Real Estate Agent Math

Since real estate agents are inclined to look at the table I posted yesterday and rave about the great investment gains achieved by those who happened to buy an "average" house in 1999 relative to the 2010 "average" sold price, I thought I should again point out the flaws in real estate agent math. First, observe that the average 1999 is not the average 2010 house.

Ask yourself just how many more houses have been built around DCL in the past ten years relative to the rest of the county. Then ask yourself if the average size of these houses is the same as the average-sized house in the rest of the county. If, like me, you think more and bigger houses have been built in the DCL area of the last ten years than in the rest of the county, then you probably realize that the 1999 "average" house is now a "below average" house (absent extensive renovations). Thus, its price if sold today would be expected to be below average. Simple, right?

Well, for those who can't follow, consider the following illustration. Imagine a Garrett County in a parallel real estate universe that prior to 2009 had no houses. Then, imagine that 1,000 new houses, averaging about 2,000 square feet, were built in 2009. On average, land acquisition, building materials, labor, and real agent commissions for these houses cost $100,000. So, on average, you would say that these houses are worth about $100,000, right? Simple enough.

Imagine that in the year 2010, an additional 1,000 new houses were built, except in this case these houses averaged 4,000 square feet and have top-end finishes relative to the 2009 houses. Assume, on average, land acquisition, building materials, labor and real estate agent commissions for these houses cost $250,000. So, on average, you would say that these houses are worth about $250,000 right? Simple enough.

Now comes the tricky part for the real estate agents. Since the only houses to sell in 2010 were the 2010 houses, they would be inclined to say that the average value of houses in the county has risen from $100,000 to $250,000. In fact, the "average" house (which doesn't really exist in this case) would be worth about $175,000. What's more, the value of the 2009 houses didn't really rise to $175,000, and certainly didn't increase to $250,000. The fact of the matter is the average 2009 house is not the average 2010 house. The 2009 houses are now below average houses, and should be priced (and valued) accordingly. Simple, right?

Don't forget to check back to Dan's Deep Creek Blog for your future updates on Deep Creek real estate.