Time value of money is the concept of weighing the value of money in your hand today as opposed to one day in the future. When you are selling your home, especially if it is a difficult sell, you must weigh the following hard questions and try to take your emotions out of the equation:
1. How much does it cost you to carry the property?
2. How long has it taken to obtain this offer?
3. What is the most probable likelihood that you will receive another offer in a reasonable amount of time?
4. What is the reasonable probability that you may have an unforeseen major expense before the next offer comes in?
THE ALL CASH OFFER:
Most of the time, the all cash offers are made with a lower than average list price to sale price ratio. (You can check your town stats for this percentage right here on our website), and then refer to the four questions above.
Try to take the emotion out of it, and look at the end result. If your home has been on the market for a significant amount of time, each day that your property remains unsold it would cost you more and more money. Let's look at an example:
Property listed at $800,000 for 10 months. Cost to carry is $4,500 per month. As of today, your home has cost you $45,000 to keep on the market during that time period.
If you get a take it or leave it cash offer tomorrow at $750,000, does it make sense to take it? I would say yes, and here's why:
The home costs $4,500 per month without figuring anything in for maintenance or repairs. Even if you were thinking that your bottom line was $775,000, it is important to look at the NET proceeds.
If you waited 8 months to get an offer of $750,000, it is quite reasonable that you would also wait at least an additional two months to get an offer of $775,000. Based upon our current market conditions, waiting just two months for a higher offer is truly looking at a best case scenario. BUT, let's just say that this best case scenario was going to happen. For the two months that you wait for this offer, you have spent another $9,000 in carrying costs. Once you get the offer, the time it takes to close is anywhere between 60-90 days. If we add $13,500 to your carrying costs to wait for this closing, you have now SPENT $22,500 waiting for this transaction to close, and you are right back to what you considered to be a low offer a few months back.
What if there are a few different offers on the table with different prices and different closing dates?
Here's a simple example of what I am referring to with multiple offers at different prices:
Your home is listed for $700,000 and it costs you $3,300 per month for your mortgage, taxes and insurance.
Let's say that you have two offers on the table:
1) $675,000 closing in three months.
2) $670,000 closing in 30 days.
Based upon your monthly costs starting from today, waiting three months to close will cost you $9,900
Your carrying costs for one month are only $3,300, so if we were to compare actual proceeds after figuring in those carrying costs, you would net more money by selling your home at $670,000 in one month, rather than holding out an additional two months for the $675,000
Today: $670,000 - $3,300 cost to carry (1 month ) = $666,700
Today: $675,000 - 9,900 cost to carry (3 months) = $664,100
It will cost $6,600 to wait the three months to get an offer that will actually COST YOU $1,600 to wait for it to close.
In this instance, the lower offer is actually worth more money NET to you.
J. Wellington Wimpy certainly understood the concept. (That's Wimpy from the Popeye cartoon). Although he could have been somewhat of a shady character at times, one thing is for sure- he knew the Time Value of Money.
And a note From Judy: If you have a question about buying or selling Real Estate in Fairfield County, and are in need of an Realtor to represent you, I invite you to contact me, and if you have an idea for a topic that you would like to see on The CT Realty Blog, please include it in the "Post a Comment" section link below this post. We appreciate the feedback and look forward to providing you with the best real estate content, advice and service in Fairfield County, Connecticut.