It is an inviolate tenet of real estate. When selling a property, one must determine whether it is more important to sell a property quickly and possibly accept less money, or to hold on for a longer time to get a higher price.
And one can statistically estimate for a seller what those time frames might be for different pricing points. By analyzing the overall days on the market against final sales prices one can generate a representative are market survey.
This method of analysis can also be used by potential buyers that are holding out in an effort to purchase the best property at the LOWEST price?
The technical term is how long it takes to sell a property is known as the “absorption rate,” and it is probably the best indicator of how long a buyer might wish to hold out when considering a purchase.
Very simply stated, the absorption rate is the number of statistical weeks that it takes to sell a property in a particular price range. If the absorption rate is low, holding out probably won’t help much.
However, a very high rate can be an indicator to take a bit more time finding just the right house or to offer less money for a “settle-for” property. It is a true supply and demand indicator.
So whether one is selling or buying real estate, market statistics can be very helpful tool for making a correct business decision.
Because good statistics can save you time OR money!
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Good point. It takes the help of a local Realtor to get that information.
Or, if the seller is pricing for "what I want out of . . . ", they may be pricing for a market 3 years in the future.
Or, if a seller is pricing 10% above market, the agent will know that the house will probably not be shown.
Or, if a seller is pricing 15% above market, the agent will know that, even if it's shown, it will not compare with other homes similarly priced.
Help!! Someone stop me.
Thanks for explaining the term so thoroughly. Its a great idea but in my area, the sought-after homes don't stay on the market for weeks, usually just days.
Mel...
I didn't want to overstate the obvious! Thanks my friend, and have a great day!
Lenn...
It's amazing when you present the numbers and then you hear those famous words:
"Yes, buy MY house is different because...."
Richard,
Absorption rate is an excellent indicator, especially in a specific price range.
Rich
Sellers really need to work with their agent to price their property accurately, get it sold, and move on with their lives. Playing games with pricing doesn't help anyone these days.
It is funny how when you are priced right on, the months supply of inventory for your particular home tend to go down (no matter what the stats say for that price range.) Price is so important. So is hiring a good Realtor that can figure out the best price for the scenario.
Thanks for the clear explanation.
Good tips for sellers and agents.Thanks for the post.
Thanks. We all know what you have said is true, but it always helps to be reminded. You live and work in a wonderful area. How has the downturn effected the activity and growth in Coweta and Fayette counties. I'm a transplant to the beach in NC from Va. Highlands in Atlanta.
I have an auto-calculation excel spreadsheet from Pat Zaby that gives a client a 3,6, and 12 month indicator of absorption rate. Like any program the rule is garbage in-garbage out. What you put in that spreadsheet should never be haphazard. I have seen too many properties lately that are price from the bottom up. You start with a too high mortgage, add commission and closing cost, calculate a profit then viola, you have a price. That price stays on the market for 180 days and skews ther absorption rate. it is up to us, and this is still somewhat subjective, to use realistically priced property to fill the program. Once you have that, then you can more effectively give your client the advice they need. FYI, I typically do two spreadsheets. One will include the badly priced property so I can show the effects of bad and overpriced property value.
You are right but I have buyers and sellers who are really struggling with the reality of the market. Sellers who cannot let go of the past prices and buyers who think that there is always another deal just around the corner. These are challenging times, once again!
It is an inviolate tenet of real estate that if a price is too high it doesn't matter how long you are on the market, it still won't sell.
It's another basic tenet of real estate that at least half of all the potential buyers for any given house will consider it only in the first few days it's on the market. That's because people who started looking six months ago and six hours ago will look at it then. After that, only those people coming new to the market will consider it.....unless the seller drops the price significantly below what it would have sold for if it had been priced right to begin with.
Going beyond the relevant absorption period without a price reduction makes little sense.
Richard,
All good points for buyers and sellers....and Carol above is spot on!
Richard,
All good points for buyers and sellers....and Carol above is spot on!
We will still face many challenges this year with both buyers and sellers. All we can do is present the facts effectively enough that the right price will be chosen by sellers and buyers will act on a home if they really want to buy it.
Richard....absorption rate is a very important factor when working with a builder on how to price a new subdivision......time is money to a builder....those carrying costs addup quickly.
I've found that after buyers see some homes they like and then want to go back, but they are sold, something clicks and they quickly get to the top of their game in deciding what value is for every house they see. There are those who continue to make low offers on homes they know will sell, thinking that all buyers are like them. The shorter that phase lasts the better I like it. But I still like buyers to see enough homes to learn for themselves how to evaluate new properties.
Statiustics are nice by my spread sheet capabilities are lame and I'm never sure what other people have put into theirs.
I see time after time homes on the market for over a year and finally they sell at a much lower price. Wouldn't it have been wiser to price it right the first time and move on?
Time vs. Money...Always good to know or a good point to make to help clear the smoke. Nothing wrong with a "reality-based" appraisal up-front, either...for "reality's" sake.
All the best!
Brian Morgenweck, Broker/Owner
But my house is different because... I'm going to have that conversation today. Ughhhhh. The seller's home is worth more, but it's not worth almost double what the REO down the street (same square footage) is.
I also think that pricing should be strategic. If a seller wants to try a higher price than that which will sell his home within 30 days (which is my benchmark for a well priced property in my market today), I make it clear that if they don't have activity or interest within the first two weeks, they would need to make a drastic reduction to create new interest. There is no point in lowering the price little by little until someone, someday makes an offer. It just helps the other homes gauge their price ahead of yours to get the next buyer. I'm a little blunt about it: you are either selling it seriously or not at all. In this market you have to be "the next one to go" in the line of sellers or you're wasting time and money.
For buyers, they could be spinning their wheels "low-balling" well priced properties that they were attracted to in the first place because those homes were priced well to begin with.
Richard, The time value of money is frequently discussed with my sellers. It doesn't always occur to them that an over priced property can be costing them $15,000 to $18,000 over a 6 month period, and that has to be taken into account when thinking of selling.
Great insight. Time vs money is a hard concept for someone. Not all can put a value of their time hence they can't grasp the concept. Buying and selling is an art, yes timing does come into play. Getting on the same page with your client is the most valuable thing so you can help them through the process.
Richard, this question is one of the first I ask my sellers and depending on how aware they are of local conditions here in the Greater Asheville area, and how realistic they are and most especially how long they've had their home, they are more likely to appreciate the scenario. However - in good markets or not so good - some folks remain fixed and unwilling to "face facts". It's a much easier process when sellers believe you KNOW what you're saying vs them thinking "you just want to get it sold."
Everyone thinks thir home is worth more than all the others in the neighborhood. It's a very emotional thing to sell the home they've raised their children in, etc.
But once the absortion rate is explained to them, they typically get a better understanding of why proper pricing is essential.
I had completely forgotten about how powerful a tool the phrase "absorption rate" can be used in helping a buyer make the right decisions when purchasing a home and how it can visually illustrate to a seller the same information. Well written article!
This is all true, and more volatile than ever in our market here in central Texas.
This is a great way to look at the buying side. Thank you. I enjoyed reading your post.
Lots of great comments today on this really tood post Richard. very will put together, I love the way you do your post.
Patricia/ Seacoat NH
I've bookmarked this post for future reference and to re-blog.
Thank you!
Having just taken a major beating on the home selling front, I totally get the whole "time value of money" thing. And one thing I stress to sellers is that selling now at a lower price than they wanted could just end up saving them money in terms of carrying costs (mortgage, lawn service, HOMEOWNERS INSURANCE which is PROHIBITIVELY expensive when a house is vacant)....and then there's the costs that you don't anticipate, like a tree falling down, or needing to take one down...groundhog removal (not kidding), security system, etc, PLUS the rent & monthly bills you're accumulating where you're now living while you sell your place.
So yeah.
Amen.
Pricing is so tough these days - and the market is still changing. Great post. Thanks!
kp
If only both buyers and sellers got that. We have many buyers out there who are still unwilling to buy because the market might drop more.
You always have to assess the situation my friend. I give potential sellers a price range that it may sell in and a time range that it may sell in and explain the lower you price it in the range the faster it can sell.
Seems simple right, then why is it so hard to get accross to some people?
Richard,
Right on both counts. Having said that, this current market is not quite as easy to predict with all the numbers in front of you, it has lost some validity with the tremendous pressure of comparing foreclosures and short sales.
All the best, Michelle
Thanks for the great information!
Richard, Barbara is right about the value of absorption rate to a builder. Thanks for the post.
Richard - This is a fine post. Price is a monumental point in selling the house. Price it to sell and it should. Price it to get what you want and just keep paying the mortgage payments. Buters in this market want a deal.
Richard: Knowing the stats in our business is key to success for buyers and sellers alike. And absoprtion rates are a must have before sitting in front of any seller.
I believe pricing, as I tell my sellers, is one of the most challenging things we Realtors have to do. It is critically important to obtain their goals.
#37 Michelle speaks well to the current situation. I prefer to think of the current market as an anomaly rather than the new norm. Unfortuantely, more foreclosures are coming, low appraisals - this all has an impact.
I work to show the sellers where their home fits in the market. I try to price the home correctly for a quick sale from day one. If you play with the price it can make a buyer wonder what is wrong with the property.
Richard, I agree - absorption rate statistics are great tools for helping sellers to see what they're up against. Unfortunately, I run into too many sellers who think their house is better than everyone else's.
Richard, Agreed and a very good point to discuss at a listing appointment. I like to emphasize the coorelation between time on the market and the selling price. Better to be realistic from the get go.
Usually Richard if the property does not sell in the first 6 to 8 weeks, when it does sell it sells for less.
In this case knowledge of the market, utilized properly, is power. No doubt any good Realtor will understand this and use it with each client.
Good explanation. However, when you do find that house you want and it's priced right, jump on it before someone else will. Don't play games.
Pricing is even more difficult now around the DC area because the market has changed and prices are starting to move up - small wonder when inventory is 1/2 what it was a year ago - and yes - if you find that house you want, and it is priced right, the buyer better jump on it because it will be gone!
I agree with Athina,,there has to be a strategic plan.
Richard:
Home buyers need to take all factors into consideration. What is it costing you in time to wait for the price to come down and will it be worth it? My buyers are finding that there are homes that have been on the market for close to a year but the well-priced ones are going quickly.
Good morning Richard,
Or as a speaker I heard recently talk about her "tornado theory" when talking with her sellers when they start insisting their home has more this and that and is different and better than anyone elses the likely hood is not realistic! She uses the comparison of a tornado wiping out a street of homes much like the economy has done in wiping out home values. The value of a home is only as good as recent sold properties. I do like the absorption rate and is a good measuring stick for both sellers and buyers. Thanks for a great post.
Time V. Money is something Robert Kiyosaki uses in his books to explain business ventures, it's great to see you use it in the real estate world. Thanks for this blog.
Richard, I love using absorbtion rates when talking to sellers. I don't think I have ever used it for buyers though. It sounds like it would be a good tool for them as well.