2007 July 02 | Wheatworks Blog: Financial Matters

Archive for 2nd July 2007

“Home Sellers Calculator” is Coming from Wheatworks.com

7/2/2007, 6:04 pm

Wheatworks is preparing to release a new calculator, aptly named, Home Sellers Calculator.

For more than a year I watched “For Sale” signs in front of a house I passed nearly every day. The first sign was a small, store bought, “For Sale by Owner” with a few perky balloons tied to it.

After 5 or 6 weeks, that first sign was replaced by a local Realtor®’s sign. The second sign looked more substantial but was no more effective. The house has a large yard with a long curved drive. The Realtor®’s sign was in the yard for 3 months. During this period of time the house was vacated.

The Realtor®’s sign was replaced by a 4′ by 8′ sheet of plywood, hand-painted white with large red and black letters, “Home for Sale!, Reduced $20,000!”. There were days when the grass grew a little too tall, but the new sign really stood out.

Four months later, the large, white plywood sign was replaced by a different Realtor®’s sign from a different agency. A nice, new swingset was constructed in a side yard and the long drive was repaved. This is the sign that finally declared “Sold” more than a year after the house was first placed on the market.

What must have been incredibly frustrating for the home owners trying to sell this house is that two nearby houses went on the market and sold quickly. I don’t know the details of the three transactions, but I assume when a house is on the market too long, it’s because the asking price is too high and the owners won’t accept less than they expect.

This always begs the question, “How do you determine the proper sales price for a house?”

There’s the first, “as good as it gets”, desire for a bottom line price. It’s usually based on a desired profit. Determining this price often goes something like this: “I want to clear $30,000. I owe $228,000. I’ll price it at $258,000.”

That’s one way to do it.

Another way to price a house is to ask for help. Call a real estate agent and ask, “What’s a reasonable price for this house?” The chances are good the answer will be a number or a referral to an appraiser. You can also shop the market, looking at houses similar to yours to determine your asking price.

However one sets an initial asking price, people often forget to consider the carrying costs.

In a perfect world, you would put your house on the market at 8:00 am and have a signed Purchase Agreement by lunch time. (And so you won’t think I’m being sarcastic, the perfect scenario does occasionally happen. My former next door neighbor put her house on the market one morning and within a few hours, the sign declared, “Sold!”. I had new neighbors. That’s rare.)

Because the world is not perfect, a house can be on the market for a period of time. The carrying costs that eat into profit are all those things that must be paid while a house is on the market. They include the monthly payment for the mortgage (principal and interest) as well as insurance, taxes, homeowner association dues, maintenance fees (lawn care, for example) and utilities (no one likes to look at a house without electricity, gas and water).

The longer a house is on the market, the more deeply the carrying costs eat into the sellers profit. A simple example makes obvious the damage carrying costs can do to one’s profit if a house is on the market too long.

Take the scenario I suggested above. Let’s say the amount owed is $228,000 and the seller wants to clear $30,000 so he sets the asking price at $258,000 (hoping he can use $255,000 as a counter to a low offer). Let’s assume the seller purchased the house for $235,000 at 6% with a 30 year fixed rate mortgage and has made regular payments of $1408.94 for principal and interest and pays $1,200 in taxes and $1,800 in insurance each year. Home Owner Association dues are $1,200 per year, too. They’ve been in the house just over two years. Utilities average $240 for electricity, $80 for gas and $50 for water for a total of $370 per month. The carrying costs is the sum of these monthly expenses: $2,128.94.

The only way to actually clear $30,000 profit when asking $258,000 is to sell the house before any of these carrying costs are due next month. But that’s not likely in a less than perfect world. Each month on the market will subtract $2,128.94 from the seller’s gross profit. The gross profit dwindles like this:

Time on Market
1 month : 27,871.06
2 months : 25,742.12
3 months : 23,613.18
4 months : 21,484.24
5 months : 19,355.30
6 months : 17,226.36
7 months : 15,097.42
8 months : 12,968.48
9 months : 10,839.54
10 months : 8,710.60
11 months : 6,581.66
12 months : 4,452.72
13 months : 2,323.78
14 months : 194.84

In this scenario the home seller is in a hole after 15 months of carrying costs.

And this is before we include the expenses associated with the sales transaction which may or may not include the commission to the agents (6% commission on $258,000 is $15,480 which puts the seller in the hole after only 7 months), transfer taxes and a prepayment penalty (if applicable).

In short, selling a house for a profit is not as easy as it may first appear. And the obvious conclusion is that it can be better in the long run to start with a lower asking price when selling into a slow market.

Wheatworks Software’s soon-to-be-released Home Sellers Calculator helps home sellers by displaying the net profit of different home prices so home sellers can compare their expected profit and the effects of time on market. It doesn’t determine what a home seller should ask. Rather, it helps a home seller make a mathematically-informed decision by showing the different expected net profits available for a range sales prices based on how long a house may be on the market before selling. It calculates and displays the persistent decline in profit resulting from monthly carrying costs.

Look for it soon at: Wheatworks.com

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