The Relationship Between Home Prices and Time
The connection between time and home Pricing
It is quite common that when someone is selling a home, they want to list their home at substantially more than open market prices. This happens for many reasons such as a ridiculous home valuation from a website such a Zillow, looking at “active” properties and pricing their home from there, possibly another agent gave an inaccurate value, even sometimes an old appraisal. Many real estate agents have trouble navigating the treacherous waters of explaining to a home seller the true value of their home, especially if the seller already has an inflated idea of the home’s value. Truth is, pricing a home properly at the time of listing is critical in getting a home sold fast and for the highest , fair market price. Today, we will discuss one the foundations of property value – the relationship between time, and value.
The Concept of Time Value of Money
In real estate investing (truthfully in ALL investing) there is something known as the Time Value of Money. This is the relationship of the value of a dollar in different periods of time. A dollar received today is worth more than a dollar received tomorrow. Time Value of Money (TVM) is a fundamental principle of banking and finance. The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. What does all of this have to do with getting my home sold? Let me elaborate…
Using Real Estate Statistics to Value a Home
Anytime a real estate agent provides a home value, they look at a variety of information to come up with an accurate listing price. Some of the metrics that are reviewed when deriving a home’s value is:
- Current Active Properties of similar type/area – Active Comps
- Recently Sold Properties of similar type/area – Sold Comps
- Recently Expired Properties of similar type/area – Expired Comps
- Days on Market to Sell – DOM
- List to Sell Ratio
- Dollar Per Square Foot Sold
Some agents may use additional pricing metrics, but the above mentioned always play a role in the home’s value. All or most of these real estate statistics come out of the local Multiple Listing Service or MLS.
Pricing a Home For Sale
When pricing a home to list for sale, its important to price the home as close to the realistic selling price as possible. Let’s use some pretend numbers to explain. Let’s say that after looking at the recent sold properties, current active properties and dollar per square foot the home is estimated to sell for $200,000. The next question would be “what should we list the property at”? Well, that would generally take into consideration that OF THE HOMES THAT SOLD, they sold 6% off of the listing price. Lets also say that the average Days on Market to Sell was 110 – that simply means that FOR THE HOMES THAT SOLD, it averaged 110 days to get an accepted contract. Many home sellers would like to list their home at $265,000 and “See What Happens”…but my crystal ball is pretty clear on that….I can tell you NOTHING is going to happen! At least anytime soon. Let me explain….You home will eventually be able to sell for $265,00, but not within the 120 days – or even within your listing period. Lets think back to when your Grandparents bought their home. They may have paid $25,000 for that property. If you would have told them that one day it would be worth $200,000 – they would have said you were crazy.
Using The Relationship of Time and Price
Using the same numbers as above, where the home “should” sell for $200,000 – if you wanted to sell the home in LESS than the “average DOM” of 110 days, what would you do? You would drop the price! For instance:
- If you wanted to sell home in 60 days as opposed to 110 – you may price the home at $180,000
- If you wanted to sell the home in 30 days as opposed to 110 – you may price the home at $160,000
- If you wanted to sell the home in 7 days as opposed to 110 – you may price the home at $140,000
- If you wanted the sell the home in 24 hours as opposed to 110 days – you may price the home at $100,000
The same thing works in reverse! With the increase of home values over time, you can get higher values if you are willing to wait. When I say “wait” it may take some time. For instance, if homes are increasing in value at 6% per year, in 12 months your home will be worth $212,000. Using those numbers, if you want to sell your home for $212,000 you will have to wait 12 months plus the 120 days they average to sell. That is why the home that your Grandparents purchased for $25,000 may now be worth $200,000 – but they had to wait 40 years.
Let’s look at some more numbers:
- If you want to sell your home for $212,000 you will have to wait 16 months (with a 6% annual home value increase).
- If you want to sell your home for $225,000 you will have to wait 28 months (with a 6% annual increase in value)
Get the point? The price you can get for your home is directly corilated to the time it will take to sell.
What Real Estate Agents Should Say
So what should real estate agents say when their clients want to list their $200,000 home for $265,000? They should say “no problem…but it will take 27.3 years to sell”. I’m being a little facetious here, keep in mind most listing agreements are only 180 days long, so before a real estate agent can invest marketing dollars in getting a home properly marketed, they should make sure it is priced reasonably and will sell.
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