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Absorption Rate >> A Must Added to Every CMA

Yesterday I commented on a post I read and mentioned I do a complete market analysis which includes average days on the market, average sales price and average selling price per square foot every two weeks for my listings. In addition, I mentioned I add an "Absorption Rate" to every report. The combination of the two has prompted many sellers to voluntarily reduce their asking price.

Several AR members emailed me and wanted a copy of the absorption rate I use. The one I use is below and I hope it is helpful.

Example of Absorption Rate application:

Your Right Price Analysis on a seller's home supports a Price Point of $539,000.

The sellers inform you that they want to list their property with you for $589,999.

To explain the effect of current market activity and validate the Price Point derived from your RPA, you create an Absorption Rate (AR) Analysis as follows:

First, determine the number of like-kind homes that have sold in the last 12-months at their expected price of $589,999.

8 Properties sold and closed in the last 12 months

Second, divide this number by 12 to determine the number of properties absorbed by the market on a monthly basis.

8 divided by 12 = .67 absorption rate

Third, you search the numbers of like-kind homes that are currently on the market (for sale) at their expected price of $589,999.

17 Properties are currently on the market

Fourth, divide this number by the absorption rate to determine how many months it will take to absorb what is currently for sale at their expected price of $589,999.

17 divided by .67(AR) = 25.37 month supply of homes on the market

This is powerful. When sellers see there is a 25+ month supply of homes they become more realistic about pricing their home correctly. Add this to a bi-weekly CMA report.

Posted by George Tallabas - Idaho Real Estate on 05/20/2007 06:04 PM

Comments (76)

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Originally posted at: Idaho Real Estate >> ID Real Estate Specialist: Absorption Rate >> A Must Added to Every CMA

76 Comments on Absorption Rate >> A Must Added to Every CMA

MAY

2007

I agee with you! The absorption rate is overlooked in CMAs and is a must. Very good useful post.

Wayne - Columbus Ga Real Estate

Thank you Wayne....Have a great week

There you go again, George. That is a great tip, even when you're just giving a listing update on market conditions. STAR!

This is a great thing to add to CMAs. Very informative for the sellers.

We work frequently with condos, and have an excess of them here. We use the absorption rate all the time. It helps show sellers and developers how much inventory is on the market, and then they can judge how aggressive they want to be with their incentives.

Fabulous Tip George. I will make sure I include that from now on. I could have used it several times this last month on a few unrealistic sellers.

Thank you very much Queen Elizabeth!

Jim & Maria...good for you. Have a great week

Herb...good luck to you my friend

George,

It is amazing how the absorption rate can make a seller see the whole picture! You can tell them everything included in the CMA and get to the absorption rate and suddenly, the light goes on!

This is a very important tool. But I don't use the 12 month number as heavily as you do- not with the fluctuations in my market are this year. I do point out the year-view absorption rate, but I balance it by reviewing with them the month by month sales trends, and then discuss the more recent absorption activity- say 6 month or 3 month.

I do track the general market area sales stats and use these to point out the overall trends as well.

But honestly, all these numbers really frazzle the nerves of so many clients LOL

George, great point that we often forget. We have to tailor our ideas to the market conditions, great post.

What a great idea. You are smarter than the average bear.

I did an analysis for a town home today where the comps were from $189,000 to $229,000. Not that it matters, nothing is selling in the community.

Thanks for the info. I expect I might use this in the CMA's I do to see what difference it will make. Thanks again. Mike C

Great post. This will definitely open lots of sellers eyes when trying to price their home. I will use this tool to my advantage. Once again thanks alot.

Great, Great Information. I just put together my new CMA report and I will add this awesome tool. Thanks.

Thank you George. I'm always looking for great ideas to implement into my business.

Thanks so much for this information and math formula! I also think it will be good to give sellers on a monthly basis so they can see what is happening in the market. Sherry

Yes it really works! I've used this for years. It gets really interesting especially when you tell a seller given ght current homes on the market and only 3 pending sale we have an absorption rate of 6 years in your price range!

Want to make it more powerful? Track it on an ongoing basis so you can provide them a chart showing the trend for the absorption rate. I've used such a line graph in my last two presentations and it's helped with pricing in both cases.

I'm coming up on the year mark for tracking absorption rate on a rolling 30-day basis here in the Phoenix area. The full results are on my Dalton's Arizona Homes Blog and I've posted them on Active Rain from time to time as well.

Love the idea. I do something similar but that is really a great way to go about it. Ill have to impliment it into my CMA's from now on!

Absorption rate is very important especially if ones breaks it down by submarket or even subdivision. It provides an extremely clear picture on how that specific market is doing!

Very informative. A much needed "talking point."

Thanks, George

Great advice George. Now I just have to figure out how to explain all of the numbers so people don't get the glazed over/confused look. Going on a listing presentation this week, so I will give it a try.

Paula - Yes it is a very important tool my friend

Sarah - Use it as you wish. I too have used the 3 or 6 month version

Eric - Thank you and good luck to you

Lenn - Thanks for the compliment my friend - I needed that...LOL

Mike or Emmett? - Thanks and good luck

Freddie - You are very welcome and good luck

Christina - You are very welcome and good luck

Julie - You are very welcome

Sherry - You are very welcome....I hope it helps you

Jim - Thank you my friend....good to hear from you

Jonathan - I do convert mine to a chart and it is powerful. I just wanted members to know the basic formula

Liz - Good luck with it

Kaushik - Yes it is very powerful

Gary - You are very welcome

Great job. Thanks for resurrecting it from the cobwebs of my mind. So I don't forget again I put it into an Excel file so all I have to do is punch in the numbers and it can do the figures for me. I have an appointment Tuesday with a client. I will use it then.

Doug - I'm glad it will help you and good luck to you

I use the absorption rate, have been doing so for the past 4 years and it makes a world of difference in explaining things. To the statistically-inclined clients, they're thirsty for this kind of information. For the ones who glaze over, my dialogue is that the absorption rate is simply the length of the line at the grocery store. And if you have one gallon of milk (i.e. priced right and staged properly), you can cut the line. If you look like everyone else or have a huge piled up cart (overpriced), feel free to wait as long as it takes. =)

Thanks for sharing!! Although I am sure that for some clients that's too much information, I am positive that most will appreciate this new tool in my arsenal.

Great post Geaorge. This a great tool to have. I will use it.

Thanks

Leigh - Thanks, it does make a huge difference...I hope you are well

Lillianne - I hope it helps you...take care

Julio - I hope it works well for you

Do you also provide a second Absorption Rate figure for the suggested price point ($539,000)?

Yes, this process does work! I've used it before.

I just haven't figured out how to put it into a chart but that sounds like a great idea.

I just used the absorption rate in a CMA presentation today. It's very sobering and does help homeowners be a little more realistic about their pricing.

Robert - I only provide in on my suggested price point but any variation can be done

Peggy - Charts can be done with Excel. Go to the help menu on Excel and type in Charts. Hopefully this will help you...charts are powerful

Carol - Thank you...so very true

I think this ia an important tool for realtors. It certainly makes it more difficult for the unrealistic seller to argue for an unreasonable price.

I just spoke with a seller that wants to relist for an even higher price. I'll use the absorption rate on them. If they still want to list higher, I'll walk away this time. In the past, they refuse to listen.

Great post, George. I track absorption each month for all the communities I service and provide this to past, present and prospective clients. I am curious about why you use 12 months vs. 6. CRS promotes 6 as have others I have hear from on this. Great idea to focus on the like-kind homes in a CMA - I have just looked at the overall inventory to gain a sense of the overall market as opposed to a specific niche.

Thanks for sharing this.

Jeff

Joan - Thank you and very true

Kay - Good luck to you my friend...Stand your ground!

Jeff - One can use 3 months, 6 months or 12 months out...your choice

Excellent post!

Jack

Thank you Jack...have a great week!

MAY

2007

George, Great post :) keep the good blog :) it will help some agents to start using this one :)

Thank you George, I would not have thought to use this number, but it makes complete sense!

Great post, as usual!

It's this type of tool that really helps sellers to see the true picture. Thanks so much for sharing.

Excellent. Another tool for my already burgeoning bag of tips and tricks. I like to do a lot of statistical analysis but believe it or not, this one had eluded me - until now. Thanks George!

George, I can see where this can be a helpful tool but I do think that one would need to keep a ongoing monthly chart in order to see trends. Maybe some kind of moving average. The numbers are too small and can be skewed easily. Also, sales that happened a year ago aren't really a good picture of what's happening today. Thanks for bringing it to my attention. I'll have to see if I can take advantage of it.

I did this chart for a home that I have been pestering the owner for a price reduction.

3.85 years.

No graph is necessary, no time line is necessary.

very helpful....learn something new everyday

Thanks, this is very helpful. I've started adding the monthly sales statistics report for the zipcode where a CMA property is located, and that also helps to broaden the knowledge base for prospective sellers. If 93 homes were listed last month, and only 21 sold - that's a 3-month inventory before even considering homes already on the market. Add those in, and then calculate the inventory... It really does help make a case for setting their home apart with listing price and terms - and the agent they choose to do the job.

Ray - Thanks and have a great day

Ana - You are very welcome....good luck

Diane - You are welcome

Andrew - Thanks for stopping by and your comments

Tim - Rember KISS...LOL I have used this since 1997 without altering it and it has worked wonders my friend.

Queen Elizabeth - Good for you. I hope it helps

Stu - Good for you!

Margaret - Good for you...keep up the good work

Great tip George, I usually use the 'invisible house' concept when pricing (your house won't be seen if its not one of the lowest priced comparables) but your example shows how much longer they can expect to wait. Here our market is still slightly declining so when you add that into the absorption rate its killer.

Susan - Thank you and good luck using it.

I do this but a bit differently! Price redux are SOOOOOOOOOOOOOOOOOOOO easy when you do CMA's after the fact AND combine it with absorption rate.

My people come to me for price reductions, I don't go to them!

George, what can I say? You are so knowledgeable. Thank you so much

Thank you Renee...it's nice to see you again!

Diane...thank you my friend. I will help you in any way I can

George- Great information, really good. I have bookmarked for future reference. Thank you~

You are welcome Alecia...good luck to you.

Interesting stat.

Bob Mitchell

ValueList

Thanks Bob, have a great day

Great information!! Thank you.

Absolutely Awesome. And you explained it perferctly.

Robin - Thank you and you are very welcome

John - Thanks, I needed that compliment today...LOL!

Great post...THANKS!

Great use of the absorption. Thank you so much for posting this. I could have used this on my first seller....

You are welcome Susie...thanks again for stopping by and sharing your comments.

Christy...you are welcome and good luck to you.

MAY

2007

George,

I added the absorption rates to my marketing letters but because there was little inventory turnover I only update it every 3-6 months so I have more information available. Good idea so the consumer can see the percentage of change.