Why Would My House be Worth Less Than the Zestimate?

Jason Hull of We Buy Johnson County, Texas Homes at the Johnson County line

We know that in Johnson County, Texas, 94.4% of houses listed in the Multiple Listing System were listed at a price below their Zillow Zestimate.

If you need to sell your Johnson County, Texas home to a cash buyer, it may be tempting to estimate the cost to repair your house (if repairs are necessary), subtract that amount from the Zestimate of your house, and ask for that price.

Given that cash buyers need to make money, too, that approach will make it hard for you to sell your Johnson County, Texas home quickly.

Let’s look at some reasons why this is the case.

  • Investors far outnumber owner occupant cash buyers. Given that only 3,279 houses sold in Johnson County, Texas and only 356 of them were sold as cash homes, you are just limited in the universe of buyers who can pay cash and close quickly.
  • You may not know exactly how much it will cost to repair and renovate your house. Unless you’re a licensed electrician, a plumber, and a roofer, you probably do not really know the true condition of your house. We have certainly purchased properties where the seller was very forthright with what the seller knew about the condition of the property only to find tens of thousands of repairs that needed to be done once we truly inspected the property and looked behind the walls. The buyer is assuming the risk of the unknown unknowns, and unless you are going to provide a warranty of the condition of the house (#aff), you are transferring that risk to the buyer, who must account for that risk.
  • Most owner occupants want move-in ready homes. 70% of Millennials and Gen-Xers and 63% of Boomers would buy a smaller house that is move-in ready than get a bigger house that needed repairs. There is a practical reason for this preference. A buyer does not want to have to wait for weeks or months while the rehab is taking place, forcing them to pay to live somewhere else while waiting to move into their new-to-them house. Therefore, they would need to account for that inconvenience in the price that they pay for a house that is not move-in ready.
  • You are always facing competition. Below, I will provide a case study of a house that we looked at yesterday.

Here is a property in Alvarado, Texas that we looked at yesterday. The house is listed for $119,900. When we walked through, we estimated about $22,500 in repairs to the property. Add in around $2,000 of closing costs, and we would be all-in paying the asking price for $144,400. The Zestimate is $147,185. If we were to sell at that price, we would also pay $2,000 in closing costs and $8,831.10 in commissions, netting $136,353.90, or a loss of $8,046.10. We would be better off keeping our money in a bank than investing in that property. We saw 6 other prospective buyers come through while we were inspecting the property (it was a quasi-open house), and we know at least 5 of them were investors. Therefore, if the property was priced at $10,000 less, it might sell to the one who might have been looking to be an owner-occupant and put in some sweat equity into the house. To beat the historical S&P 500 average return, the property would need to sell for around $94,500. However, as we know, the median listing in Johnson County, Texas is actually at 97.6% of the Zestimate, so, assuming that this property is only worth 97.6% of the Zestimate, or $143,574, then, to get the same return as the S&P 500 average, the property would need to sell for around $91,750.

Furthermore, if I wanted to get the S&P 500 average return, I’d invest in the S&P 500. We invest in real estate to beat the S&P 500, and I believe most investors feel the same way.

On its surface, that property looked like a good deal. So, you may be tempted to anchor what you think you can get for your house to what you are seeing in the market. However, if you want to sell quickly to a cash buyer who can close in 7 days, you need to go a little deeper in your thinking about what a buyer would be willing to pay. In the example above, what seemed like a good price, upon further analysis, was priced 23.5% too high to attract a cash buyer who could close in 7 days. Realtors often do a disservice to clients who need to sell fast to cash buyers because they do not understand the math that goes into determining the price that an investor is willing to pay for a house.

Save yourself 6% in costs and potentially months in delay in selling your house if you need to sell your Johnson County, Texas house quickly, and prepare yourself to sell your house at a price that a cash investor is willing to pay. If you are facing foreclosure on your Johnson County, Texas house, or need to sell quickly for another reason, you only have a limited number of potential buyers for your house. Don’t burn through them by setting unreasonable price expectations, or you may find that you run out of time and buyers.

Do you need to sell your Johnson County, Texas home fast? Contact us today and see if we can help you out.

    You can also call us at (972) 808-6913.