Real Estate Talk:
Why it is critical to set the right pricing when selling residential or commercial real estate
By Joseph Marovitch
Most real estate for sale is a question of pricing. At what price can a seller place a property on the market and quickly generate offers? In residential sales, there is a market price. This is pricing to sell a property based on comparable sales of other similar properties in the same location over the past twelve months.
The comparable properties will have the same number of bedrooms, bathrooms, garages, living space and condition. For discrepancies such as more or fewer bedrooms or size, the evaluation will be broken down to price per square foot.
The market price is pricing to sell a property based on comparable sales of other similar properties in the same location over the past twelve months.
However, there are subjective values that cannot always be accounted for such as style and taste. Each buyer has their own. Therefore, after the property has been on the market for a month or two, it is wise to calculate how many viewed the online listing, how many people called to inquire, how many visits took place and how many offers were received.
If there have been many online views, many calls, many visits and an offer or two, then the price is good. Indications are that there is interest and at the price the property is being sold at.
Here is where it becomes tricky. If there are many online views, many visits, and no offers, then indications are that there is interest at the price the property is offered at, but the property has issues that are deterring offers.
The style of the property may be to the seller’s taste but not to the buyers’, or the property is dated and requires upgrades to a greater extent than the average buyer will want to tackle.
The question then is how to motivate buyers to make an offer. There are only two ways, either upgrade the house in a tasteful but neutral way such as soft off-white colours or reduce the price.
Reducing the price is the least risky and least expensive way to move forward. No matter what the seller may do to upgrade the property, there is no guarantee a buyer will appreciate the work, however, everyone understands a price reduction. A price reduction provides a buyer choice to do what they want and allows the property to sell quickly.
A price reduction also allows for less expense in the carrying cost since the property sells quicker. The money saved in selling quicker can be far more than upgrading the property, especially if the property is upgraded but does not sell quick enough to cover the upgrade expense. The longer a product sits on the shelf, the more the vendor must pay to maintain the product.
‘Income property pricing is based on how much money it makes after expenses.’
In income property sales, pricing is different. Price is not based on comparable sales but rather on a rate of return or a cap rate. Income property is purchased based on how much money it makes after expenses. To calculate the price of an income property of five or more units (apartments), a seller must use the following formula:
Net operating income / purchase price x 100 = Cap Rate
Example: NOI: $50,000 / Price: $1,000,000 x 100 = 5 Cap Rate
The higher the cap rate, the more one can sell for.
The scale is as follows:
5 cap rate or higher = profit-making property
3 – 4 cap rate = just covering expenses
1 – 3 cap rate = no profit
Every morning, sellers place income properties on the market with brokers who are professional and know what they are doing. On average each day there are twenty to sixty new income properties listed, yet there are only one to four properties with a cap rate of 5 or higher. The rest are 2 to 4.5 cap rates.
Unless these are properties in excellent locations that will grow in value over time (in which case, do not sell them), these listed properties are a waste of time for the seller. Either the brokers don’t know what they are doing, or the seller does not understand the concept of pricing an income property. Sellers do beware. While the property is listed at a higher than market price, the broker may not be selling the property but will be acquiring new buyers for other property because of your property.
Next article: A look at commercial leasing – what is involved?
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Have a great week!
STATE OF THE MARKET
Montreal still appears to be ahead of the game as real estate prices continue to rise but inventory is scarce. There are less and less single homes, condos and apartments available. Rents are on the rise. Tenants are aware that if they leave the apartment they have been living in for a long time, the rent they will pay at their next location will be higher or the apartment will be smaller.
Landlords are aware that if long-time tenants vacate, the landlord can raise the rent higher than the Régie du lodgement maximum for current tenants. There is a housing shortage and the question is what should homeowners and renters do?
If you are a homeowner and you intend to downsize, then the market is in your favour. However, if you need more room, you may want to renovate and increase the size of your property rather than sell and purchase another. Selling so you can buy bigger will cost.
Investing in your current home is an excellent investment. The longer one holds a property, the greater the value will be in the future. Homeowners do not have to sell their property to take money out of it. They can borrow against the property or get a reverse mortgage.
‘If you are a homeowner and you intend to downsize, then the market is in your favour. However, if you need more room, you may want to renovate and increase the size of your property rather than sell and purchase another.’
If you are a renter, stay where you are. There is a cap on how high the landlord can raise the rent. There is even a cap on how much higher the rent can be raised if the landlord renovates or upgrades the property. There is only a market cap on rent if the apartment is vacant. In other words, renters will pay fair rent based on what similar properties are renting for.
If you are selling to purchase bigger, bargain hard. Prices are rising as inventory decreases, however, there is a rule you will want to follow when buying a property. The rule is: be sure you can easily sell whatever you buy. For those that say price is no object, wait till you want to sell. Price will be an object.
Image: Andrew Burlone, WestmountMag.ca
Read also: Other articles by Joseph Marovitch
Joseph Marovitch has worked in the service industry for over 30 years. His first career was working with families from Westmount and surrounding areas, hosting children between the ages of 6 to 16 as the owner and director of Camp Maromac, a sports and arts sleep away summer camp established in 1968. Using the same strengths caring for the families, such as reliability, integrity, honesty and a deep sense of protecting the interests of those he is responsible to, Joseph applies this to his present real estate broker career. Should you have questions please feel free to contact Joseph Marovitch at 514 825-8771, or email@example.com
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