The current positive economic news has restored the confidence some sellers had that led them to believe they could sell their property for more than it was worth. More than ever, sellers are likely to want to wait for prices to recover before they sell.
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
**please note, the fourth part will follow tomorrow