The answer is obvious. Our money is made when we buy real estate but we cannot spend any of that money since we do not have it yet until we sell the property. We need to sell the home to secure our profits and maintain our cash flow. There is no cash flow with an unsold house.
It is equally true that the day you purchase a property is the day your potential profit is at its zenith. For every day thereafter, your potential profit diminishes accordingly.
This will illustrate the point.
If your potential profit on a deal is $50,000 and your monthly holding costs approximate $1500.00, you may easily calculate how the passage of time affects your profit:
**After one month……..Profit = $48,500.00
**After two months……Profit = $47,000.00
**After three months….Profit = $45,500.00
**After four months……Profit = $44,000.00
**After five months…….Profit = $42,500.00
**After six months………Profit = $41,000.00
As most investors realize, to sell a home at the best and most profitable price does take some time and the actual lost profit is much more than this example, as there are other sundry costs including losses due to the lack of operable cash flow to bear as well – all taking from your profits.
It is crucial to recognize as well that you never want to sell your property too quickly, for if you do, you undoubtedly priced it too low. There is an art to pricing a property correctly. You want to price it just right so you balance selling it quickly and selling it for the highest price.
If you were to close on five houses a year, using our illustration above, you can see how you need to sell the home at the right price but quickly. In selling those homes, you easily may average a lag time of six months each in obtaining your net profit. With the above numbers, you would have suffered lost profits of $9,000 per house and with five deals, losses of $45,000 in total. You no longer have the access to the $45,000, money you may have used in your marketing or for purchasing other property.
Look at this another way. With that lost $45,000, if you had applied those dollars to five more deals and each deal generated profits of $40,000, your gains would have been $200,000. In essence, you did not lose just $45,000 but $200,000.
Essentially, it is crucial to sell your property quickly but never too quickly. Master this balance and you will be successful.
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