Are short-term home sellers screwed?(tenence.com)
tenence.com
Are short-term home sellers screwed?
http://www.tenence.com/home-flipping-explained
16 comments
If you haven’t sold in 90 days, your price is to high. There is always a buyer at the right price.
As a real estate investor, I specially target homes going unsold after long durations on the market due to unrealistic expectations.
As a real estate investor, I specially target homes going unsold after long durations on the market due to unrealistic expectations.
> If you haven’t sold in 90 days, your price is to high
Right. So it's selection bias. The people who can get a price 15% more than they paid manage to sell within 90 days, the people who can't dont.
Right. So it's selection bias. The people who can get a price 15% more than they paid manage to sell within 90 days, the people who can't dont.
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That’s not selection bias, that’s a functioning marketplace. Something is worth what someone will pay for it. If demand is increasing, prices increase.
The point that the op is making is that this is only looking at the "successful" trades. It is not looking at the set of "attempted" trades. So it is only looking a selection of the possible trades, and so there is a selection bias involved in the data set. This is very much a form of survivor bias.
It is likely that it also "only" includes those that managed to buy a house at under market rates, and sold at, or above, market rates within 90 days. Anyone who is buying to live in is likely paying as much or more as the "sale" price.
This is further stated in the market, since the annualised rate of return is 650%, but house prices are _not_ going up that quickly.
Which, in turn, means that distressed buyers are not necessarily going to see a 15% increase in the price of their house in 90 days, nor are they going to see a ~30% in 180 days, since their property may not be "undervalued".
It is likely that it also "only" includes those that managed to buy a house at under market rates, and sold at, or above, market rates within 90 days. Anyone who is buying to live in is likely paying as much or more as the "sale" price.
This is further stated in the market, since the annualised rate of return is 650%, but house prices are _not_ going up that quickly.
Which, in turn, means that distressed buyers are not necessarily going to see a 15% increase in the price of their house in 90 days, nor are they going to see a ~30% in 180 days, since their property may not be "undervalued".
Attempted transactions do not make a market. Completed transactions do.
There is clearly selection bias in the quoted figure of houses sold within 90 days, because people try to maximise what they'll get.
People only tend to drop the price after it's been sat around for a while. By definition, such sales are not very likely to happen within the 90 day window and therefore do not contribute to this average.
People only tend to drop the price after it's been sat around for a while. By definition, such sales are not very likely to happen within the 90 day window and therefore do not contribute to this average.
What window of time would provide better data if not 90 days? 3 months? 6 months? A year? Anything more than 90 days and it’s stale market data.
There's selection bias at any time scale. Those who manage to sell their property at all are getting better prices than those who fail to do so.
The point is that you can't calculate a probability of making +15% within 90 days just by looking at how many of the houses sold within 90 days were sold for +15%. Or any +X%. Or any time period.
If you really want to calculate such a probability, you need to buy a bunch of houses at random, then try to sell them, and then see how much you made and how long it took. The data used in the post is not suitable.
The point is that you can't calculate a probability of making +15% within 90 days just by looking at how many of the houses sold within 90 days were sold for +15%. Or any +X%. Or any time period.
If you really want to calculate such a probability, you need to buy a bunch of houses at random, then try to sell them, and then see how much you made and how long it took. The data used in the post is not suitable.
Sure. But the right (market) price 30 days later might be the same price you bought it at (or less), meaning you'll be selling it at a loss after various transaction fees.
There is massive selection bias here. You are not showing how many homes were listed but didn't close. This is measuring only successes, not all the failures to sell.
Also you need to factor in realtor fees on both the original purchase and then subsequent sale (I do not know what they are in the UK, but in Canada they can 3%-7% of the transaction, and this exclude lawyer fees and mortgage discharge fees) which means that you need to get a certain percentage of "gain" in the selling price compared to the purchase price to make any real profit at all. If this was Canada, a good percentage of these so called "profitable sales" would actually be breakeven or slight losses.
Assume realtor fees of 5% on both the original purchase and the sale, this completely wipes out the profit of $168M on the $1.5B of sales. Hmm...
Strange article. It is like the author is not at all knowledgeable at all about how realestate works, or maybe UK is very different than Canada.
Also you need to factor in realtor fees on both the original purchase and then subsequent sale (I do not know what they are in the UK, but in Canada they can 3%-7% of the transaction, and this exclude lawyer fees and mortgage discharge fees) which means that you need to get a certain percentage of "gain" in the selling price compared to the purchase price to make any real profit at all. If this was Canada, a good percentage of these so called "profitable sales" would actually be breakeven or slight losses.
Assume realtor fees of 5% on both the original purchase and the sale, this completely wipes out the profit of $168M on the $1.5B of sales. Hmm...
Strange article. It is like the author is not at all knowledgeable at all about how realestate works, or maybe UK is very different than Canada.
Limited by data here unfortunately. The data source I'm using is Land Registry, which only shows successful deals. Regarding transaction costs, in the UK its around 1.5% for broker fees, plus moving and legal costs. There's also capital gains tax on profits generated on the sale, which is a complex mathematic, and applies if its 'not your first home'. And stamp duty (varies by price) which you pay on purchase.
I understand all of your points, and from what you're saying, with the fee levels you've described, it does sound like the UK is different from Canada.
I understand all of your points, and from what you're saying, with the fee levels you've described, it does sound like the UK is different from Canada.
1.55B * 0.03 = 46M in realtor fees. This reduces the expected profit by 1/4.
I for one paid a fixed sum which came to about 0.65% for the estate agent fees for my latest sale.
I'm not sure whether I understand (or trust) this analysis.
- If I buy an house and resell it within a year, barring extreme circumstances, I'm probably a real estate investor/professional; maybe it's the fact that I was able to buy a property which I felt was underpriced, then maybe I did some minimal "rejuvenating" modifications, and sell it at a premium.
- We don't see the negative data; how many properties were on sale and were not sold? We're very likely to introduce a bias, otherwise, because I suppose very few people would sell at loss, hence we see few sales at less than purchase price.
- If I buy an house and resell it within a year, barring extreme circumstances, I'm probably a real estate investor/professional; maybe it's the fact that I was able to buy a property which I felt was underpriced, then maybe I did some minimal "rejuvenating" modifications, and sell it at a premium.
- We don't see the negative data; how many properties were on sale and were not sold? We're very likely to introduce a bias, otherwise, because I suppose very few people would sell at loss, hence we see few sales at less than purchase price.
Negative data would be very helpful, unfortunately its harder to get. The data I used was from Land Registry UK which only captures successful transactions.
Did you combine data from the 3 UK registries (England & Wales, Scotland and Northern Ireland)?
The analysis is just for London
I noticed that there seemed to be a lack of detail about other factor that may have affected the price. Are the properties being sold at the same time of year? As you say selling in such a short time period may be indicative of buying, some simple rejuvenation and selling again.
Its worth noting that the story seems to have been written by an estate agency, and there would therefore be an interest in encouraging property transactions.
Hm, no we are not an estate agency :) Not yet. I was just curious about whether the widely held belief that short term sales are disadvantageous to home owners is true or not, thats what motivated the post.
Sincere apologies. I saw "Our mission is to make home buying and selling easier" and jumped to conclusions.
I really love articles like "are people who <do something totally ridiculous> screwd?" This gives the impression for these people that they are doing something totally normal, and that it is the world screwing them.
You never ever want to sell a home you live in short-term. You only do that if you really don't have another choice. It's probably your biggest investment. You probably bought a bigger home than you can afford. Sell it for what it's worth and invest the time. The costs of selling too quickly might be retiring at 55 years of age or at 65 years of age.
And if you decide to go the easy route anyway then it was you who screwed you. As said before being in a f*d up situation otherwise might be an exception. But it might also be a sign that you do in general not the sensible thing.
You never ever want to sell a home you live in short-term. You only do that if you really don't have another choice. It's probably your biggest investment. You probably bought a bigger home than you can afford. Sell it for what it's worth and invest the time. The costs of selling too quickly might be retiring at 55 years of age or at 65 years of age.
And if you decide to go the easy route anyway then it was you who screwed you. As said before being in a f*d up situation otherwise might be an exception. But it might also be a sign that you do in general not the sensible thing.
Homes that resell within 90 days are fix & flips. Yes, they sell for a higher price, but there is also more investment put into them than just the purchase price.
> Homes that resell within 90 days are fix & flips.
That seems like an unwarranted assumption. How do you know any fixing was involved?
That seems like an unwarranted assumption. How do you know any fixing was involved?
The article treats short-term sellers as though people are randomly choosing to sell their homes after 90 days.
But that defies all logic. It's almost impossible to turnaround in that time by accident.
People who sell after 90 days were almost inevitably intending to do so all along. Fix and flip is a more reasonable starting assumption.
But that defies all logic. It's almost impossible to turnaround in that time by accident.
People who sell after 90 days were almost inevitably intending to do so all along. Fix and flip is a more reasonable starting assumption.
I guess it would depend if the first sale was brokered by a private individual or by a real estate agent. One would tend to think that most agents would price a home close to market (since they have more information of market pricing than the average person) and prices closer to market would be hard to flip for a large spread in a short period of time.
How do you know it _wasn't_? We basically have a _whole bunch_ of possible hypotheses here that the data/analysis here does not allow us to distinguish.
I don't know, and made no claim implying knowledge. The "what about" attempt (more formally tu quoque) fails.
Wait, we are supposed to ignore transaction costs? I kept waiting for them to be factored in, but it never happened. I have a simple reason for the 15% number — you need to make ~ that much to be breaking even!
Humans have strong loss aversion and it’s common to come across properties where the offer price is clearly set at a point where the sellers will only be making their money back. You can make fair offers in this situation but we had them declined every time. This was most evident during the 2008-2010 housing bust when we had to look for 18 months for a house that was fairly priced — and after we bought, we got two calls from people we’d made offers to — offers which they declined — asking if we were still interested in buying at our offered price! In the case of one house I tracked, they ended up selling at over 10% below what we’d offered them!
Combine that with the lack of any kind of data on houses that didn’t sell, and I would take this analysis with a hefty nugget of salt.
Humans have strong loss aversion and it’s common to come across properties where the offer price is clearly set at a point where the sellers will only be making their money back. You can make fair offers in this situation but we had them declined every time. This was most evident during the 2008-2010 housing bust when we had to look for 18 months for a house that was fairly priced — and after we bought, we got two calls from people we’d made offers to — offers which they declined — asking if we were still interested in buying at our offered price! In the case of one house I tracked, they ended up selling at over 10% below what we’d offered them!
Combine that with the lack of any kind of data on houses that didn’t sell, and I would take this analysis with a hefty nugget of salt.
You're right, I should do the math on trxn costs in my next update - the main ones are stamp duty on purchase and broker fees on sale. The minor ones are moving costs and legal fees on buying and selling. Capex I'll have to ignore because I have no data on this.
Still, if you assume the broker got paid say 1.5%-2.0%, the stamp duty was 3.5-4.0%, there's still a sizeable margin in between.
Still, if you assume the broker got paid say 1.5%-2.0%, the stamp duty was 3.5-4.0%, there's still a sizeable margin in between.
Your missing another big one which is the cost to hold the house. If you're an average flipper that investor money is going to cost you about 1% per month of the purchase price so you can probably assume another 3% or so there.
After that you need to factor in your time as the flipper (time to do the purchase analysis, acquire the property, fixup the property, market the property, sell the property). Ultimately for flippers a 15% spread between purchase and sale would usually be a sizeable loss
After that you need to factor in your time as the flipper (time to do the purchase analysis, acquire the property, fixup the property, market the property, sell the property). Ultimately for flippers a 15% spread between purchase and sale would usually be a sizeable loss
I don’t know UK laws, but you also get dinged in the US on property taxes (pay half a year), home insurance (can’t close without it), HOA fees ($500 selling our house this year despite our HOA being otherwise meaningless), warranty (not consistently required) and various local costs that are associated with the municipality or state — not to mention mortgages are deliberately designed to make their money even if you pay them early.
Again, I’ve never bought/sold in the UK, but in the US you could easily see $100K in costs on a transaction of ~$2M, and the percentages will go up as you move down market.
Again, I’ve never bought/sold in the UK, but in the US you could easily see $100K in costs on a transaction of ~$2M, and the percentages will go up as you move down market.
A warning to those taking these numbers seriously. I had a go of Tenence service after reading and it's property valuation service gave Very dodgy results for my previous properties.
For my last property it gave the wrong square footage and it's valuation method is ridiculous. For example, sold 2010 £200k sold 2017 £400,000 -> valuation £300,000?
Valuing a property based on the average of previous sold prices regardless of time-scale is nonsense and needs to be fixed. If not, I am looking forward to buying that Mayfair townhouse last sold in 1930 for £1,000 ;-)
For my last property it gave the wrong square footage and it's valuation method is ridiculous. For example, sold 2010 £200k sold 2017 £400,000 -> valuation £300,000?
Valuing a property based on the average of previous sold prices regardless of time-scale is nonsense and needs to be fixed. If not, I am looking forward to buying that Mayfair townhouse last sold in 1930 for £1,000 ;-)
Sorry about that, will look into this particular case and fix. For square footage we rely on EPC certificates which sadly are not always accurate.
Thats alright, thanks for taking a look at it. I can see why it is very hard to get a good reading of square footage. I was a bit too harsh in my last comment. The valuation algo however is concerning. Perhaps take a look at the Savills local house price indices, I know a number of valuation algos use that heavily alongside Land Reg data. Good luck!
>on average, if you sell your home within 90 days, you’ll do it at 15% higher than what you bought it for.
Uh, well, what I think this probably means is that people who _aren't_ going to make money _don't_ sell a property within 90 days. Even if they were buying it as an investment/flip, if they aren't going to be able to sell it for a ~15% profit... they hold on to it longer. Until they can.
Realizing this confusion of correlation with causation makes the rest of the "advice" in the article somewhat suspect too.
It's interesting findings, that there are significant numbers of owners managing to flip a house quickly for profit. But I'm not sure it can be extrapolated into a "what you should do".
Uh, well, what I think this probably means is that people who _aren't_ going to make money _don't_ sell a property within 90 days. Even if they were buying it as an investment/flip, if they aren't going to be able to sell it for a ~15% profit... they hold on to it longer. Until they can.
Realizing this confusion of correlation with causation makes the rest of the "advice" in the article somewhat suspect too.
It's interesting findings, that there are significant numbers of owners managing to flip a house quickly for profit. But I'm not sure it can be extrapolated into a "what you should do".
You should label your axes properly. You haven't defined 'price change' and 'gap' anywhere in the text, so we have to try to deduce the meaning from context.
I'm still not sure if the units are percentage change or thousands of GBP.
> If you can wait till year-end, then you're even better off
So .. why stop here? Isn't this just saying that since London houses are an extremely rising market, the longer you hold the more profitable it its?
So .. why stop here? Isn't this just saying that since London houses are an extremely rising market, the longer you hold the more profitable it its?
The relevant factor in short term asset holds is transaction costs. Whether you're buying stocks or houses. If you can account for them and make a profit anyway, you're making money. Generally you need a market edge to lean on.
But at the end of the day it's hustling in a zero-sum market. Holding on to your edge requires work. And doing the deals requires work. Not something you want to make a career out of if you value your sanity or free time.
But at the end of the day it's hustling in a zero-sum market. Holding on to your edge requires work. And doing the deals requires work. Not something you want to make a career out of if you value your sanity or free time.
This story gives the impression that you can somehow magically make a profit by buying a house, waiting a few months, and selling it. This is completely ignoring the concept that most of the data is going to be from house flippers who don't just buy and sell houses, but renovate houses. If you are a professional who buys fixer-uppers that no one else wants the hassle of dealing with, then put a lot of money and work and skill into them, yes you have a good chance of selling it for more than you spent on it.
If you just buy and sell, and don't do anything to the house, you're very likely to lose money (when factoring in transaction costs) unless you really know what is happening in the market. People see what you bought the house for a few months ago, why would they pay more than you did? Also, as many others have mentioned, there is a lot of selection bias. People are less likely to sell if they have to sell for a loss, if they have to hold onto a property they wanted to sell because they would lose money if they sold, they don't show up in this data.
If you just buy and sell, and don't do anything to the house, you're very likely to lose money (when factoring in transaction costs) unless you really know what is happening in the market. People see what you bought the house for a few months ago, why would they pay more than you did? Also, as many others have mentioned, there is a lot of selection bias. People are less likely to sell if they have to sell for a loss, if they have to hold onto a property they wanted to sell because they would lose money if they sold, they don't show up in this data.
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There's an obvious strategy here to make an infinite amount of money!
What about property tax, which (AIUI) is paid in a big lump sum on purchase, and not annually like in the USA?
There's some selection bias here. Those who got lucky (e.g. they bought the house cheaply) found it easy to sell for a good price quickly. Those who got unlucky and couldn't find a buyer quickly are excluded from the "90 days" window so don't contribute to the statistic.
It might be true that homes sold within 90 days of purchase sold for an average of 15% higher than the purchase price, but it doesn't mean you can expect to sell a home within 90 days of purchasing it for 15% more than you paid.