The Physics of Real Estate

There are situations in real estate when you absolutely know that your observations, analysis or interpretation of the facts will be subject to a higher level of scrutiny.  Consider mediation, court action, valuing the assets of an estate or filing grievances on a municipal assessment.  

Taking the mantle of expert in these situations requires a consistent belief system based in a rock-solid and limitlessly defensible understanding of the underlying concepts - it is this unshakeable basis that I call the Physics of Real Estate.

In my practice, these are the four “natural laws” that I live by:

1. Buyers and Sellers represent equal and opposite forces

By making offers buyers exert a downward force on prices and by making counter-offers sellers exert an upward force.   Neither the offer nor the counter-offer typically represents “market value” as each party attempts to serve their own interests.

Buyer...

Buyer...

Seller...

Seller...

Consider a buyer who signs a purchase contract at a number higher than they EVER thought they would pay and the seller who signs that same contract and is convinced that the price they are agreeing to is so much LOWER than they had ever considered.  Agents know that this truly represents Fair Market Value and that all is “right with the world.”

"there is only ONE fair market value"

It's discouraging when a real estate professional asks whether a market valuation (or Broker Value Opinion) prepared by another agent was done on behalf of a prospective buyer or seller.  There is no difference because there is only ONE fair market value, regardless of who is asking the value question.

2. Fair Market Value depends on your frame of reference

“Fair Market Value is whatever a buyer is willing to pay” is something we frequently hear.  Well, maybe, but maybe not.

Take the case of an agent asked to prepare a market valuation on a particular property (and we know it doesn’t matter whether it is a buyer or seller who is asking).  They select comparable sales from their MLS in preparation for the analysis and they complete the exercise.  

Since all the comparable properties have closed at a date prior to the analysis, this is most certainly a backward-looking exercise. Even if value is adjusted up or down for time, the result is an UNPROVEN reading of Fair Market Value.

Let’s call this the agent’s “Best Guess” of FMV.  

Now that agent markets the property.  It goes under agreement at a price substantially above or substantially below the Best Guess.  Was the Best Guess wrong?  No.  But wait one minute!  The first law was that Buyers and Sellers represent equal and opposite forces to arrive at Fair Market Value - so Best Guess had to be wrong!  Not really.

It’s all in the frame of reference!

Plenty of properties sell for lower than or higher than their Fair Market Value based on circumstances unique to that buyer and that seller at that moment.   But as soon as that sale is completed, that contract price is no longer lower or higher than Fair Market Value, it now IS Fair Market Value (and here is the key)...BUT ONLY WITH RESPECT TO ANY/ALL FUTURE TRANSACTIONS.  The data point just completed represents a NEW measure of Fair Market Value for any valuation that this agent or other agents subsequently prepare.  

So can properties sell above or below their Fair Market Value?  

It depends on your frame of reference!

3. In a vacuum Buyers and Sellers can't hear themselves being wrong

This is not a statement of arrogance or disdain for buyers and sellers but rather a routine observation of fact.  Consider this: We are top-flight agents with well over 1,500 transactions completed.  We STILL bounce our proposed words and actions off each other, our colleagues and our mentors.  We continue to do so throughout each transaction.  We do this because we are paid to see pitfalls BEFORE they happen, but pitfalls often seem to come dressed in different clothes.

"a professional would have quickly exposed as myth"

Unrepresented people considering a sale or purchase have no such luxury. They most certainly bounce ideas off trusted others but so often we see that people can construct their own reality.  People so commonly embrace plans and actions that a professional would have quickly exposed as myth at the first mention!

3563ccf3fb0ee7de471f33394b6e6d95.jpg

A simple example in my home market is sellers downsizing from homes with impressive gardens. They are usually convinced that June is the month to enter the market so the blooming gardens will enhance showings of the house. Having done this so many times before, I know categorically that Feb and March are our strongest market for sales.  Late winter buyers sense buyer-competition in the market and act with urgency even with three feet of snow blanketing the gardens.

There will be tumbleweeds blowing through the real estate market by the time a homeowner’s perennials are in bloom!

Where does this comes up in expert testimony or dispositioning assets?  In the absence of expert advice, actions that look foolhardy or even deceitful, in the rear view mirror, are probably just illustrations of something an unrepresented seller or buyer talked themselves into.

Interesting side note...This lack of a sounding board also explains why most agents think so many FSBOs (For Sale By Owners) are kind of crazy.  Take this common gem:  

“We were going to take down the wallpaper in the main living space but we thought, the next people will want to paint in their own colors.  If they are real buyers they will see beyond the wallpaper.”    

Oh, my aching head.

4.  Following “The Path of Least Resistance” explains most cases

Nothing can describe this better than a real example.  I was asked to give testimony in a case that involved an occupant that was forced to leave a rural home.  The individual’s actions just prior to and just after this final day were discussed at length.  One plaintiff described the occupant’s actions as “scorched-earth”.  

Welcome home!

Welcome home!

Allegedly, brand new major appliances were removed from the house. Indeed the pictures in evidence did show spaces where appliances should have been - except the electric range.  It was present but it wasn’t new, nor was it nearly the quality of appliance the plaintiff had described.  When asked about the anomaly the plaintiff explained that ALL the new appliances were removed and that the occupant later returned and installed the inferior range shown in the photos.

This made so little sense that the opposing attorney questioned the fact in detail.  After much confusion and repeated questioning, the plaintiff admitted that around this time she HAD purchased major appliances of a relatively high quality but they were for her PRIMARY RESIDENCE and PERHAPS she was confused about what level of appliances existed in this investment house.

So, is it impossible that a disgruntled individual might exchange an old, broken down electric range for a shiny, new one on their way out of a rural home?  It’s not impossible.  Is it likely that they would replace the range rather than leaving an empty space?  Not very!  It seems much more likely that there never was a shiny, new range and while the occupant may be guilty of a hasty and unpleasant exit, the photos of the old range are certainly not evidence of the claim.

This is not to say that odd things don’t happen in real estate transactions - in fact, not many businesses are weirder - but the oddities rarely involve actors fighting upstream against the path of least resistance.  

With human behavior, the simplest explanation is typically the correct one!