Understanding transaction costs

The question is often asked, how long to hold should I hold on to my property. It’s impossible to answer this question without first understanding the concept of transaction costs.  Transaction costs are part of every economic exchange, if you’re selling some stocks that you own, when you sell them, the brokerage (on-line, in person it doesn't matter) deducts their fees from what you sell.

So, unless the stock price increases more than what you paid, including the transaction cost value, you would not make money on the sale of your stock (we will ignore the tax consequences at this point).

While there are more components to real estate transaction cost, the concept is still the same. Unless your gain is more than the value of the transaction costs, you will not make any money.

When prices were steadily rising every quarter, the appreciation would help offset the transaction costs, making it possible to profitably sell. In our current environment of flat prices, this obviously isn’t the case.

The only way to predictably account and mitigate transaction costs is to create value when you buy.

We’ve never seen a real estate transaction where the transaction costs came in less than the estimate. Seems like they are always more. The temptation is to ignore them as a “cost of doing business” but this is precisely what you don’t want to do. In fact, on any project you work on, you should include a contingency on these items also.

The other items that should figure into any analysis of how long to hold your property are the tax consequences of selling and rate of appreciation in the market area.

More about this important topic to come.

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