Posted by Jonathan J. Miller -Tuesday, November 29, 2011, 2:00 PM
I was asked this interesting question the other day [specifics changed]:
What is the typical percentage discount on a property’s price in order to achieve a quick sale, i.e. liquidation or disposition value versus market value?
There is no rule of thumb for a “quick sale” value since it is always changing and depends on the property type, location, supply, demand etc. but here’s the logic:
The quick sale value is a function of the marketing time that is required by the owner/client which is often faster than the current market can achieve.
Translation: sell it faster than competing properties in the same market i.e. compress it’s marketing time.
For example: The average days on market might be 6 months in the subject neighborhood – the number of days from the original listing date to the contract date – but the client wants to know what the value would be if they had to sell it in 30 days. This comes up in a foreclosure transaction (and can sometimes explain the “discount” mistakenly identified with such sales), a corporate relocation sale (when a company is buying the home when relocating an employee) or even a seller is under duress who has to sell quickly.
If someone has to sell a property much faster than typical market conditions, then the price must stand out among the competition to allow the property top sell first. This doesn’t mean that a lot more marketing is required – you’ve usually got plenty of competition – it means the price needs to be lower.
The larger the difference between the two periods of time to market a property (quick sale and typical), the larger the discount needed to move the property faster.
Unfortunately if the market is declining, the seller has to price the home ahead of the declining conditions and not “chase the market”. A simplistic example might be something like this:
If the conditions show a 10% annual decline and the average house is usually on the market for 6 months, that means the average house would be expected to sell for 5% less 6 months from now (this is an example – I’m ignoring seasons). Since that is what the average house does, one way to sell the home faster is to outpace the expected decline. This is a significant problem in areas with a lot of distressed property since everyone does this and forces the market to fall faster.
In a rising market such as during the frenzied market in 2004, there was no difference between “normal marketing time” and a “quick sale” since all properties sold almost immediately.