Seller Considerations – Calculating Costs, The 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.
You may not want to include the risk of additional depreciation for properties selling on the low end as prices nationwide in this sector have stabilized. Be sure to calculate costs for at least 3 years when doing a seller pro-forma. You can use an excel spreadsheet or a simple word document to present the information