2014 Seller Considerations – Seller Pro-Forma: Calculating the Real Cost Of Waiting
We’ve all been reading about improving market conditions in real estate for quite some time now. What the media has failed to mention is, depending on the market and price points, we may still have long way to go. In the ultra-luxury market for homes valued at over $1 million, year-over-year prices continue to decline because few buyers are willing to risk overpaying when there is a glut of inventory.
Many affluent sellers still continue to cling to the idea that they will get more money if they wait for the market to improve before they sell their home. In ultra-luxury markets, they are probably too optimistic. When the month’s supply of inventory is excessive (30-80 months), even aggressively marketing a home that is priced too high, can be a waste of time, money, and effort.
It’s important for every seller to determine the real costs associated with waiting for prices to improve before they sell their home by completing a Seller Pro-Forma. A Seller Pro-Forma involves four key points which include: carrying costs, opportunity costs, potential depreciation, and a reasonable sales timeline. If there is a glut of inventory on the market, (month’s supply of homes for sale) a sale could take 3-5 years.
Consider the following Pro-Forma for a home valued at $2.5 Million.
1. Carrying Costs ($800,000 mortgage) 1 Year 3 Years 5 Years
Principal and Interest $64,000 $192,000 $320,000
Taxes and Insurance $16,000 $48,000 $80,000
Repairs and Maintenance $6,000 $18,000 $30,000
(Pool, Lawn, A/C, Roof, etc.)
Homeowner’s Fees $2,000 $6,000 $10,000
Club Membership $3,600 $10,800 $18,000
Utilities $3,000 $9,000 $15,000
Total $94,600 $283,800 $473,000
Sellers usually think their total risk is 1 year’s expenses. In reality, it could be 3-5 years because of the abundance of properties for sale in the ultra-luxury market.
2. Lost Opportunity Costs (with $100,000 equity)
Ask your seller what their return would be if they invested their net proceeds based on the rate of return on present investments. Use that number to determine lost opportunity cost.
Assume its 5% return on $1.7 million 1 Year 3 Years 5 Years
($2.5 million less $800K mortgage) $85,000 $255,000 $425,000
3. Potential Depreciation
If the average price of homes that sold last year in the ultra-luxury market dropped by 5%, with the current glut of inventory, it could take another 1-3 years for prices to correct.
5% depreciation per year based on list 1 Year 3 Years 5 Years
price of $2.5 million, selling for $2 million $100,000 $300,000 $500,000
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4. Total Loss $279,000 $838,000 $1,395,000
Conclusion — A seller waiting to realize $2.5 million for a home that is valued at $2 million today, could incur $838,000 in net loss, if market values continue to decline until the glut of inventory is absorbed. In actuality, waiting for 3 years to get an additional $500,000 in this example, could cost the seller $838,000 if the home values continue to drop because of the glut of inventory
Does it make sense to sell now for a little less money to minimize risk?