why the price is not too low is that real estate is very inexpensive in this area and always has been. In other words, this property is located in real, true bargain country. This has always been a lightly populated, rural area. It's been an overlooked, best kept secret kind of location relative to the United States as a whole.
And this area is not part of the real estate crisis, where the value of real estate is dropping because it was run up too high. The buyer of this property will not have to worry about the value of this property dropping more than a trivial amount due to the real estate crisis that is found elsewhere.
Another reason why the price is so low is that the property being sold has not had any extensive and expensive full scale room updates in the last 25-30 years. For example, it does not have a recently updated, fully modern 2008 kitchen. Rather, it has a 1980 style kitchen. Speaking hypothetically, had the inside of the house been updated recently, the selling price would be as high as $32,500, depending on what was updated and how recently it was updated. If aside from this the grounds were spruced up, the roofs of the barn and of the work shed were fixed, and new house windows were installed, the market price would creep closer and closer to $40,000.
The house did have within the last 30 years a nice new metal roof installed, new aluminum siding, new bathroom fixtures, a few new windows, and a few other relatively minor upgrades, but for the most part, on the inside the house looks and functions similar to the way it did 25-30 years ago.
So the list price of $23,300 is not missing a zero at all. It is a true bargain in a bargain location so to speak.
Another way to think of this is to note that if this same exact property were almost anywhere else, the price of it would be much higher. For example, if this property were 25 miles from Denver, the price would be 5-8 times what it is, between $115,000 and $185,000. If this property were 25 miles from Wichita, it would be about 2-4 times what it is, between $50,000 and $90,000. If this property were in Wyoming in mountain country, it would be even more than what it would be 25 miles from Denver, because there is great interest among higher income and wealthier people to live in Wyoming as opposed to Kansas.
By far the most important reason why the price is not too low is that real estate is very inexpensive in this area and always has been. In other words, this property is located in real, true bargain country. This has always been a lightly populated, rural area. It's been an overlooked, best kept secret kind of location relative to the United States as a whole.
And this area is not part of the real estate crisis, where the value of real estate is dropping because it was run up too high. The buyer of this property will not have to worry about the value of this property dropping more than a trivial amount due to the real estate crisis that is found elsewhere.
Another reason why the price is so low is that the property being sold has not had any extensive and expensive full scale room updates in the last 25-30 years. For example, it does not have a recently updated, fully modern 2008 kitchen. Rather, it has a 1980 style kitchen. Speaking hypothetically, had the inside of the house been updated recently, the selling price would be as high as $32,500, depending on what was updated and how recently it was updated. If aside from this the grounds were spruced up, the roofs of the barn and of the work shed were fixed, and new house windows were installed, the market price would creep closer and closer to $40,000.
The house did have within the last 30 years a nice new metal roof installed, new aluminum siding, new bathroom fixtures, a few new windows, and a few other relatively minor upgrades, but for the most part, on the inside the house looks and functions similar to the way it did 25-30 years ago.
So the list price of $23,300 is not missing a zero at all. It is a true bargain in a bargain location so to speak.
Another way to think of this is to note that if this same exact property were almost anywhere else, the price of it would be much higher. For example, if this property were 25 miles from Denver, the price would be 5-8 times what it is, between $115,000 and $185,000. If this property were 25 miles from Wichita, it would be about 2-4 times what it is, between $50,000 and $90,000. If this property were in Wyoming in mountain country, it would be even more than what it would be 25 miles from Denver, because there is great interest among higher income and wealthier people to live in Wyoming as opposed to Kansas.
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