aleksandr vasser

Aleksandr Vasser Explains Real Estate Sunk Costs

Unrealistic sellers cost everyone time and money. Their agents list their properties to only lose the listing after six months without a transaction. The seller must constantly deal with showing their home any time of day or night. This is a guest post by the other Avky Inc co-founder, Aleksandr Vasser. Aleksandr Vasser lives in booming Phoenix, Arizona.

Buyers waste countless minutes touring and bidding on a home that will never actually sell, or, more accurately, be sold. Why? Sellers often don’t understand the concept of sunk costs.

Aleksandr Vasser Explains Real Estate Sunk Costs

Sunk costs can be defined as dollars that have already been spent on a good (real estate) that cannot be recovered. When buyers purchase their home, they put a certain amount of money down. In practice, this money goes to the seller and can never be recovered by the buyer. Unfortunately, too many buyers anchor on the moment they hand over the very large check.

Fast forward two years into the future and a 20% – 40% decline in value later, the buyer now becomes the seller. Rather than simply looking at the market price, adjusting for the pluses and minuses of their respective homes, and listing their home on the market, sellers think back to how much they paid for their home. Mistakenly, they feel that they should at the very least be paid the same, if not more for all of the hard work they put into the improvements.

The problem with real estate is that every investment is a sunk cost. As soon as a homeowner spends $10,000 to remodel the kitchen they create a sunk cost. They can never directly recover their $10,000 from the kitchen installer, short of physically removing the improvement. Even then, the recovery would be 50% of less than what was paid for the items.

Avoid Bad Real Estate Logic

Sellers become disconnected from the market when they focus on costs, rather than focusing on value creation. Buyers pay for the right to use a house, the surrounding land and to be a part of a community. This is the value they receive from a house. Each buyer is an individual and a buyer can buy access to a variety of homes for at a variety of price points. Buyers do not care what sellers spend on the kitchens or bathrooms, they simply what to buy the best experience at the lowest cost.

Using this basic logic, sellers should approach the process of seller their home differently. In a down market pricey renovations do not make sense. Their cost will never be recovered in the price of the home because buyers now want to pay 40% less for the home.

Since a home is simply a collection of rooms, it can easily be inferred that they essentially want to pay less for a new kitchen or bathroom or any other interesting remodel.

Listen to the Real Estate Market

Seller need to focus on beating their competition. Before doing any repairs homeowners should consider the costs and the benefits. The costs are simply the dollars spent on the repair or remodel. The benefit is either a faster sale or a sale at a higher price.

It’s easy to see the value of a higher price, but both of these have value. If a new kitchen will make the home sell one month faster, the seller will save one month of interest and taxes. The seller also avoids one month of market volatility. In a down market, the certainty of a sale can be quite valuable. For some, selling their home in 2014 vs. 2015 could have meant an extra 10% in their pocket.

Buyers should forget their purchase price as soon as they buy their home. Smart buyers will succeed by listening to the market. Perform repairs and renovations that will increase the price of the value of the home more than their costs, but also consider renovations that will make the home sell faster. The bottom line is always focus on the market.

Aleksandr Vasser can be reached for questions on Twitter at @aleksandrvass1.