Sunday, March 28, 2010

We have an offer out…

Last week we put an offer on a house we like. Unfortunately, it suffers from much the same problems we seem to encounter everywhere…it has some expensive problems that the owner has failed to correct, but he’s pricing it as if those problems had been resolved.

This particular house has a cottage on the grounds that will bring in rental income, and a studio that, when the half-done kitchen is finished, will also bring rental income, so we can actually offer a little more money for it, since we’ll have some income to offset the higher monthly house payment. But, there are significant…and costly…problems with the place.

Real estate agents use a thing called “comps” to help people come up with a price for their houses. This is a survey of recently sold nearby properties, their size and selling price. That would seem to be a good way…if the house across the street has the same footprint on the same size lot, then the prices should be proximal, yes? Well, no, actually…because the comp doesn’t take a lot of important differences into account.

Let’s say the house across the road has been renovated inside…it has a professionally designed gourmet kitchen with a large gas stove and first rate finishes including real wood cabinets…plus a generous scullery with room for three appliances. And perhaps the bathrooms have been renovated into luxury spas with Jacuzzi tubs and slate-tiled walk-in wet rooms instead of prosaic showers. And that tiny, almost useless fourth bedroom has been repurposed into a huge walk-in closet and dressing room. The back patio not only is covered, but it has a ceiling in which there are dimmable lights and it is surrounded by stacking glass doors that can be closed in cold weather. Maybe there is air conditioning and underfloor heating, gas fireplaces, and costly natural wood floors. And none of this is visible to the neighbours because the house still retains its original appearance from the street.

Now, your house may be in immaculate condition…nothing is broken, nothing is shabby, nothing needs fixing. But your kitchen is original, complete with the cheap melamine cabinets and counter tops, the old white enamel electric hob and miniscule oven, and space only for the smallest of refrigerators. Your washing machine is in the kitchen, and there is no place for a dishwasher or tumble dryer. Your bathrooms are original…30 years ago, when brown fixtures with orange accents was the rage, they were the height of fashion…today they are in like-new condition, but they are still brown and orange. Your patio is paved and a few timbers covered with shade cloth is your patio cover. Space heaters take care of the cold, big fans take care of the heat, and your spotless floors are the original tiles with the house, beautifully preserved, if 30 years out of date.

The comps cannot take into account the differences between the two houses, only the basest of the similarities. And while comps are useful in determining a range of prices in an area, they are useless in determining a fair price for a property simply because the differences in property amenities and condition cannot be factored in. Ok, so the estate agent is supposed to be the arbiter, the person who adjusts the comp figures in order to bring the asking price into line with specifics of the house. In theory this is correct, but in practice…well, the owner is actually the person who determines the selling price: if the agent won’t list the house at the price the owner wants for it, the owner will simply shop agents until he finds one who will.

What does the owner use to determine his price? Well, there are numerous answers to that…back in the States, for example, I knew a man who was in the middle of a divorce and had to share the proceeds of the sale of the family home with his soon-to-be ex-wife He had spotted a house he wanted to buy and determined he needed $90,000 to his pocket in order to be able to buy it. So, he calculated what the house had to sell for in order for him to realize his $90K and that was the sales price he settled on. Other people will take the comp as gospel…the house across the road sold for X a year ago, so my house must be worth X+the rate of inflation, never mind that my house hasn’t been painted in 10 years, the kitchen cabinets are falling apart, and the bathrooms are original with the 30 year old house.

We are seeing a lot of the latter…they look in the newspaper and see that a 3br, 2ba house in their area is on the market for X and immediately assume their house is worth the same, and that is not only the price they list it for, it is the price they insist on receiving. Instead of viewing the listed properties, taking into account the upgrades their house will need to be comparable and either doing the work or reducing their expectations by the cost of the work, they somehow perceive the cost of making their house truly comparable as belonging to the pocket of the person who buys their house. And so the houses sit on the market and buyers like me gnash their teeth in frustration.

I have seen some beautiful houses that are priced right for their size and condition…many of them, in fact. But they were not suitable for our needs…the rooms were too small for our furniture, there wasn’t space for the maid and her family, or something. But the houses themselves were beautifully updated and tastefully decorated and priced fairly for their size, condition, and location. Unfortunately, the few houses we have found that are suitable for us in terms of size and accommodation are sorely in need of renovation, and the owners have fallen into the comp trap…they won’t reduce the price of the house to take into account the necessary renovations to bring the house up to current architectural standards: modern bathrooms, open plan kitchens with good finishes, updated exteriors and, in some cases, necessary repairs.

And that brings me to the house we presently have an offer out on. Our offer is R300K below the asking price because the owner, nice man that he is, is asking “renovated and modernized house” price for a house that desperately needs some very costly work. The house is large and it is lovely, but even the estate agent says the owner’s expectations are out of line with reality. Originally he wanted to list at R3mil and the agent refused to take the listing. The man came down to R2.5mil and the agents took the listing, but with the knowledge that the seller would likely not get offers at that level (nor would the house likely appraise for that, making it difficult to get a mortgage).

We have carefully assessed the property and found numerous deficiencies: two of the brick boundary walls are in bad condition: one is a security risk, the other a safety risk. They will have to be taken down and replaced. Since we recently extended a brick wall at our house in Cape Town, we know this is going to cost in excess of R50K. There are no gates at the end of the driveway, which is a security problem in Johannesburg. To put in the gates and remote control for them will cost handsomely. The bathrooms have not been touched since the house was built: pea green fixtures and rose pink tiles! We had an estimate to upgrade our small bathroom in Cape Town: R20k + the cost of fixtures and tiles. The main bath in this house is quite large, so to update the two bathrooms, we are probably looking at R100K (the main bath has a Jacuzzi bath, also in pea green, that will have to be replaced, and the whole shower must be torn out and rebuilt).

To give the sellers credit, they did redo the kitchen. Unfortunately, they did the wrong things to it. It was an open plan type of kitchen and they sealed it up! They also removed about a third of the cabinets by removing the wall between the kitchen and the scullery! We have a copy of the 1980 house plans (when an addition was put on the house) that shows the original kitchen, so we can see what the layout was. Now, instead of stepping out from the kitchen and going directly into the living room/dining room, you have to step out of the kitchen into the foyer and walk through the foyer and then up three steps into the dining room…all this carrying heavy, hot pots of food and piles of dishes, both clean and dirty. The kitchen will need returning to an open plan design…separate kitchens are very much out of fashion and they make houses difficult to sell because open plan is what house buyers want. And returning this to open plan is not going to be a cheap proposition since it will mean taking out walls, moving electrical work and cabinets, etc.

There is a studio flat attached to the house that could be rented out except for one thing: they brought in the pipes, drain and electricity to put in a small kitchen but never finished the job. So, at least another R30K to buy and install cabinets, countertops, sink and taps, and a kitchen stove.

Some years ago houses built of facebrick were very trendy here. “Facebrick” is a kind of exposed brick that is neither painted nor plastered over, and comes in numerous colours and textures…and is now so out of fashion that some areas actually prohibit the building any new houses with it! And this huge house is not the only facebrick on the property, so are all of the garden walls…and the entire driveway and what should be the front yard are also paved with bricks. Not only does this outdated exterior drive the price of the house down, it is expensive to remedy…it is doubtful we will live here forever and it is essential that we take the difficulty in reselling this house into consideration: if we don’t want to linger on the market, we will have to employ an effective…and costly…program to either paint or plaster over (or both) at least a portion of the brick, remove some of the paving bricks and install plantings to soften what is now an monolithic expanse of bricks, bricks, and more bricks.

Then there is the fact that this house is on a corner…not a good thing in Joburg. The perception here is that a corner house has two boundary walls exposed to criminals and is therefore twice as vulnerable to being invaded. Also, this house is in a boomed area, with only two entrances a neighbourhood of 250-300 houses, and one of the entrances is on the road that runs beside the house, making for a relatively busy street just outside the main bedroom. Now, the wall has electric fencing on top of it and there is an abundance of plantings between the house and the wall to soften traffic noise, but potential buyers will still see that the house is on a corner lot…and a relatively busy one at that. This, of course, drives the desirability of the house…and its value…down further.

So, knowing all of the above and being aware of the costs of necessary repairs and bringing the house up to modern architectural standards, we made an offer on the house that was R300,000K below the listing price. The owner has until Tuesday evening to respond.

And so we wait.


  1. In the US, well California, one has access to the police records for a property including information on "nuisance" neighbors. Is that the case is Joburg, too? With security concerns, it would be interesting to know what kind of safety issues have occurred in the past. Keep up the good work :-). Norine

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  3. No, that isn't the kind of thing the police bother themselves with here. The neighbours aren't a concern with this house, but the fact that it is a corner lot and has two of the property lines exposed to the public...burglars around here scale walls like monkeys...will be off-putting to potential buyers. The present owner says he has not had any problems in the 7 years he has owned the house, and the previous owner, who was there for 14 years, also had no problems. BUT the house has a "safe room" and it also has an "escape door" leading from the master bath into the attached cottage, so SOMEBODY who lived there was a little paranoid!


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