Price, Value & Affordability—What You Need to Know

These words do not mean the same, they are related but they refer to very different aspects of the real estate transaction, or any transaction for that matter.

Price is simply the amount in dollars that a piece of real estate is being sold for. Price by itself usually does not mean much, example: I am selling you this pen for $50 dollars.

Value, on the other hand, is the relative worth to you or others of a particular good, service or piece of real estate. Value & price are not proportional, meaning the increase of one does not necessarily mean the increase of the other.

Value is what you get in exchange for what you pay, instinctively we believe that if we get more in exchange for what we pay, we have value!

In the above example, $50 for a pen may seem expensive when compared to a plastic pen you can buy at an office supply store for $1. However if I were to tell you that this is a gold pen from a famous brand name such as Cartier, then, all of sudden, $50 sounds very inexpensive.

This is because we instinctively assign value, what we think the object is worth, to price. We need to be very careful when doing this so we don’t make a mistake. In other words, the number in dollars that represents price does not represent value.

Example: Recently (March 2011) a home in Queen’s Harbour, Jacksonville, previously purchased for nearly three million dollars, sold for $1.5 million. This is a high price for sure, however was this a great buy? with lots of value? probably so. Price & value do not necessarily go together.

What we as buyers are looking for is value, not necessarily price.

This brings us to Affordability.

The $1.5 million dollars home is most likely a great home, it provides a lot of value, but can we afford it? Chances are most of us can’t.

The majority of people buy a home in monthly payments so affordability is related to how much that payment is likely to be. Don’t forget that a full mortgage payment is composed of many pieces:

– Interest.
– Return of principal.
– Property Insurance.
– Property taxes.
– Mortgage insurance (if buying with an FHA Loan)

Decide what your level of affordability is by adding all the above and seeing how this fits in your monthly expenses. Your mortgage broker can help you do this; the TYPE OF LOAN has a far more superior impact in your monthly payment than the sales price.

For example, buying a home using an FHA Loan will result in the highest monthly payment when compared to a conventional loan for the same home. The trade-off however, is that an FHA Loan may allow you to buy a home that otherwise you could not using a conventional loan.

In closing, remember to look at Price, Value & Affordability as their own & separate subjects, don’t lump them together, price is just one of the many factors which in most cases is not the most important!

Talk to your mortgage broker, analyze all the different loan programs that you may qualify for, decide on a TOTAL monthly payment (including all the above) that you CAN afford and then shop for VALUE!