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The Opportunity Cost Of Delay

By Dan Sowden

If you are selling your home, consider this question: would you be better off with an extra $500 added to your ultimate sale price or having the sale settled 2 weeks earlier?

If you answered that you would prefer the money it is likely that you have just lost money.

While for some people it may work out well to stay in their homes longer, it is important to understand what holding out for more means in dollar terms to most people. 

‘Time is money’ is a cliche that in this instance is likely to be true. In financial jargon, this concept is called ‘opportunity cost’. It refers to the amount you have lost by not having the money for a certain period of time

Ask yourself what you would be doing with the money if you already had it in your hand. For example if you sell for $500,000 you could be earning 7% interest in the bank – that is $675 a week.

Or you could put the money against your mortgage at say 9% and you would be saving yourself $865 a week. 

There are two ways you may be likely to have your settlement delayed. One is when a buyer asks for an extended settlement, the other is when the seller holds out for a high price that may or may not happen.

In the first settlement delay scenario, a buyer making an offer may work with whatever time component you have stipulated in your contract or they may ask for a delay in settlement. The offer itself may seem OK, but as you can see from the above figures, if you could be doing something else with the money, then their long settlement needs to be balanced by a higher offer. 

The second delay scenario is usually caused by the seller holding out for an arbitrary price  that is based not on market research but on ‘we need to get $x in order to buy what we want’. If the market is turning and prices are dropping then such a seller could end up getting a lower price by holding out too long, and this too must be added to the ‘opportunity cost’.

Bridging finance expands the cost of waiting even more as short term bridging finance is one of the most expensive home loan packages.

It is so easy for people to get tunnell vision when it comes to understanding that ‘more’ in price terms is not necessarily ‘better’ in net financial  status. Time and pricing factors need to be taken into account when assessing financial strategy to maximise financial outcomes.

Source: Local Property News.Net

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