Market Math for Sellers

Location, location, location. Well, maybe. In a typical market, where supply and demand are more or less in balance, this old saw may cut some wood. In our current local market, where supply and demand are out of balance, and there may be several homes on the market in the same or similar location, price and condition rule. The dog named Location may not hunt.

So, how does a home seller put all this into perspective and develop a market positioning strategy that will get their home sold? First, it’s important to recognize that your competition is made up of homes that have recently sold, rather than the place down the street that has been on the market for 6 months or the place next door that sold for a high price 2 years ago. Also important is that some of the homes currently on the market are distressed properties, either facing foreclosure or already owned by a bank. These homes are usually priced below the comps to get them sold fast.

Now that we have an eye on the competition, how do we get in position to become a sold comp? Price and condition. It is critically important to listen to your Realtor’s® advice about pricing and balance that information with the level of urgency surrounding your plans to sell.

Let’s look at an example of a home that is fairly valued at say $395,000, and is in moderately good condition, perhaps requiring just some exterior paint, fresh carpets and some grooming of the landscape. Let’s also say that the similar home down the street sold last year for $450,000. Now it’s mighty tempting to list at $450K and rationalize that your home should sell for close to that. Yet the local median price is down 9-10% from last year, so that may be a stretch.

Let’s also consider the holding costs of your home, which include mortgage (principal and interest) expense, taxes and insurance at a minimum. For this home, with a mortgage balance of say $310K at 6.25% interest, taxes at 1% of value and insurance at $800/year, the monthly holding costs are about $2300. That’s what it costs the homeowner every month this home is on the market, at a minimum.

So if the seller yields to temptation and lists at $450K (and a professional agent would not take the listing at this price), some months may pass before reality sets in and the price is lowered to say $425K, or better yet $400K. If it’s 6 months, that works out to $13,800 in holding costs so far. Now that the price is more realistic, an offer comes in at $375K, reflecting the buyer’s notion that the seller is probably getting pretty anxious and ready to deal. Then follows a difficult negotiation and the home sells for $385K, after a total of 8 months on the market.

The total cost of over pricing and under conditioning is now 8 months of carrying costs ($18,400) plus the $10,000 off the fair value for the anxiety factor, for a total of $28,400!

What’s the alternative? Price and condition! Let’s say that instead of yielding to temptation, the seller yields to the good advice of his seasoned professional Realtor®. He spends a total of $10,000 on paint and carpet, a few hours in the yard making things tidy, and prices the home at $400K today. An offer comes in 2 weeks at $385K, reflecting the buyer’s notion that this home is very competitively

priced, in great condition and if he doesn’t buy it, someone else will! Then follows a smooth negotiation and the home sells for $395K after 2 months on the market. Here the seller has invested $10K in upgrades, spent 2 months holding costs, or $4600, and received fair market value for her tidy home. The difference? A savings of $13,800 and six months of anxiety. What a difference a good plan and right action can make!

Doing a little math can be a good thing.