Admin

Real Estate Agents Fail Home Sellers Over Carrying Cost

By
Real Estate Agent with Realty One Group RB14038403

What Really Grinds My GearsReal Estate Agents Fail Home Sellers Over Carrying Cost. Where do I even begin here? Real estate agents say they’re all about doing right by their seller clients, but far too many times they are only setting them up to fail. This isn’t about marketing style or convincing a seller that an agent or her company is the biggest and the best. Home sellers, this is about your money.

On the selfish side, a lot of agents will say anything to secure a listing from a home seller. From showering them with nothing but compliments about their home to giving them an unrealistically high price to put the house on the market for, some agents will stop at nothing to “buy” a listing. Ethically, this turns my stomach. But for purposes of this post, I want to talk about a little thing that most agents fail to include when discussing price and how much a seller might expect to net upon sale. It’s called carrying cost.

Your carrying cost is simply how much you spend on your house from the time it is listed until the time it is sold and typically include your mortgage payment, taxes and insurance, utilities, and any maintenance and repair which must be done on the property.

When you meet with a real estate agent about listing your house, he or she will typically go over something called a Seller’s Net Sheet. This usually takes the price of your house minus your mortgage balance, broker commission, taxes and closing costs to give you a rough idea of what you can expect to get (or owe) at closing. There can be problems right off the bat here because often the agent will base your net from the list price, not the anticipated sale price. You should always ask for net sheets with multiple sales scenarios. And probably 99 times out of 100, carrying cost will not be factored in but it is very important in gauging the cost of selling your home.

To determine monthly carrying costs, add the following:

  • mortgage
  • real estate taxes and insurance
  • total utilities
  • maintenance and repair (HUD estimates this comes to between 1 & 3% of a home’s value per year)

Every thirty days that your house goes unsold, you should subtract the total carrying costs from your anticipated net.

Why is this important? Because many times, home sellers (with the help of their agent) will price their house too high. They might try to justify the price by thinking that they will make more money from the sale, aren’t in a hurry to sell or they can wait until the market comes to them. Soon though, they begin to ask their agent why their house isn’t moving. “The market’s slow,” or, “you need to lower your price,” they’re told. Critical days are wasted as the house become a stale listing and is used to sell other properties with better values-to-price by comparison.

I didn’t mean this post to morph into a “proper pricing” lecture, but by far that is the single reason homes languish on the market. Carrying cost over time can compound this problem as shown in this example:

Market Value: $180,000

List Price: $200,000

Carrying Cost/Month: $2,500

Sells 6 months later at $180,000; closes 30 days after signed agreement

Basic Net (sale price of $180,000 – 7 months carrying costs of $17,500): $162,500

Now, with a realistic, competitive price:

Market Value: $180,000

List Price: $185,000

Carrying Cost/Month: $2,500

Sells 1 month later at $180,000; closes 30 days after signed agreement

Basic Net (sale price of $180,000 – 2 months carrying costs of $5,000): $175,000

The carrying cost number, when added to the usual ‘”seller net sheet” costs, gives a truer idea of real net.

You can see how important it is to know your carrying cost, especially in relation to a home’s list price. You might think that asking $15,000 more in the beginning will get you more money at closing, but really it can cost you a lot more as the home remains unsold. Another thing to keep in mind is the possibility of things going wrong with the property the longer it’s on the market (unforeseen major repairs like an air conditioner, water heater, etc.) that can be avoided the faster the house is sold.

In conclusion, a few tips to keep in mind as you think about selling your home:

  1. Know your monthly carrying cost.
  2. Don’t jump at the first agent who offers pie-in-the-sky pricing; who tells you only what they think you want to hear.
  3. Price your home so it offers the most value for the money compared to its competition, based on solid market data.

While not unethical, failing to educate home sellers about carrying cost and not factoring them into calculations up front is unprofessional, and can cause the sellers to leave a lot of money on the table. Always interview with more than one agent and use the REALTOR® who does his homework for you.

Comments(15)

Show All Comments Sort:
Courtney Cooper Neese
Seattle, WA
206-850-8841

Mike, this is an excellent write up and I am hitting the suggest button and also gogin to reblog it :)  Thanks so much!

Jan 29, 2013 10:57 PM
Pat & Steve Pribisko
Keller Williams Greater Cleveland West - Westlake, OH

Mike, this is a great informational blog.  I wish more sellers would listen to your analysis.  We have had sellers who just won't lower their home prices, inspite of  agreement to do so at the listing meeting.  Some sellers still list with the Realtor who is the higest bidder for the listing price.  I hit the "suggest button" too.

Jan 29, 2013 11:18 PM
Lanre-"THE REAL ESTATE FARMER" Folayan
ERNAL REAL ESTATE GROUP with Samson Properties - Bowie, MD
I don't make promises.I deliver results.SOLD HOMES

I agree with Courtney Cooper who re-blogged this one. Just SUGGESTED THIS ONE. Let's see if everyone else agrees with us here so far. Great post Mike.

Jan 30, 2013 05:52 AM
Lanre-"THE REAL ESTATE FARMER" Folayan
ERNAL REAL ESTATE GROUP with Samson Properties - Bowie, MD
I don't make promises.I deliver results.SOLD HOMES

Mike had to go back and re-blog this one. Since I am targeting listings SUPER HARD this year,it only makes sense that I re-blog this one. Thanks again for writing a well written blog.

Jan 30, 2013 05:59 AM
Mike Schmidt
Realty One Group - Brownsburg, IN
Buy, sell and invest Indy real estate

Thanks everyone for the comments so far. I feel very strongly about this. I've decided to add a little image that addresses that, courtesy of one Peter Griffin.

Jan 30, 2013 06:13 AM
Mike Schmidt
Realty One Group - Brownsburg, IN
Buy, sell and invest Indy real estate

Scott, that is a great, great point regarding carrying costs when there is no mortgage to factor in. I'll definitely use that when the situation arises!

Jan 30, 2013 11:44 AM
Christina Sanchez Hood
Palo Alto, CA
#SiliconValleyHOODS | Inspired Living

Mike, this is a great post for any home seller considering hiring an over-pricing listing agent.  It truly is poor service when an agent causes the seller to spend money unnecessarily.

Jan 30, 2013 11:55 AM
Mike Schmidt
Realty One Group - Brownsburg, IN
Buy, sell and invest Indy real estate

Christina, I've railed for years against agents who are willing to do anything to get a listing. Part of our job is helping the seller to see the cost of selling a home. Positioning a home to sell now is, in my opinion, always to the seller's benefit. Over-pricing simply prolongs their agony.

Jan 30, 2013 12:10 PM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Real Estate Broker

Really a great point... so many agents forget about the cost of carrying a home (especially if it's vacant) and my experience is the most sellers don't think of this either as something reducint their net when they get an offer they might not be thrilled with but should negotiate.

Jan 30, 2013 07:49 PM
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Mike, a very good point sellers often do not take into consideration when selling. The carrying costs can add up quickly with an over priced home.

Jan 30, 2013 09:58 PM
Mike Schmidt
Realty One Group - Brownsburg, IN
Buy, sell and invest Indy real estate

Nina and Michael- I think many sellers, particularly those who have never sold a home before, don't even think of what it is going to cost them aside from the commission they pay.

If your Board is anything like ours, the net sheets they provide have spaces for sale price, closing date, first mortgage payoff, title insurance, taxes, commission, ...and a bunch of blank lines. I just wonder how many agents actually go into more detail than that with sellers.

Of course, I add customary closing costs they can expect along with carrying cost through the closing date and I let them know that the figures I enter are estimates only, but I also present them with a couple of scenarios based on different sales prices and short and long marketing times and educate them.

This doesn't always put a smile on their face, but I know I have done my job.

Jan 30, 2013 10:57 PM
Tamara Inzunza
Realty One Group Capital - Alexandria, VA
Close-In Alexandria and Arlington Living

The problem is, sellers don't really consider their carrying costs until they've been on the market for too long because they've overpriced their house.

Jan 31, 2013 12:29 AM
Mike Schmidt
Realty One Group - Brownsburg, IN
Buy, sell and invest Indy real estate

Tamara, that's when they start to feel it, whether or not they've been told about it. Like I said in the post, the longer a seller is holding out for their price, the more that something major can go wrong, like a furnace, roof, etc. Unforeseen repairs while for sale can blow net proceeds out of the water.

Jan 31, 2013 12:54 AM
Lloyd Binen
Certified Realty Services - Saratoga, CA
Silicon Valley Realtor since 1976; 408-373-4411

Mike, excellent post.  Yes the seller needs to factor carrying costs into the equation.  Two additional points.  One is what Scott in #6 mentions--lost opportunity costs especially when sellers have large equities and/or a free and clear property.  In today's low interest rate environment it isn't too great, but it usually is.  Also, carrying costs of an owner occupied home vs. a vacant home vs. a tenant occupied house are very different and need to be evaluated accordingly. 

Feb 01, 2013 02:39 AM
Mike Schmidt
Realty One Group - Brownsburg, IN
Buy, sell and invest Indy real estate

Agree, Lloyd. It just goes to show that agents need to ask questions and find out more about their sellers in order present as complete a picture as they can.

Feb 01, 2013 03:08 AM