12/20/2013 11:19 am ET Updated Dec 06, 2017

Redefining a "Good Deal"

More than ever, I get asked by my friends, family, and clients to find them a "good deal." Whether it's their first home or 5th investment property, everyone wants a good deal. Usually, my question is: "what do you consider a good deal?"

I've heard the whole gambit of answers, from very simple needs to incredibly specific requirements. Most of us have thought briefly about what defines a "good deal", but putting it into words can prove to be difficult. What a person considers "good" and a "deal" are subjective; what a first time homebuyer and a savvy investor consider a "good deal" are going to be vastly different. The keys to finding a good deal are current value and context. Finding a good deal is not always easy because these two factors are always changing. Here are some things to look for:

All of us understand the basics of money - going to the supermarket and buying a bottle of Sriracha hot sauce for $3.00 is better than paying $3.50 elsewhere. It's a simple concept, yet there are many variables that we typically gloss over because they have little to no impact on our choice to buy (because, let's face it, it's only $3.00). However, transferring the same direct concept to other environments, especially big-ticket items like homes, don't always net the same result.

One of the most common answers I get is "I want to buy this house for $xx,000 less than the list price". In certain circumstances, this is a reasonable goal. In others, it's like shooting yourself in the foot. When searching for a good deal, the list price carries minimal importance because it's an arbitrary number. What a seller asks for doesn't necessarily correspond to the actual value or current value.  The role the list price plays is only a starting point (and more often than not, homes do NOT close for list price). Think of it like buying a car from the classified section in the paper or Craigslist - the owner may start off asking whatever they want, but to get a good deal, you need to 1. know how much the car is worth and 2. get the car for less than that price. In fact, sometimes paying more than asking will get you a "good deal"! Neither of the two criteria for getting a "good deal" in this scenario involve the listing/asking price so don't let it sway your decision.

Another common answer is "I want to buy this house for $xx,000 less than (appraisal/last sold/CMA)". We're on the right track here! Regardless of the asking price, we're looking at the approximate value and basing our judgement upon that. What's missing is the context. How much a buyer offers needs to also be based upon the state of the market (and more importantly, the specific neighborhood), the direction the market is heading, and inventory levels. Why? Because these factors, in context, constitute your opportunity cost. In today's market, paying full price or higher can still constitute a good deal. Why?

Another common adage I hear from experienced investors is "I should have bought [a certain property] when I had the chance. Now it's so much more expensive." At first it may sound counter-intuitive to say that paying full price constitutes a "good deal", but consider our Sriracha example. While $3.00 was a fair market price for a bottle, when you read news of an imminent Sriracha shortage, suddenly paying $3.00 seems like a good deal. Heck, even shelling out $3.50 would be a good deal when you consider that moving the production plant might mean no Sriracha for the next 6 months, and $5.00 bottles thereafter.

This is the state of our current market. In the current Hawaii market, inventory levels are historically low and prices continue to move up. On top of prices, interest rates continue to hold steady at historic lows as well. To put it simply, there are factors outside the "supermarket" that will effect Sriracha prices, just like there are factors outside the home you're looking that will effect its price. Ignoring the context means you might be missing out.

The market is always changing, everyday. It also means that the current value and context are changing too. I'm not suggesting that buyers need to go out and offer above asking to secure "good deals", but merely that as the market changes, the definition of what a "good deal" changes. Simply defining what a constitutes a "good deal" does not mean it will translate to a different context; we need to be able to redefine it as situations change. Different markets, different rates, and different prices will mean you'll need to evaluate each deal in the appropriate context. Knowing how to adjust is key because you'll likely face a different context when you are ready to sell or buy again.