Opportunity Costs In Real Estate Sales - What You Need To Know

Opportunity Costs In Real Estate Sales - What You Need To Know
14-Oct-2019

“Should I sell or should I wait till the property is worth more?”

“I really wanted $20k more. Should I accept this final offer?”

“I’d lose $20k on my trade if I sell for that, what should I do?”

These are all questions that investors, homeowners and traders are faced with when navigating the unpredictable nature of the property market, especially when the market is on the decline or staying fairly stagnant.

Many people will decline lower offers in the hope that someone will come along and pay that golden figure they have been waiting for, but sometimes they may have to wait for years for that to happen.

In order to avoid this situation as a property trader you should always have a ‘Plan B’ as a backup option. For example, if the market turns to worse or things don’t go to plan, ask yourself whether you can hold it long term or whether it would be ok to sell at a loss.

Should You Sell At A Loss?

Some of you reading this will be thinking: “why would I ever sell at a loss?” The market can be very unpredictable and change quickly at times, no-one ever intends to sell at a loss, but sometimes stuff happens and it is better, or necessary to cut your losses.

7 Reasons Why Property Needs To Be Sold Urgently

People sell for many reasons. Some don’t really need to sell, and there is no real urgency, but the majority of people are selling with some necessity or under some kind of pressure. When a property is sold urgently, there could be the following reasons:

  • Planning to retire and need money from the property sale for that
  • Needing to sell to invest in another investment type
  • Selling to buy a better property (yield or location)
  • Property trader or renovator selling to generate income
  • Developer selling their stock to free up some capital
  • Family selling a deceased estate
  • Moving to a different location

Of course, there are many other reasons why people may need to sell their property in a timely manner, however there is a significant factor that many people forget about or do not consider - the Opportunity Costs of not selling in the desired timeframe.

Opportunity Cost

Opportunity Cost refers to the potential cost involved in hanging on to the property for an extended period of time versus the potential benefit if the seller had taken that $20k less or even $50k less when it was offered and moved on.

For example the Opportunity Cost involved (expenses and time) involved in waiting for another $10k or $20k more can be quickly consumed in interest payments and other expenses as they add up to these amounts over the time it takes to wait for the better offer.

Getting hung up about not getting the ultimate sale price or even just what they consider a reasonable amount for their property then leaves people vulnerable to ending up in a falling market where they have to hold their properties for years and years to get what they want.

Having taken the lower offer they could’ve moved on with the next project and made $100k from it. Potentially there is the possibility you could do that several times during the time needed to wait for that extra $20k. While in hindsight it is easy to see the benefits the seller can often be too emotionally involved in the sale process and miss the big picture.

When Opportunity Costs Matter

There are many reasons where the opportunity costs of not selling outweigh the benefits of accepting a reduced price offer:

  • If you are a trader or renovator, you can get on with your next project sooner which means more overall profit;
  • If you’re planning to retire, you can get on with the next step in your life sooner, even though it might be less than you initially thought;
  • If you’re upgrading, then you can buy the next better property which might make more significant capital gains or cashflow than the current property you are selling;
  • If you’re selling a deceased estate, all the family members can move on with their lives.

Note: If the loss is shared within a group of partners or family members, then it is divided equally and isn’t quite as bad as one might think. 

Ignoring the opportunity costs involved in property investment is one of the biggest mistakes many sellers will make when faced with undesirable offers. Want to know more about Opportunity Cost when selling your property? Give the team at Property Ventures a call today.