Pricing in Down Markets
Pricing Fredericksburg, TX real estate is always a tricky proposition, best left to careful market analysis performed by an experienced professional. That said; this article explores an alternative to pricing property to sell in a downward-trending market.
Enough has been written about the current state of “the real estate market” so I won’t bore readers with re-hashing all of that. Suffice to say that we are certainly in a Buyer’s Market (whether sellers have yet realized that or not). I have observed that many of today’s sellers have owned their real estate for relatively short periods of time. It used to be that folks weren’t so mobile or that real estate was not looked upon as an “investment vehicle” (akin to stocks, bonds, etc.). As this has changed, so have the frequency of seller transactions and the overall average length of property ownership.
A change in ownership trends invites a fresh look at how sellers traditionally price their properties (especially in a buyer’s market). For simplicity sake, this discussion will be limited to pricing and selling single family real estate on a before-tax basis. The after-tax implications of residential sales (as well as the sale of “investment property”) should be discussed with your tax professional.
Most folks will insist than an agent price, market and sell their homes at a “market price”. “Market price” is traditionally determined by careful analysis of recently sold comparable properties. If market conditions are deteriorating (i.e. list to sale ratios, time on market and unsold inventory are increasing), this model produces a “market price” based on old prices produced when the market was in better shape. The result is likely to be pricing a home that will sit too long and be forced to endure consistent and significant price reductions.
How about this instead. Look at what you originally paid then add in the cost of any improvements made (not on a dollar for dollar basis, however). Take this number and apply an investment rate of return (determined by and acceptable to you) for each year you’ve held the property. How’s that for a price? It may not be “market” but if it provides you with an acceptable return, who cares?! If your calculated price is determined (by an experienced professional) to be “above market”, re-think your return and try again.
A simple example: Let’s say you paid $100,000 for your home 5 years ago and you decide you need to make a 15% return on the money you’ve invested in that home. Your wise use of leverage (e.g. “other people’s money) had you paying 20% down ($20,000) and financing the balance of $80,000 at 7% on a 30-year note. Your monthly payment of $532 consisted of principal and interest. Over the 5 years, you have reduced the principal owed on the loan from $80,000 to $75,305. This mean you have “invested” another $4,695 into the home (the interest you paid to the mortgage holder is a cost to you for using their money and not considered as an “investment” to the property any more then would be your utility bills, for example).
Taking your initial out-of-pocket investment of $20,000 and adding your principal reduction investment gives us a total out-of-pocket to you of $24,695 over the 5 year period. Applying a 15% over 5 years gives us a target return of $49,670. Now add that to your mortgage balance of $75,305 and that gives you a target net price of $124,795. Add the rule-of-thumb cost of sales of 8% to that target and you get a list price of $135,842 (you can add a bit on to that for “negotiating room”).
If you are able to sell your home for a net price of $124,795 you’ve achieved a 15% return on your money. Not too bad. If you are advised that “market price” is $150,000 and you believe that can be achieved in a reasonable timeframe then go for it. At least you now know what price not to go below if you want that 15% return. If you are advised that “market price” is only $120,000, then it’s either time to revise your return expectations or wait until the market recovers sufficiently to gain your required return.
Real estate is a very complex business and you are well advised to work with a professional who can make the complex understandable, remember Experience Matters
