The Definition of a "Good Deal"

Blog Post Image
Real Estate

One of my FAVORITE topics to cover with my clients is "The definition of a good deal".  On the surface, for those not in the industry, a good deal might be seen as simply buying a product for less than the asking price.  However, after buying nearly 10 houses last year, I've come to learn that the definition of a "good deal" is far more subjective and it usually depends on what the buyers goals.

For example, let's say you have a $500,000 turnkey property and three different buyers.  Let's call them Buyer 1, Buyer 2, and Buyer 3.  For arguments sake, let's say that the property is located in Cape Cod, a popular vacation destination.

Buyer 1 is on the hunt for a property that they can use as a vacation home for the next 5 -10 year (max) and they would like to finance the property with a 30 year conventional mortgage with 20% as their down payment.  If they get the house, great, but if they lose in a multiple offer situation, they won't lose sleep.  Fair enough, if they were to buy this home at the asking price of $500,000, then their monthly payment (with today's interest rates), would be about $3,000.  For buyer 1, a "Good Deal" might be trying to buy this home under market value, because it would reduce their monthly expenses marginally.

Buyer 2 is on the hunt for a property that they can use for both personal vacations and some short term rental income.  Their strategy is to finance the property with a 30 year conventional second home mortage with 10% as their down payment.  Their goal is to cover their annual expenses and maybe make a little bit of money.  Through working with their real estate agent, Dave Menapace, they learn that this home could produce $48,000/year as a short term rental and still allow Buyer 2 to vacation at the home for up to 3 weeks per year.  After running the numbers, Buyer 2 learns that with a 10% down payment, they could afford to buy the house for $550,000 (10% over asking), which would require a monthly payment of $3,500/  Since they project an annual income of $48,000 (avg $4,000/month), they will still NET $500/month and walk away with a $6,000 profit.  This profit will continue to grow year after year and by year 10, could be a $20K/year profit.  In a multiple offer situation, $550,000 might be a GREAT deal for this buyer!

Buyer 3 has just sold an income property and made $600,000!  Wow - must be nice!  However, they are set to pay 35% in capital gains tax!  Thats equal to $210,000!  That's a lot of money to give up.  Buyer 3 wants to conduct a 1031 exchange to avoid paying the capital gains tax.  This buyer decides they LOVE this house that is listed for $500,000.  They aren't sure if they want to use it as a vacation home or a short term rental at this point.  They decide to offer $600,000 for the home (20% over asking!).  For this buyer, this is an AMAZING deal!!! Why would paying $600,000 for a $500,000 house be considered an AMAZING deal?  Well... rather than paying $210,000 in taxes, they were able to roll those profits into another home and avoid paying taxes all together.  Down the road, they can do a cashout refiance or use a home equity line of credit to access their equity if they so choose.

So what does this story illustrate?  This story shows that a "Good, Great, and Amazing Deal" depends more on the buyer and their starting point, rather than simply the price that they buy a home for.

How can this be applied to YOU in today's market?  My suggestion is to focus in on your goals with the property and really get a sense for what you need and want.  When it comes to making an offer, I usually coach my clients to think about their end game, then we work together to craft an offer that aligns with their goals, but also puts them in a safe position to have their offer accepted!