Seller Pro-Forma Case Study

This would be a good case study to share with you sellers and anyone in your farm area, as many homeowners have contemplated selling. Feel free to forward or copy and paste.

For several years now Mike and Connie Misconception have been thinking about selling their million dollar second home. Like many prospective sellers, they have no mortgage and think it is wise to wait for the market to improve, so they can get the same price they would have received at the height of the market in 2006.

If it takes a few more years, its no big deal. They don’t need the money and the carrying costs are only $24,000.00 per year. Besides, if they sell now, they’ll only get $700,000, a $300,000 loss from what the property was worth at the height of the market. Even if it takes 5 years and they pay out $24,000 per year x 5 years, they will still be ahead by $300,000 – $120,000 ( $24,000 x 5). In other words, they will make another $180,000 by waiting.

The problem is that Mike and Connie are basing their analysis on limited facts. Let’s look at what its really costing the Misconceptions:

• Carrying Costs Yearly–
  • Taxes-          $12,000.00
  • Insurance-      $6,000.00
  • POA –             $2,400.00
  • Maintenance-  $2,400.00
  • Utilities-         $1,200.00
  • TOTAL         $24,000.00                                                                                                        

So far, the Misconceptions Strategy is costing them what they think it will cost them. If it took 5 years to sell, they would have spent $24,000 x 5 years, or $120,000.

But there’s more Mike and Connie haven’t considered:

•  Opportunity Costs- If the Misconceptions sold their home today, they would have $700,000 to invest. The Wall Street Journal reported last week that Fund Managers expect the Stock Market to return 11% in 2011. In other words, if Mike and Connie invested their net cash and received an 11% return, they would have:

• $700,000 x 11% = $77,000

If it took Mike and Connie five years to sell, they would have lost $77,000 x 5 years or $385,000 in income they could have received investing the money in something other than a second home.

But, that’s not all of the potential costs. In order to manage risk, the Misconceptions must consider that their property has depreciated or lost value for each of the last 4 years. It is possible it could depreciate even further in the coming years. Many experts including Barbara Corcoran of the Today Show, believe Real Estate will depreciate an additional 10% in the coming year. If we had several more years of economic woes stemming from Unemployment, Deficit spending, and Foreclosure problems, Real Estate could depreciate even further.

• Depreciation

Mike and Connie should also consider the following:

• Home Value in 2006                    $1,000,000.00
• Value Today based on sales          $700,000.00
• Loss in past 4 years                       $300,000.00

The home has lost an average of $75,000 per year. Based on the Economy, Market conditions and many experts, it could lose value for an additional 3 years or:  $75,000 x 3 years= $225,000, before the market stabilizes.

• Conclusion- As previously discussed, the Misconceptions believe that by waiting as many as 5 years they will end up with an additional $180,000 in profit. In reality, the following could happen:

• Loss from Carrying Costs       $120,000.00
• Investment Opportunity loss   $385,000.00
• Potential Depreciation            $225,000.00
• Total Real Loss                   $730,000.00

    Does it make sense for Mike and Connie Misconception, to take the risk of and Additional $730,000 loss, or to sell now and get on with enjoying their lives???