Price, Value, Bananas and Property

If you’ve read my previous articles on the property market you’ll know that I believe that each and every transaction is unique and effectively creates a market all by itself.

It’s this uniqueness of each individual property transaction that brings out the true power of understanding that price and value (especially in the property market) are TWO different things.

Confused?

Let me expand.

Let’s first have a look at why most people believe that price and value are the same.

Just open up about any newspaper in the world and you will, most likely, find adverts like this:

[line]

Property For Sale

Great Property!.

3 Bedrooms,  2 Bathrooms, Good location.

$500,000

[line]

So what’s wrong with that? Well, nothing especially if you are the seller of the property! In fact, it’s very, very clever.

Why? Well, let me ask you one thing – what is house actually worth?

$500,000 I hear you say? (OK, I imagined that’s what you said)

In my opinion, it’s the wrong answer.

 “Perception is reality”.

When you walk into a shop – most products have a price on them – and then people make the decision as to the “value” based on the price.

Let’s take the example of two cars… A high-end car like a Mercedes and a lower end car like a small Toyota.

They are both cars, they both get the driver and their passengers from A to B, they both have 4 wheels, gears and an engine, etc..

But both are priced very differently!  Why? Well, the high price creates a high “perceived” value and the lower price creates a lower “perceived ” value.

You may have to think about that for a minute …

Now let’s go back to the advert for the house. The advert has given you a “perception” as to the value of the house. And people, on the whole, believe that a product (including a house) is priced at what it’s worth.

At what point do people buy?

If you study marketing you will know that a person buys a product or service at the point at which the price is LESS than the value.

Imagine going into a shop where the price of a banana was $1,000 – would you buy any?

Probably not. As you might think that price is too high. (IF you don’t then people might think you had gone bananas)

In reality, if the value of having a banana is not worth the price tag – very few people will buy (in fact bananas would probably become a luxury item, and eating bananas would be seen as a status symbol).

As an aside and just from a point of interest, if the price of the banana was too low – say even free. The value disappears also! (people do not value free things). So even if the price was zero the value is still not higher than the price – and nobody would buy (or take) them. (Have you ever had someone offer you something in the street as a handout… how many people actually take them, and of those that do… how many people read them?…  free = no value).

OK, so let’s get back to the bananas. You already have a perception that bananas do not cost $1,000… but picture this… You’ve been stuck in the desert for a week and you’ve not eaten– you’re so hungry – and you finally find someone who has a banana and wants $1,000 for it… would you pay?

I bet you would – because by then the value of having the banana is much higher than the price… I’d imagine you’d even pay $10,000 for the banana (well rather than die)

Important… So every time you buy something you are making a conscious decision in your mind about value versus the price.  You see most people equate value with price because the “value decision” starts with the price.

You see, Price and value are NOT the same thing.

Turn the tables

So let’s look at the other side of the table… the seller – when does the seller sell?

Quite simply…When the price of what they are selling is GREATER than the value of keeping it! Think about that for a minute, a person sells something when the price is higher than the value.

And there is a twist… they sell when the price is higher than the value to them.  And that is based on their personal circumstances and their thinking.

So going back to our house that is on the market – for $500,000 – is it worth 500,000?

To you?
Maybe

To the seller?
Absolutely not.

And that my friends is a fantastic opportunity for you as a buyer of property – when you know that someone is selling something higher than the value to them!

Become a “Value” Expert

Buying and investing is all about ascertaining value and you becoming a property value specialist.  What does that mean? It means that you have to understand the property market better than anyone else. Including the seller, the estate agent and other buyers in the market. Then, and only then, will you be able to use this knowledge to your advantage.

Imagine for a moment you are a value expert… you know more than anyone else about the value of the property in your area.

Do you think you could find a deal?  I doubt it… I think you’ll find hundreds.

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