Leave Vacant or Rent It? The Optimal Decision for Home Seller

I was requested by my lecturer to do an executive summary writing on any self chosen research report for my 20% coursemark marks and 20% presentation marks. Bet what research I chose? It was Leave Vacant or Rent: The Optimal Decision for Absentee Home Sellers, a research done by Terrence M. Clauretie and Marvin L. Wolverton from USA. It is basically about, if an owner wish to sell their house, which decision will profit them most; rent it or leave it vacant?The decision is based on the time on market (TOM) that is from the time the property put for sell untill the house is completely sold and also in terms of the final purchase price. The reserach was done in US, by collecting data of 55,202 houses sold in the Las Vegas from January 2001 until March 2004. The conclusion of the research finding is that in US, buyers prefer to buy a house with owner-occupied, compared to vacant or tenant-occupied. Then, house with tenant occupied takes longer time to sell (more value on TOM) and lower purchase price compared to vacant house. in other word, if you want to sell your house, it is better for you to leave it vacant compared to rent it out cause it will take longer time to sell and the price will drop.

Here is the full executive summary for the reserach:

All real estate owners who put their residential property for sale are in the aim of gaining the most wealth from the transaction. In doing so, they face dilemmas; should they move out and rent it, keep it vacant or keep stay in it until the house is already sold in order to enjoy the most of financial profits. Most owners tend to move out and rent it to get passive income while it is listed for sell but this is said to extend the time of market (TOM) and decrease the selling price. Previous research found that houses with vacant possession have to be sold at lower price with longer TOM compared to owner-occupied. Selling a house with tenant-occupancy also gives the same unhappy situation to the seller. Therefore, this study will find out to what extend the possession status of the residential property in the market affects the final selling price and TOM.

The study has been conducted by generating a simple model of the buyer’s decision to rent a property that will reflect the property owner’s financial position. It is then followed by collecting data of 55,202 houses sold in the Las Vegas from January 2001 until March 2004. Variables of data captured are sale price, time on market (days), improved living area (square feet), home age (years), lot size (square feet), number of bedrooms, number of bathrooms, number of garage stalls, existence of a pool and number of fireplaces. The data captured also covers occupancy status variables that are owner-occupied (33,013 sales), tenant-occupied (1,866 sales) and vacant (20,333 sales). Then, the data is scientifically tested and analysed by using the rental decision model generated.

The major finding of the study is it proves that residential property buyers are in favour of buying owner-occupied houses compared to tenant-occupied or vacant houses. In total, considering the mean price $195,418, tenant-occupied house owners lost about $34,980 when the quantity of their houses sold is 17.9% less than owner-occupied ones. On the other hand, owners of vacant houses lost approximately $6,645 when their houses are sold for 3.4% less than owner-occupied ones too. In terms of TOM, tenant-occupied houses are harder to sell whereby it takes around 66 extra days or 147% more in TOM value compared to owner-occupied units. Vacant houses selling transactions are of better situation where it only requires extra nine days equivalent to 20% more in TOM value. The study also identifies two other variables that affects the TOM but are not captured in the data collection. It might be the sellers’ passionate plus the unknown and overpriced or special criteria of the properties.

In concluding the research, renting a residential property to be sold is a not a wiser decision compared to leave it vacant since it results a bigger difference in the number of days on the market that is 66 days versus nine days. The final selling price difference between the two options is also high that is with the net loss of $28,335. Handling a property will incur cost of approximately 1% of property value per month, equivalent to $64. Even though renting the property will generate passive income to the owners of average $45 per day, after adopting all variables’ value into the model generated earlier, it eventually causing them to bear additional 14% cost from the mean property price that is equivalent to $27,224 per unit. This might be as a consequence of tenants who do not give enough cooperation in helping to market the house or because of the physical condition of the property under their possession.

This study highlights a couple of recommendations that are:
• More research should be conducted in focusing the tenants’ behaviour and its impact on the property market;
• Efforts should be promoted in conducting research on real estate agents’ troubles in renting a property and its impact on TOM and selling price.

However, there are limitations in this analysis study. The data collection is excluding houses with selling price less than $100,000 or more than $600,000 in order to control the variable of luxury to the study. House with land greater than one acre is also exempted from to prevent the land access factor. This limitations reduce the research findings’ applicability for all real estate properties especially houses with these two criteria.

This is a US based research. How far the finding is applicable to Malaysian real estate scenario is another issue. I wish to read a study report on the same scenario in Malaysia.. so that we all know which one is a wiser decision, rent it or leave it vacant.