An effective way for agents to help sellers determine the actual financial impact is to prepare a Seller Pro-forma that calculates the real financial impact on a seller who waits until later to sell using the seller’s actual value and likely appreciation. Sellers resistant to accepting a lower price for their home are likely to rationalize their decision by oversimplifying the real cost of holding their property. For example, a seller may rough out their annual costs by just looking at the cost for taxes and insurance, when in fact there are also costs for Repairs, Maintenance, POA dues, Utilities, Special assessments, etc. The actual carrying costs alone are usually much higher than what the seller thinks he is spending.
As a Trusted Real Estate Advisor, it’s important to factor in the total financial impact of waiting to sell. With prices beginning to stabilize and even increase, it’s important to prepare a pro-forma for every seller you represent. The Pro-forma should include:
1. Carrying Costs
- Prinicipal & Interest on the Mortgage (if any)
- Property Taxes
- All Insurances
- Maintenance (Lawn, Pool, Housekeeping, etc.)
- POA or HOA dues
Calculate the total costs each year, and then project what the total would be for 1,2,3,4, and possibly even 5 years.
2. Opportunity costs – This is the amount of money the seller would be earning on the equity in their home if they sold it and invested the money. Don’t assume you know what this amount is. Rather, ask the seller if they will be re-investing the proceeds from the sale and how much they are presently receiving on their investment. (A typical answer is 5%.)
3. Potential Depreciation – This number is based on what the depreciation has been in recent years. It forces the seller to acknowledge that prices could still drop. It is not to be used if prices have stabilized. It is calculated by looking at the drop in value over the past 3 years, which can be as easy as looking at the drop in assessed values of the tax records. By taking the average loss in value over the past several years, you can project a potential loss during the coming year.
4. Selling Timeline – It is also important to calculate how long it could take for the seller to realize their price. For example, if prices have continued to drop according to recent data, and the seller wants to wait for a specific price, an agent can project how long it will take to sell the house by factoring in a loss in the first year, and then increasing the value in future years by 5% each year, until the desired price is reached. For example if a home could have sold last year for $550,000 and this year it is only worth $500,000, the seller has already lost $50,000 because they waited. If projections indicate prices are still dropping in the seller’s area, an agent could drop the price by another 5%-10% in 2012, bringing the value down to $450,000. If the market improved and the home began to appreciate In 2013, a typical gain would be 5%. It’s reasonable to assume appreciation of 5% in each coming year. Let’s say the seller had insisted on waiting until they could sell their home for $600,000. Here’s how each of the four categories above could be included:
- First, calculate how long it will take before the seller could get his price.
2012- $450,000 (assuming no additional depreciation)
2013- $472,500 ($450,000 x %5 = $22,500 in appreciation added to the value)
2014- $496,125 (at 5% appreciation)
2015- $520,900 (at 5% appreciation)
2016- $547,000 (at 5% appreciation)
2017- $574.300 (at 5% appreciation)
2018- $603,000 (at 5% appreciation)
If appreciation were consistent with history, it would take the seller another 6 years before they could sell their home for the $600,000 desired price.
5. Adjusted actual selling price – If the seller had no mortgage, but still had carrying costs of $15,000 per year, they would lose $90,000 waiting for the value to recover ($15,000 x 6 years = $90,000). If the seller took the net proceeds of $500,000 in 2013 and re-invested for a return of 5% per year, he would earn $25,000 non-compounded x 6 years = $150,000. The loss of income ($150,000) and expenses paid ($90,000) during the 6 year hold period would total $240,000, vs. the seller’s perception of taxes & insurance- $10,000.
Conclusion– Does it make sense to lose wait 6 years and lose $240,000 if you could sell for $500,000 today? ABSOLUTELY NOT! – Why not sell now?