Costs of Over Pricing

Most sellers don't have a clue as to just how much it costs them to hold on to an over-priced house.

The Variables

Real estate agents will talk about a house being "market worn" if it remains unsold for a lengthy period of time,but the problem is hard to articulate, because the two very big variables are:

1. How long is too long?
2. How much did the price decline?

Both variables are indeterminate. They are anecdotal and subjective, based on "what they should have gotten," whatever that means. Add in to the equation that the real estate market is a lot more dynamic than it's often credited for, and you only have a "guesstimate." However, like any other commodity, houses cna become market worn. Think of autos on a car lot. If it's not selling, obviously it's not appealing to the market. The only cure is to price it to the level where people will buy it over another car, and the usual way to do that is to reduce the price to the point you need to in order to get it sold. Or, in the case of houses, you can add improvements, but with VERY FEW exceptions, they rarely bring back the money invested in the short term. While "kitchens and baths sell houses," in most markets they only return about 80% of the investment in the short term. That means you LOSE 20% of your investment. There are other strategies to accomplish the same thing.

What Else?

I thought you'd never ask. Besides the unknown variable factors there are some known factors to consider. What about carrying your mortgage, taxes,insurance and maintenance costs for an extras six months or so? Take a $375,000 value house with a $300,000 mortgage @ 6.25%, a $6000 tax bill and $1,000 insurance, and that's about $2,430 a month. Add to that about 2% per year maintenance costs, which adds about another $675 a month, and that's a total of $3,055 monthly. Carrying that house for an extra 6 months costs: $18,330; 9 months: $24,975; and a year: $36,660. You'd be surprised how many listings have been hanging around more than a year in the MLS at this time. That's another statistic you won't hear much about from the average agent. That's because the "average" agent is responsible for most of them.

We're not done yet. That $375,000 house you HAD to get $425,000 for has actually declined by another 4% in this slow market; so what WAS worth $375,000 LAST year is NOW worth $15,000 LESS, or $360,000. So, in the case of year "holding" the property, add $15,000 to the $36,600 above. Now we're getting into some serious money: $51,660.

This is REAL Important

Do you remember that commission? It would have been $22,500 (6%) on $375,000, so lucky for you, it's only $21,600 on $360,000. But you could have netted out +$14,160 MORE if you had listened to the right price in the beginning. Now it will cost you $51,660 + $21,600 in commission, or a whopping: $73,260 to sell the same hose by holding on to it a year longer than you should have. Now you know why so many houses get taken "off the market." By the time reality sets in, it's often too costly for sellers to continue to sell in a declining or stagnant market.

Yes, there are many other legitimate reasons to take property off the market, but this is an important one not often spoken about.

Family Costs and Opportunity Costs Considered

Sorry, we're still not done. Living in a hotel room for 6 months in your new job across the country without your family is also very trying and costly in another way. While you can't assign a dollar value to the emotional tool that kind of living takes on your health and well-being, there is definitely a cost. It translates into a humanistic quality of life toll not often considered until you've been through it. Usually the out of pocket costs are borne by the new employre, but not always, and usually not entirely.

The other issue is the lost opportunity cost of not being able to buy in the new home area. Another thing to consider is that it is entirely possible that if you're moving across the country, it is highly likely that the employment market where you now live is not as good as the new location. It is equally possible and likely probable that in the new market houses are increasing in value, where they are declining in your existing location because of economic conditions. Add these costs to the above.

What if you Have to Sell?

Let's say you've landed the job of your dreams across the country. You got a 30% increase in pay. You're excited, the family is excited and you want to sell quickly. because after reading this and thinking through the process, you'd like to sell quickly.

Here are the keys to the kingdom. If you want to sell quickly, you need to price your home BETTER than the market value. That's right. You need to price BELOW market value. My recommendation? 5% to 10% below appraised market value. Start out 5% below fair market value if you like, but no more than 2 weeks. Then, drop down the other 5% for a total of 10% below market value. Your house should sell within 30 days. Now, that means a 10% discount to get it sold so quickly means a $33,750 price reduction from fair market value, but deduct from that about 3 months worth of costs for carrying at the "fair market" price - about $10,000, so you're really netting about $22,750 less; the upside is you get rid of the worries; the family is with you; and you get to settle in your new home much faster. You'll also be more content in your new job, which will likely translate into a happier boss.

There's a reason relocation companies that "buy" transferring employees' houses give you 30 days to sell at "fair market value," then begin reducing the price - often by 10% the first shot. An old axiom in the relocation business is that it costs about 2% per month to "carry" a house. They want them sold quickly, and they always hire local brokers to get the job done. they realize their value in the market - even at substantially reduced prices.

Now you know better.

Chris Michaud
(978) 697-8568
Acceptance Group
chis@acceptancegroup.com