Formula for house price?
June 28, 2020 3:22 AM   Subscribe

How do I work out a minimum price to ask for when selling property?

I own a small unit and would like to sell and then buy something bigger at some point in the next couple of years. The housing market is obviously very volatile at the moment, so I won't rush into anything.

I believe that the best way of going about this is to sell first and my main concern is not selling for less than I should. Is there some kind of formula to work out a minimum price that I should aim for? For example, maybe it takes into account how much I paid, how long I've owned, duties and taxes that I have paid or will need to pay etc.

I acknowledge that we're probably very much heading into a buyer's market (if we're not in one already), which would have a big impact on how much a property will sell for. Since I don't need to sell immediately, I would hold off on selling if there's no way that I would be able to meet the minimum price that I would like.

I live in Victoria, Australia in case that makes a difference.

Thanks in advance!
posted by kinddieserzeit to Work & Money (15 answers total) 8 users marked this as a favorite
For example, maybe it takes into account how much I paid, how long I've owned, duties and taxes that I have paid or will need to pay etc.

None of which is a factor in determining a realistic asking price. The only factors that will determine price is size, location,features, standard of finish, local schools and amenities because that’s what determines how much somebody is willing to pay for your unit in your current market. It is then up to you if you are willing to accept that price or hang on until the market is more in your favour.
posted by koahiatamadl at 3:57 AM on June 28, 2020 [12 favorites]

Best answer: If you aren't in any rush you can figure out the point at which you would break even on your original purchase and wait until it looks like the market will be right for selling at at least that amount. But that may not give you a number at which you can list it right now.

If you do want to figure out your break even point, work out:
- what you paid for the house in terms of deposit +fees +stamp duty
-what you have paid since then in terms of mortgage payments
-what those two pots of money would have accrued in interest over the time period you have owned the house. (Eg use a compound interest savings calculator with your deposit +fees+duties as initial deposit and assuming you were adding your ongoing payments to it regularly).
-add all three of those numbers together, and add those to what's left on your mortgage.
-add to that the fees you will incur to sell the house.
-deduct from this how much you would have spent on rent over the period you have owned this house, if you had rented instead.

This total is the number it would need to sell for to make it financially better for you to have owned this house than to have rented over the same time period.

When we sold our last house, that was a meaningful number for us in terms of how happy we felt about the sale. (We did break even almost exactly to the dollar). We probably would not have sold in a market where we didn't think it likely we could get a figure around that amount.

posted by lollusc at 4:09 AM on June 28, 2020 [9 favorites]

Best answer: Oh and you probably should also include the money you have spent on maintenance and any renovations since owning the house too. Sorry, I forgot that.
posted by lollusc at 4:11 AM on June 28, 2020 [2 favorites]

Response by poster: Thanks, lollusc, that's exactly the kind of calculation I was looking for.
posted by kinddieserzeit at 4:22 AM on June 28, 2020

Wow lollusc, that's a great calculation!

For gauging prices, what people seem to do is look at what similar properties are going for at the moment. Your real-estate agent would probably have a good feel for what you can expect.
posted by freethefeet at 4:47 AM on June 28, 2020

I've also recently sold a property in Victoria over a year ago. I'll offer a different, opposing view - it has to do with the sunk cost fallacy.

Let's say you own some shares today and their market price is $50.

Your decision on whether or not this is a good price to sell at, is completely independent of what you bought it at - it does not matter whether you bought the shares at $30, and thus would make a profit, or you bought the shares at $70, and thus would make a loss.

The only thing that matters is what you think the future holds - which direction prices are headed in.

A good way of framing this question is turning the question on its head - would I buy this property today for, say $500,000? If the answer is no, then you should sell it, regardless of whether you paid $600,000 for it originally, or $400,000. This will keep people from holding investments far beyond the point they should have kept it. Remember, the buyers set the prices, not the sellers - as the seller you have zero control over the transaction price. You can only decide whether to sell into the existing market or not.

The first step is to get a free consult from several real estate agents and get them to value your property. Their valuation should be realistic, they can't lowball the value (they lose business to other agents) and if they set a value too high, the property sits on their hands for a long period of time and they may not end up collecting the commission on it. Once you know the realistic value of your property, then you can make the call whether you want to sell now and convert it to cash, or if you want to hold on to it for the price to go up and make the sale later when you need the cash.

For reference I sold an old, roughly $630,000 apartment in the city where the I paid the agent about $13,500, about $2,000 to for a premier listing, $3,000 to the stylists, $1,000 to the lawyers. It was in a declining market that was about 5% off its peak and I didn't really see the potential for future growth - a lot of the projected growth in rentals was predicated on strong international student intake and immigration intake, enough to surpass the massive build out in capacity, and I just wasn't feeling optimistic about it.
posted by xdvesper at 5:06 AM on June 28, 2020 [15 favorites]

If you're using lollusc's formula, deduct the rent you would have paid from your mortgage payments before you calculate the interest you would have made on a comparable investment, because of course you would have been paying rent all along, not at the end.

But I don't think your plan is necessarily a good one. Sometimes people make bad investments. Holding until the investment is good may mean waiting forever and losing more money. Let's say you think you should net $15k but will only net $10k at today's prices. Suppose stocks zoom up but pandemic-associated foreclosures keep real estate values stagnant such that you net $11k in a year from your house but would've netted $20k had you rented. When will you catch up? Wouldn't you have been better off if you'd sold and put that $10k into stocks? As xdvesper says, it's about what you think is likely to happen in the future, not where you would like to be based on the past, that matters.
posted by slidell at 6:17 AM on June 28, 2020 [1 favorite]

From your question and from the comments you have favorited, it sounds like you don't want to go in this direction, but I'd strongly urge you to focus on the future rather than the past. Even more so if we're heading into an extended buyer's market, as you suppose. You say: "Since I don't need to sell immediately, I would hold off on selling if there's no way that I would be able to meet the minimum price that I would like." That's all well and good in an appreciating market, but what if (as you say) we're going into a recession and house prices are going down, not up - and in the years that your house sits on the market, you're paying carrying costs (taxes, utilities, etc.) to hold the house. Xdvesper is right to flag sunk costs as key. Just because you possibly made a bad investment in the house doesn't mean it's a good idea to double down on that investment. That's like a gambler determined to stay at the table until he's recouped his money. If you're going to lose money on the house sale, best to do it ASAP - it will get more painful over time, not less.

I would also urge you to bear in mind what I wrote a few years ago here, which is still true:

"The question isn't what you want for your house - it's how much someone else is willing to pay for it. I've come across a surprising number of houses in my city (also a fairly hot real estate market) that have lingered on the market on and off for *years*. Why? I've looked at comps for hundreds of houses now and have a pretty good sense of my local market. The houses in question are really clearly overpriced - sometimes grossly. The sellers are making emotional pricing decisions, pricing it at what they want to get rather than what they realistically can get. One house I saw, not updated since the 1960s (faux wood panelling and everything!), was around $100k overpriced in my view. The lovely elderly woman owner that I spoke with when I viewed the house couldn't understand why no one was making any offers. Her pricing was in line with completely modernized houses in the area, not houses in the condition that hers was in (probably needed 70k worth of updating). In other words, her realtor failed her.

There's a right price for your house, based on your local market and your specific house's relation to it, and you and your realtor need to find it. How much you paid for it 8 years ago, whether you got a good deal or overpaid at that point, whether or not you're going to make a profit at sale, and all those similar sorts of ROI questions really have no bearing on how you should price it right now in order to sell it. You need to get a realtor who has a track record of actual sales. I might interview several realtors and ask them how they'd price it, just so you can get a good ballpark, and then pick the most competent one."

You propose a formula of a minimum sale price based on what you paid, how long you've owned, duties and taxes that you've paid or will need to pay etc. Thing is, none of these is relevant for determining an appropriate sale price for your house. Your house may be worth far more or far less than you've put into it, determined by what your local housing market has been doing. Imagine if someone in the Bay Area bought their house in 1970 for $100,000 and has put $200,000 into it over time. Would it make sense for them to set their minimum sale price at $300,000 when the house is actually worth $1,000,000 due to the tech boom in the area? Or, as friends of mine discovered who bought before the crash in a declining Midwestern city and had their house on the market for 5 years trying to recoup the price they paid before deciding to take the hit, it can make the most financial sense to cut your losses early even if you can't get back out of a house what you put into it.

What you need to do is to go on whatever the Australian version of Zillow or is, and spend a few hours looking at price per square foot in your area. Make sure to pay attention to renovated vs unrenovated, house vs condo, neighborhood delineations (often different neighborhoods have different price brackets that their houses fall into; houses that are geographically nearby each other but in different neighborhoods can have very different pricing per square foot), and any other discriminating factors. The most useful "comps" will be properties of your type (house or condo), of about the size of yours, with about the same number of bathrooms, of about the same age and level of renovation, that sold ideally in the last six months to a year. You'll pretty soon realize that there are very predictable prices per square foot that properties sell for. You might even decide to do some strategic renovation to bump your property up to a higher bracket (maybe the houses selling for $50 more per square foot all have renovated bathrooms or something, and you decide that you could get $50,000 more for your house with a $20,000 outlay on bathroom reno, or whatever). There's a narrow range of dollar market value for your house that already exists: your feelings about what your house should be worth are entirely independent of that number and are frankly not relevant.
posted by ClaireBear at 7:21 AM on June 28, 2020 [10 favorites]

Just to sum up my point more succinctly: there's already a pre-existing dollar amount that your house is worth and will almost certainly sell for, determined by the parameters of your housing market. You may have feelings about that number. But the only thing that focusing on those feelings will do is to distract you from making the best financial decisions for yourself vis-a-vis when to sell and for what asking price - especially in a softening market.
posted by ClaireBear at 7:33 AM on June 28, 2020

If you aren't in any rush you can figure out the point at which you would break even on your original purchase and wait until it looks like the market will be right for selling at at least that amount. But that may not give you a number at which you can list it right now.

I live in an area that has more than its share of unique properties -- waterfront, views etc. In talking to one of the more successful local real estate agents, she described the market as basically two-faced.

1. certain people fix a price for their one-of-a-kind property ... and then wait for a one-of-a-kind buyer. Sometimes it's a long wait, sometimes the property never sells, but inherent in what they're asking are two things: they can afford to wait and they have some kind of future dream which will require that kind of money. I'd call this a seller's deal.

2. this is more reflective of the "normal" real estate market. You set a price (usually higher than you ultimately hope to get but not grossly out of touch with what similar places are currently going for) and you work from there. In the case of the home my parents bought over twenty years ago, it was a case of a marriage breaking up and house that had to be sold soon in order to free up some equity. They got a buyers deal as a result.

And then there's everything in between ...
posted by philip-random at 8:22 AM on June 28, 2020

Real estate agents will visit and give you a free valuation. Get as many as you like; be clear that you are not ready to sell and not ready to choose an agent. This is an opportunity for them to make a pitch to you about their skills, so it it not an utter waste of their time.

The best way to get a useful valuation is to get it appraised. This costs money, for a reason. An appraiser will use comparables and be thorough. Call your bank, ask for some names of appraisers they use.
posted by theora55 at 10:00 AM on June 28, 2020

The other thing is to think about the best strategy for getting what you ultimately want, which you say is to sell your current place in order to buy a bigger apartment. You think we're heading into something that's increasingly a buyer's market (i.e. house prices are going to go down as demand slumps).* Strategically, then, it would make most sense to sell your place now: if house prices are dropping, waiting will only yield you less, so you'll get more selling now rather than later. Then, you take advantage of the softening market to pick up a larger apartment at a low price in a few months or years or whenever you think the market is at its nadir (or whenever you find something you really like at a price that is better than you'd pay now). In any case, hanging onto your current place while the housing market drops is unlikely to yield the best outcome for you, especially if your main goal is being able to trade up.

* I remain agnostic about whether or not this is true, and I certainly don't know the housing market in Australia, so I'm working on the assumption that you're right.
posted by ClaireBear at 10:50 AM on June 28, 2020

There are people whose jobs consist of just this, coming into your home and letting you know what it’s worth. They’re valuers and we had one come to our place (in Sydney) and give you exactly what you’re wanting, a valuation. I’d contact one. You could get a real estate agent but honestly most of them are overly optimistic just because they want to land the listing. The valuer has no skin in the game and will give you an honest assessment.
posted by Jubey at 4:09 PM on June 28, 2020

Best answer: I am not a real estate professional.

I agree completely with the folks that are telling you that your personal finances don't have anything to do with how much your home is worth on the open market. It sounds like doing the calculations to make sure you aren't selling for a loss is important to you, and definitely do those if so. But also get the property appraised, talk to several agents and listen to what they tell you. If your numbers and theirs work, yay!

If not, I feel your choices are:
  • Put your home on the market for a "loss", ignoring your math, or
  • Decide to check again in a few years and see if the numbers are better
  • Decide your place is just fine and forget about selling
The choice you should not make:
  • Put the house on the market for a price which is obviously too high
Yes, there is a chance that someone out there will see your place and decide it's their dream home despite being __% overpriced, but honestly lottery tickets are probably the better bet. Overpriced properties have a lot of disadvantages:
  • Buyer's agents will actively steer their clients away from them
  • You won't get a "good" listing agent, as selling involves investment in money, time and reputation on their part without recompense if the place doesn't sell, and they know yours won't
  • Listings become stale; even casual browsers (via online sites) see "on market for ___days" and rightfully wonder what's wrong with the place (and when you overprice, something is wrong: is doesn't have the space that money should buy, or doesn't have the view that money should buy, or isn't in Hot Neighborhood, or...)
  • Selling sucks while you're living there, and I cannot personally imagine having to live with the levels of clean and "be out the door in ten minutes" preparedness that being on the market for months requires
Also keep in mind that things happen to houses and condos, so your "what has this cost us" spreadsheet has the possibility of ballooning, perhaps dramatically, at any time. (A new water heater might mean a few thousand dollars, if it leaks all over expensive flooring when it fails and you need plumbers right now with whatever water heater they can lay their hands on, ie, the top-of-the-line model.)

My point is that the math should only be a consideration about whether to sell, not what price to sell at.
posted by maxwelton at 11:29 AM on June 29, 2020

Response by poster: I'd definitely choose one of the first options, maxwelton. In a way, doing this calculation is mostly out of curiosity as to whether the number for me not making a loss matches up with what similar properties are selling for.
posted by kinddieserzeit at 1:38 AM on June 30, 2020

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