By Larry Hotz, Senior Editor
“The only way to properly price home in today’s market is by using Absorption Rate Pricing.”
That’s what Larry Kendall told us at the Kentwood Companies’ Semi-Annual Meeting held at the University of Denver Cable Center yesterday. Larry has been training Realtors in Colorado and across the nation for as long as I can remember. But this message is one of the best I’ve heard in today’s changing real estate market. Instead of relying on the historical data of an appraisal or a Competitive Market Analysis, it utilizes the current homes for sale in a particular neighborhood to forecast the most likely sales price.
Larry was one of the original founders of The Group in Fort Collins and has gone on to become something of a national guru. He’s generously given of his time not only to train the brokers in his own firm but also Realtors in Fort Collins and around the state of Colorado and the nation. Unlike so many national speakers, he still has his finger on the pulse of the local market. He works with the brokers in his firm on a nearly daily basis confronting problems in today’s real estate market.
His approach is actually one that I’ve been utilizing with my clients for years. It involves first analyzing the active listings in a particular market. That is usually just a neighborhood. The number of listings in that market is then divided by the number of sales per month. The result is the absorption of the market or how long it would take for all of the existing inventory to sell if no other listings came on the market.
Of course, using this approach can be bad news for some sellers. If there is more supply of homes for sale in the neighborhood than there is demand from buyers, the inevitable conclusion is that the home must be priced at the bottom end of the current supply.
But sometimes there’s good news for sellers. Larry gave the example of one broker who couldn’t justify a price higher than $290,000 for a perspective listing. There were no recent sales higher than $290,000 in the area. “I just asked her how many homes were currently for sale in that neighborhood.”, Larry explained. “She told that there no homes for sale. ‘Go ahead and price it at $300,000’, I told her. It sold for $305,000 with multiple offers.”
He presented the pond as an analogy of home values. The inflow to the pond is the new listings to come onto the market. The outflow from the pond is the sales of those new listings as they occur. But, the pound itself settles into three layers. The top layer is the one that’s most likely to move into the outflow of sales. Those are the listings that are perceived by buyers as being the best values and our receiving showings and offers.
The middle layer represents those listings which are receiving showings but no offers. They are less likely to sell as quickly.
And the bottom layer is called the “stagnant mass”. Those are the homes receiving very few showings and very little interest.
Larry presented a mathematical formula for analyzing how a particular listing is priced and where it fits into the pond. Most impressively, his analysis can be used even predict the amount of time it will take for listing to sell a particular price. He presented a detailed worksheet that can be used to present this information to a seller.
This can be particularly valuable information in a market where only one in four listings that goes onto the market will actually sell at all. We’ve known for a long time that the factors influencing the potential sale of a home are conditioned, marketing and price. Location is not a variable because a home cannot be moved. It’s fixed in a certain location. But ultimately price compensates for or adds value to the home based on location.
If you’d be interested in learning more about Absorption Rate Pricing or obtaining my form for calculating the absorption rate, please call me or use the form below. I’ll be happy to share this information with you anytime.