People come into the real estate market with a lot of misconceptions.
Sure, people are far more intelligent, educated, and informed about the market than they used to be, but I find this also makes them more stubborn.
Would you call in a plumber to your home, and proceed to tell him how to fix your sink?
My favorite Bruce Lee story goes as follows:
A highly educated man went to a zen teacher to ask and acquire knowledge about zen. As the zen teacher began to explain his teachings, the man would continuously interrupt with his own ideas or to agree/disagree.
Finally the zen teacher stopped talking, and offered the man some tea. He poured tea into the cup until it was full, and then kept pouring until the cup overflowed onto the floor. The man shouted “Enough! No more can go into the cup!”
“Yes, indeed I see,” said the zen teacher. “Just like your cup, you are full. Full of your own ideas and opinions. If you do not first empty your cup, how can you taste my cup of tea?”
I experience this every day in real estate, but it’s not to be unexpected.
I met a new prospect last fall who was interested in purchasing a condo “purely for investment.” He was eyeing Mozo Lofts, King’s Court, and King George Square, and wanted a 1-bedroom or 2-bedroom unit. I took him to King George Square to see a 2-bedroom, 2-bathroom unit of about 930 square feet.
His first question about the unit was with regards to the price per square foot, and I informed him it was roughly $525/sqft.
In addition to being his first question, this was also his last question!
We then went to see a 1-bedroom unit at Mozo Lofts, and again, he asked what the price per square foot was. It was roughly $499/sqft.
When we left Mozo Lofts, he looked next door at the construction site that will someday be Rezen Condominiums, and asked me if I knew what the price per square foot was in that building. As I informed him that price per square foot was about $423, his eyes lit up. He thanked me for my time, and we went our separate ways.
When I called him the next day to follow up on our condo viewings, he told me that he felt King George Square was severly “overpriced” and that he wasn’t interested.
King George Square is the most popular building in the downtown core right now, and prices have risen dramatically over the last couple years, for all those investors who are interested.
As I continued my conversation with this intelligent investor from Dubai, who clearly had money and had numerous investments in addition to real estate, I realized that he had this preconception, which was really a misconception about the price per square foot.
He was comparing apples and oranges! The unit at King George Square was a 2-bedroom, 2-bathroom, and the unit at Mozo Lofts was 1-bedroom! The unit at Mozo also had no parking space! How can you compare one unit that includes parking and a locker to a unit that doesn’t?
The unit at Mozo Lofts, which was priced at $299,900 for 600 square feet, would be priced at $334,900 if it had parking and a locker like the unit at King George Square did. This would change the price per square foot from $499 to $558! NOW, which unit would be “overpriced?”
But when I tried to explain this to him, there was just silence on the other end of the phone. I asked him, “Do you understand that the price per square foot at Mozo Lofts is only lower because there is no parking and no locker?”
And as if he had heard nothing I said, he simply replied, “I like Mozo Lofts because the price per square foot is cheaper.”
I began to look around for a hidden camera, assuming this guy couldn’t be for real.
But THEN, he told me how Rezen Condominiums is his first choice because the cost per square foot is about $100 cheaper than King George Square.
(try to calm down)
I explained to him that Rezen has yet to be built! The cost per square foot is cheaper at Rezen because they are a year away from finishing the project, and all pre-construction condos offer lower prices than resale condominiums because they need to make sales in order for the project to get off the ground!
As an “astute, informed investor,” surely he should realize that waiting a year to take posession at Rezen would mean twelve months of lost rent from a perspective tenant, while tenants can move into Mozo and King George Square as soon as his deal closes.
But when I suggested this, he simply balked at the notion and called Rezen a “better deal.”
One of the most important lessons we learned in mathematics in grade school was how to add and subtract fractions. You can’t subtract 1/4 from 5/8 without first making the numerators the same. Make 1/4 into 2/8, and low and behold, an eight year old child can subtract 2/8 from 5/8.
It’s the same idea in real estate when comparing one condominium to another.
How can you use cost per square foot as an effective price measure when one unit has completely different features from the next? A 2-bedroom unit will differ from that of a 1-bedroom unit, and things like parking, locker, appliances, and finishes will make a huge difference in your bottom line.
You can’t compare apples and oranges and expect to draw any effective conclusions.
The sad part about this story, is that this “client” of mine stopped returning my phone calls and emails once I tried to explain to him these basic principals of evaluation. I was only doing my job, and unlike most agents to just want to sell to anybody, I thought it would be prudent to educate this man about the investment he was so eager to make.
Perhaps next time I should just glue a fake plastic smile to my face and agree with everything he says?
Honesty and modesty are two seldom-seen traits in real estate, and call me naive if you will, but I think it’s the way to go…