House Still For Sale: Cutting The Price May Save You Money

With the housing market continuing to tank, if you've got a house for sale that's sitting on the market, you're probably going to have to cut the price. But it's hard to tell how much to cut. You don't want to panic and cut too much, but you don't want to price yourself out of a sale by keeping it too high.

Now if you don't need to sell the house, meaning you've just put it on the market to test the waters, you can afford to just wait it out. But if you've already bought a new house, moved, or are trying to sell a vacation or second home, then you've got a different decision to make.

If you're like most people, there are certain expenses you need to cover every month for your house. And the longer it sits on the market, the more those expenses pile up and reduce the total value of the ultimate sales price.

You can figure out these numbers on your own, but a good estimate is that it probably costs about 1% of the value of your home to keep it each month. That 1% takes into account your mortgage payment, taxes, insurance, utilities and basic upkeep.

• Consider a $250,000 house with a $200,000 30 year mortgage at 5%. The mortgage runs about $1,100 a month. Real estate taxes can be between 1% and 2% (or more) depending on where you live, so that's probably another $300 to $400 a month. Utilities could easily run $250 a month, insurance $75, and then basic maintenance another $300. That puts the total at about $2,100 a month, or a little less than 1%, if nothing major goes wrong. Throw in a margin of safety of 10% on the costs you didn't think of, and you'll see it's pretty close to 1%.

Now let's say you live in an area where there's an 8 month supply of housing inventory. That means on average it may take you 8 months to sell a home. If it costs you 1% a month to keep the house, then you're looking at an 8% cost just to carry the house until it sells.

In this situation, you have to ask yourself if you'd be better off cutting the price by 8% to 10%, selling it fast, and moving on?

That's the basic formula you need to consider. So calculate how much it costs you each month to keep the house and then multiply that number by the number of months of housing inventory in your market. For instance, if it costs you $2,500 a month and there's an 8 month supply of houses, that's $20,000.

• You can find out the inventory number from your realtor.

That gives you a ballpark figure for thinking about a price reduction. If the price reduction allows you to sell the house quickly, you're saving the $20,000 you would have had to pay to carry the house for the next 8 months.

It might feel worse to aggressively cut the price, but it may save you money in the long run. If you keep the house on the higher-end of the price range, it could take you longer than 8 months to sell. And if housing prices fall further, it could be a double whammy.

Plus, if you cut the price and sell it early, there's a basic financial value in getting rid of that liability. Bad things can happen to houses that sit vacant on the market and you bear that risk for each month that goes by. One bad storm or break-in could cost you a lot of money.

• I've sold two houses in the last 4 years, and in both cases I had to ultimately follow this formula. Otherwise, I might still be sitting on them.

Bottom line. If you've got a house for sale, cutting the price may save you more money in the long run.

Above material does not constitute financial or tax advice; consult your individual financial and tax advisor prior to making any financial decisions.
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