What is That Offer Really Worth?
Following up on Jim Cosgrove's post regarding the need to adapt to a changing market; i.e. a Buyers Market, I thought it would be useful to have a brief discussion of the time-value of money.
As Listing Brokers, working with someone who wishes to sell their home, we sometimes find it challenging to keep our client focused on the total financial impact of their decisions and the final result they are trying to attain.
This of course begins with their initial asking price. When we present a Seller with a pricing recommendation based on the final sales prices of comparable properties it is not at all unusual for that Seller to feel that their home has superior location, features or amenities to those properties to which theirs is being compared. This is perfectly natural; they know their home best and understandably highly value certain features of their home that are important to them.
However, a prospective Buyer will more than likely be represented by a Buyers Broker and together they will look at the Sellers property (as well as other, competing properties) with a cold and calculating eye. The Buyer will act in enlightened self interest and buy that property which best suits their needs at the lowest price possible.
By overvaluing and then overpricing their property a Seller can cost themselves more than simply a lost sale. They also lose the value of the money they would have had if their property had sold sooner even if for a lower price.
Here's an example: comparable sales indicate a home will sell for $250,000. We recommend an asking price of $259,000. The Seller believes their home to be worth more than indicated and insists on an asking price of $295,000.
A potential Buyer sees one of our ads or visits our website, calls their Buyers Broker and comes to see the home. They have a positive initial reaction and ask for additional information. We supply their Buyers Broker with reams of data. They visit the property again, this time with friends and/or family in tow to validate their decision to like this property. We show them around, carefully pointing out all of the many wonderful features of this home being sure to explain exactly how those features will benefit them.
The Buyers decide to make an offer. They ask their Buyers Broker to look up comparable sales and advise them on the fair value of their potential purchase. The Buyers Broker concludes that the fair value is $250,000. They initially offer $240,000. and after negotiating for awhile arrive at $250,000 where everything stops. Our Seller refuses and spends another year (sometimes longer)on the market trying to achieve closer to $295,000. Eventually they give up and settle for the next offer they can get which is $235,000.
In that year, had they accepted $250,000., paid off their mortgage and credit card debt and invested the balance, that money could easily have earned the equivalent of 8% or $20,000 ($250,000 X 8% for one year). Over pricing cost them $20,000 in lost earnings on the proceeds plus $15,000 in a lower final sales price for a total loss of $35,000.
The lost earnings opportunity for each individual is dependent upon their particular financial status. We recommend our Listing clients discuss this issue with a qualified financial planner. This can help avoid a lot of frustration after the fact.
Although a higher asking price may sound good in the beginning it is the final result that is important. If you are considering selling your home, please call me and together we'll discuss what you are trying to accomplish and the best way to get there.
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