Sunday, February 26, 2012

Different Stages of the Seller in Today's Housing Market

Those who are new to the Real Estate market — not involved on a day to day basis, following the market or stalking the Crib Chatter website — go through a learning curve when they decide to sell their home. They think I paid X and it’s 2,3, 5 years later, it must be worth Y. Or I changed out the light fixtures, it must be worth more.

Every owner thinks that their house is special and worth more than the one next door, across the street or down the block. This healthy belief gets even sillier when it’s clear the houses were built by the same builder and have the same general floor plan, number of bedrooms/bathrooms and the only real difference is the exterior paint.

What's really surprising is that even today owners thinks their place is worth X because the houses across the street sold for X +/- a few dollars last month, but fail to account for the fact that the other house had updated bathrooms and kitchens. During the Boom you could get away with this because "prices could only go up" and "buy now or be priced out forever" mentality.

If you bought in the last 5 years and didn’t do anything to the property (I’m NOT talking about renovators here)- why do you think you will get more than what you paid?

 It's really a quite simple formula:

Z = Price_Sale - Amount_You_Owe_Bank - Transaction_Costs

You want Z to be a positive number and to be as large as possible. You cannot do much about Amount_you_owe_Bank other than pay it down as quickly as possible. Transaction_Costs are pretty set too.  And you don't really know Price_Sale until you put your place out there and then its too late.  For many people Amount_You_Owe_Bank is higher than Price_Sale and they cannot afford to bring that much money to the table. 
The reality is that a lot of people are out there chasing the market. Believe it or not, a lot of people don’t know this or even truly realize how bad the current market is. Yeah they see headlines but unless you are buying or selling a place, you treat it the same way a person who doesn’t like sports treats a headline about the Cubs or the Bears.

So when someone tries to sell today, they go through a few stages.

  • Stage 1: My house/condo is worth so much more than everyone else’s on the block/in the building and I should get back every $1 I put into it;
  • Stage 2: Okay I may not make any money, but perhaps I can have something for a Down Payment on the next house;
  • Stage 3: Geez, at least let me sell for enough to break even;
  • Stage 4: Yikes, I have to bring how much to the table?

I knew the market was bad when I placed my condo on the market almost two years ago but thought skipping Stage 1 and going directly to Stage 2 would give me an edge. Unfortunately, I was already chasing the market but didn't even know it. The paradigm at the time was price it at or just below the comps and you would be fine. Unfortunately, that paradigm soon switched to if you cannot afford to sell your place (at whatever price necessary) then don't bother a realtor with putting your place on the market in the first place.

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