Top Reasons for Sellers To Sell- #1 Seller Pro-forma
With all of the recent bad economic news in the media, sellers should be keenly aware of how long it could be before the Real Estate Market rebounds. As a Trusted Advisor, every agent should prepare a Written Seller Pro-forma that identifies the impact a long sales cycle could have on their finances. It’s important to use the “What if” and “Is it possible” arguments to manage the Seller’s risk.
Every Pro-forma should include 4 key considerations:
1. Carrying Costs– Calculated over 1 year, 3 years, and 5 years
A. Principal & Interest
B. Taxes & Insurance
C. POA, HOA or Condo fees
E. Repairs and Maintenance
2. Opportunity Costs– Equity in the home that could be invested if the property were sold, calculated over 1 year, 3 years, and 5 years.
3. Potential Depreciation– The average drop in value over the past 3 years, projected out over the next 1, 2, and 3 years.
4. Sales Timeline– The amount of time it could take before the sellers will realize their price. This number can be calculated by determining the value today and adding or subtracting:
A. Potential depreciation in the next year
B. No appreciation in the 2nd year.
C. 5% typical healthy market appreciation calculated over the number of years it will take before the property will sell for what the sellers want to get.
Top Reasons for Buyers to Buy Now- Reason #1- Recaptured Depreciation
Every buyer should be made aware of the fact that prices have most likely overcorrected with homes selling for less than they actually should be selling for. This has occurred as a reaction to the bubble that was created during the housing boom. The severe distressed property situation we have now came about because of so many new homeowners being unable to make their mortgage payments. This has led to the excess inventory situation and foreclosure mess. Consequently, we now have homes that are valued for less than the 5% typical appreciation we should have seen over the past 10 years.
The amount of over-correction can be determined by looking at sales data from 8-10 years ago to determine what the typical sales price was during one of those years. This number reflects what the home should have been worth if the market had been stable.
It can be multiplied by 5% every year and compounded, until the year 2011 is reached.
The value of the property today can then be deducted from the number above to determine the amount of “Recaptured Depreciation” that could be recovered once the market is healthy again.
This approach is a great way to minimize the risk for buyers who still may be concerned about additional depreciation. It actually shows the buyer what the “Upside Potential” could be, or what they could realize in additional appreciation once the Real Estate market recovers.