I remember sitting in one of my development classes and wondering what my professor was talking about with land holding costs and development projects. The scenario was this: A family owned development firm buys a 50 acre tract for $500,000 and holds it for 25 years, at which time the next generation of leadership in the family wishes to develop the land. The management looks at the outstanding low purchase price of $500,000 and moves forward due to a great return on the investment. However, the land is now valued at $6,500,000. The management is thrilled that they only have to show $500,000 in land costs, and the project is great.
However, the problem is that the family may have only put $500,000 into the land, but they have $6,500,000 in the land no matter how you look at it. They could sell the land and pursue another project for $6,500,000 if they wanted to, and it would have the same actual return on the investment. You can’t look at the purchase price to determine the quality of a project. You have to look at the Value of the Property at the start time for the project.
So, what does this have to do with our homeowner today? Easy. There are folks out there that keep saying, “If you don’t NEED to sell this year, don’t!” Well, why not? Prices have retreated from their highs of 2006. That doesn’t mean that if you hold out until the market stabilizes that you will be sitting on 2006 prices. It means that if you hold out, that your prices, when they stabilize will do so at their current levels, whatever that level may be.
Is this an EASY time to sell? Absolutely not. But that doesn’t mean that you are going to get a better deal in a year. Last year I had a client who had moved away and received an offer that was less than she had hoped for on her house in Charlottesville. It was a good offer, but still not what she had hoped for. I asked her if should would buy her house as a rental property at the price she was offered. She said, “No. Why would I?” Well, because if you didn’t sell it for that, you just bought it back.
It is easier to see this analogy in stocks and bonds and other liquid assets. If you buy a stock for 50 and it slides to 35, you should ask yourself, is this the safest investment moving forward, not the past. If you can find a better asset, you should go sell the stock and buy the better assets. Likewise with your home, even if you are not making as much as you would have hoped, or even if you have lost some money, if you can find a better use for your assets, you should move them.
Ed Note: As I read this post this morning, 8 hours after stopping working and heading to bed, I realized that this post (which remains in it’s original form above) ends not the way I would have liked. To clarify: with stocks, you may move them from one to another because of the soundness of the investment or the potential gain. But with housing, the asset is more than just a financial producer, it is the center of family life, it provides for a safe haven, perhaps a launch pad for a specific school district. It has many uses. My point was that if the asset no longer performs the way you need or would like (no master bedroom on the first floor as your knees begin to give – not in the right school district as your child reaches school age – not close to a new job – not enough bedrooms with a new child on the way) then those asset changes need to be put into perspective and weighed. But the idea that because the market is not liquid or active this year prohibits a move, I think is a mistake.