Figuring out the math when it’s time to move on
WASHINGTON -- In a hot housing market, it doesn’t seem to matter what price sellers put on their homes. Whatever you ask, someone will offer more.
But in a slow market, pricing is key. Price the place too high and it will languish, soon taking on the aura of a white elephant.
Yet the key isn’t so much your asking price as it is how fast you want to sell, said Zan Monroe, a senior instructor for the Council of Residential Specialists based in Fayetteville, N.C., and proponent of “absorption-rate pricing.” If you’ve got time on your hands and are in no real hurry to move, then, yes, you can offer your place at the high end of the market. But if you want out fast, you have to be much more realistic. You need to find the price point at which your house will sell as quickly as you need it to.
Absorption-rate pricing isn’t new. Practically every type of business uses the technique. But it is new to real estate. “Our industry is just now catching on,” said Monroe, who teaches agents how to help clients determine an asking price commensurate with their need to move on.
First, realize that only a certain number of houses will sell in any market, strong or not, in any given time period.
To determine the odds that your house will sell, you’ll need help from an agent whose firm participates in your local multiple-listing service. You’ll need to know how many houses were on the market in the last six months, how many sales closed in that period and how many new listings were entered into the MLS during the same time frame.
Six months is the perfect time search, Monroe said. Any longer presents an inaccurate picture because the same house may drop off the market and come back as another listing. It appears as two different properties, when in fact it is the same.
Let’s say there were 53 closings of the 128 listings that entered the MLS in the last six months. That means 41% of the houses that entered the market sold. So the odds of your place selling in the 180 days after you put it on the market are just over 40% -- regardless of how low the price. Most people find this exercise rather sobering. “I’ve never met anyone who considered the fact that their house will not sell,” said Monroe, the real-estate educator. “But in some places right now, there’s only a slim chance, if any.”
Remember, you can cast as wide a net as you want. Or you can drill down to, say, your own neighborhood, a certain price range, school district or even house style. The more detailed the search, the more accurate the results, Monroe said.
Once you determine your criteria, you can figure out the absorption rate. And you’ll also want to ascertain a trend line, so you’ll need to go from a 12-month analysis to a six-month review and then to a three-month survey. The longer time period gives you the most data to work with and, therefore, a good average, while the shorter time frames tend to show the most up-to-date sales picture. This, Monroe explained, “tells you exactly what the market is doing.”
Say, for example, that 1,200 sales fitting your search criteria closed in the last year. That’s an average of 100 per month. Divide the number of active listings -- say, 800 -- by the average closed per month, and you’ll now know that there’s an eight-month supply of houses on the market.
According to Monroe, a six-month supply is a balanced market. Less than that is “not enough houses to fill demand,” he said. “More means there are not enough buyers.”
Next, perform the same analysis doing a six-month search and then a three-month search, and you can see exactly what’s going on. If the months’ supply of houses is going down, the rate of sales is speeding up. But if it is going up, sales are slowing.
If you have given yourself a year to sell your place, then an eight-month supply shouldn’t bother you. But in Monroe’s 27 years in the real-estate business, he has never heard of any seller who has had that long.
“Usually,” he said, “sellers have a time frame of 90 days. And if they have to be in that new house or new job in three months, then they really need to find a buyer in 60 days, not 90.”
Now it’s time to decide where to price your place in relation to the market. Here, Monroe suggested asking yourself what your “walkaway” price would be. This is the amount of money you’ll have in your pocket after settlement. Look at the prices of the homes in your search criteria that have been sold and that are still on the market to see if your “walkaway” price is in the ballpark.
“For most people, this is a reality check,” Monroe said.
Based on the absorption rate in your search, you can see how long it will take to sell your place. If it will take more time than you have, you’ll have to set a lower price. That, in theory, should attract more potential buyers and allow you to put up a “sold” sign sooner rather than later.
“Every house has a selling price,” Monroe said. “But sellers need to be more realistic. There’s a one-day price, a 30-day price, a 60-day price and so on.”
Lew Sichelman can be reached at firstname.lastname@example.org.
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