Seller Pro-Forma Revisited
Some sellers still continue to cling to the idea that they will get more money if they wait a couple of years to sell their home. In most cases, they are sadly mistaken. From an agent’s perspective, aggressively marketing a home that is overpriced, can be a waste of time, money, and effort. The single most important step of any strategy to sell a home should be to get the property listed at a competitive or reasonable market price. Nothing else that an agent does matters until the home is priced properly.
The most effective strategy for seller price reduction is a seller pro-forma. A seller pro-forma involves four key points. They are carrying costs, opportunity costs, potential depreciation, and a reasonable sales timeline. Listed below is a simple word document format that you can use for a $300,000 home.
1. Carrying Costs ($200,000 mortgage) 1 Year 3 Years 5 Years
Principal and Interest $14,000 $42,000 $70,000
Taxes and Insurance $4,000 $12,000 $20,000
Repairs and Maintenance $3,000 $9,000 $15,000
Homeowner’s Fee $2,000 $6,000 $10,000
Utilities $3,000 $9,000 $15,000
Total $26,000 $78,000 $130,000
Sellers usually think their total risk is one year’s expenses. Always present three and five years because the market may not recover in one year.
2. Lost Opportunity Costs (with $100,000 equity)
Ask your seller what their return would be if they invested the equity based on the rate of return from their existing investment. Use that number to determine lost opportunity cost.
1 Year 3 Years 5 Years
At 5% Annual Return $5.000 $15,000 $20,000
3. Potential Depreciation ($400,000 value in 2007)
Home has dropped in value $100,000 in four years, or $25,000 per year. Given current economic conditions, home could depreciate an additional $25,000 per year for up to three years (this is based on last three year’s history).
1 Year 3 Years 5 Years
Depreciation Amount $25,000 $75,000 $75,000
4. Conclusion—A seller hoping to get $400,000 for his house will incur $168,000 in loss if the home doesn’t appreciate and still only sell for $300,000 or less, never realizing the $400,000 sales price. If this happens it would be like the seller selling today for $468,000 ($300,000+$168,000 loss in three years).
5. Total Loss 1 Year—$56,000 3 Years—$168,000 5 Years—$225,000
It makes sense to sell now for more money, have no aggravation, and minimize risk.
This sales pro-forma must be done with every existing listing and every listing prospect.