More Tips on Pricing Property

With all the talk of housing markets across the country still in decline and a quiet stalemate here in Manhattan, many sellers and their agents are confused as to how they should price their property for an efficient sale.  Lew Sichelman wrote Figuring out the math when it’s time to move on for the LA Times on Sunday and addresses absorption-rate pricing for the real estate industry.

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.

Monroe suggests the following to determine absorption-rate price for your home:

  1. First, realize that only a certain number of houses will sell in any market, strong or not, in any given time period.
  2. Determine the odds that your house will sell. Hire an agent familiar with MLS or local listings data to determine:
      • How many properties were on the market in the past 6 months?
      • How many sales closed?
      • How many new listings entered? (Ex. 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)
  3. 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
  4. Once you determine your criteria, you can figure out the absorption rate by completing a 12 month, 6 month, and three month analysis. (EX. 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)
  5. Perform the same analysis doing a six-month search and then a three-month search (EX. 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)
  6. Determine your "walkaway" price which is the amount of money you’ll have in your pocket after closing. 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 of the sold homes.
  7. 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.

If this isn’t terribly clear, here’s my two cents:

  • Select your price based the amount of time you have to sell focusing less on current supply of inventory (in terms of prices) and more on what has actually sold or gone to contract.
  • The 12 month, 6 month, and 3 month analysis can be useful tools in determining price if you actually pay attention to the data but keep in mind the criteria that you used to gather that data.
  • And LASTLY but MOST IMPORTANTLY, hire an agent whom you trust with the interpretation of the data and make them explain how they came up with a price.

Manhattan definitely isn’t Fayetteville but I think Mr. Monroe’s tips could indeed be useful in any market.

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