Home owners whether in Washington DC ,Maryland or Virginia who are thinking about selling their house will soon later want a Free MarKet Value Analysis of their home or want to know how much is their home worth. One thing they definitely want to know is their Carrying cost. This article is a well written article that every home owner/seller should read before choosing their local Real Estate Agent.
Real 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:
- 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:
- Know your monthly carrying cost.
- 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.
- 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.