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Opportunity Costs!

Opportunity Costs!

Selling at a loss is never the goal of investing in property, but Mark Honeybone says there are times when you need to cut your losses.

By: Mark Honeybone

1 September 2019

Should I sell or should I wait till the property is worth more?”; “I really wanted $20,000 more. Should I accept this final offer?”; “I’d lose $20,000 on my trade if I sell for that, what should I do?”

These are questions that investors, homeowners and traders are faced with at times, especially when the market is on the decline or fairly stagnant.

Many wait 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.

That’s why if you are a property trader, you should have an “out-plan” or an alternative plan. For example, if the market becomes worse or things don’t go to your plan, ask yourself whether you can hold it long term or whether it would be okay to sell at a loss.

Some of you reading this will be thinking: “why would I ever sell at a loss?” The first answer to this is that no-one intends to sell at a loss, but bad things sometimes happen to good people.

The market can be very unpredictable and change quickly at times. So this brings us back to the dilemma of whether to sell at a loss if that does happen.

Opportunity Cost

People sell for many reasons. Some don’t really need to sell, and there is no real urgency, but most aren’t like that. When a property is sold urgently, there could be the following reasons:

  • Planning to retire and need money from the property sale;
  • 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; and/or
  • Moving to a different location.

Of course, there are many other reasons. If you are selling urgently, there is a significant point that many people forget about – the opportunity cost of not selling.

People get too hung up on not getting the ultimate price or what they consider a reasonable price for their property.

Then they end up in a falling market, where they have to hold their property for years and years to get what they want. In the meantime, if they’d taken that $20,000 less or even $50,000 less, they could’ve moved on with the next project and made $100,000 from it. Potentially they can do that several times during the time they need to wait for that extra $20,000 or $50,000. It often doesn’t make sense! The seller can be too emotionally involved and miss the big picture..

Why Should You Sell At A Loss?

  • 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 property which might make more significant capital gains or cashflow than the current property you are selling; and
  • 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.

I have seen this happen many times. It also happened to me during my own property endeavours. However, I made the correct decision of selling every time.

Remember if you are waiting for another $10,000 or $20,000 it won’t take long before interest and other expenses cost you the same: those are the opportunity costs.

Property Ventures is a licensed Real Estate Agency that specialises in investment property throughout New Zealand. They also have the NZ Property podcast/YouTube series where Mark interviews the property experts from around the country helping hundreds of thousands of investors. He can be contacted at mark@propertyventures.co.nz or 0800 NZPROPERTY (697767) Or watch the Podcast/YouTube video at www.propertyventures.co.nz/podcasts