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MLS Days on Market isn't the whole story.

By
Real Estate Agent with Keller Williams Realty St. Louis Kirkwood

As a Realtor helping a Seller you do a Comparative Market analysis and present that data to the Seller to help them choose a price which will attract the most buyer interest in the least amount of time. I know you do that, we all do that. But ... when you look at your MLS data are you seeing the whole picture? In my market in St. Louis, the average days on market is 118 days, but is it? When you do a CMA try this, check the history of those listings. Note the date of the last price reduction and note the date that the status changed from Active to Pending (or whatever designation that indicates an accepted offer). The MLS reports days on market as the number of days from the time the listing went Active to the time it's status changed to Sold. If that listing was "do not show until ..." or was overpriced for 30, 60, or 90 days before a price reduction attracted a buyer, all of those days are included in the DOM number in your MLS! In addition, if you have an accepted offer but the Buyer can't close for 30-45 days, add that on too. A properly priced listing that goes under contract in 1 week, can still show 30-60 days on market!

When we looked up the history of dozens of homes, we found that, on average a properly priced home will get an accepted contract within 30 days of being priced right! Furthermore, that number doesn't change much over a wide variety of price ranges or geographic locations. This is wonderful news for your Seller. If the price they choose is the correct one, they'll know very quickly, within 3-4 weeks. If there still isn't an offer, they know not to wait, it won't get better for a very long time.

So if we know a properly priced home is under contract within 30 days, how do we know what price to ask in order to get that outcome? Dig deeper into your MLS data. Our MLS used to report LP/SP ratio using the most recent price as the list price. They have changed recently to using the original price. Both numbers are important. The price at the time of contract shows the price that attracted a ready, willing and able buyer. The original price shows the price that the seller really wanted but didn't get. If your MLS is like ours, look at the price of the listing at the time it went under contract. Compare that to the sale price, I'll bet that the average LP/SP ratio will be around 95%. That tells us that when we find a price that is within 5% of what a buyer will pay for a home, we'll have a contract within 30 days. If that's true, price reductions should be in 5% increments. You'll also note that those listings that took the longest to get a price reduction or reduced price too little have longer days on market than those that were priced strategically in the first place. You will see that some listings still sell for 99% or even 100% of list price. You can't go too low, when your listing looks like a deal, you get offers, if it looks like a GREAT deal you get A Lot of offers! The buyers will actually push up the price for a very desirable home.

Don't chase the market, get ahead of it. If you have ever chased a ball down a hill, you know that the only way you'll ever catch it is to get in front of it. A declining real estate market works the same way. The only way to catch the market is to get ahead of it. If DOM are 30 or less for successful listings, and LP/SP ratio is 95% or better for successful listings then the only guaranteed strategy is to reduce price by 5% every 30 days, you will get an offer!

You can also use this same data when working with a buyer. A buyer may look at a listing and say "well it's been on the market for 180 days, I think I'll offer 70% of list price and see what they say" I try to help the buyer understand that the total days on market doesn't count, it's the days since the last price reduction that count. And no-one is taking 70% of list. We can try for a 5% to 10% discount, but a listing that sells for less than 90% of the asking price at the time of offer is really rare!

Jack Maxwell
Great Spring Real Estate - Houston, TX

Great commentary on pricing.  Pricing ahead of the curve works well in declining markets as well as in rising markets.  As listing agents we have a duty to obtain the highest price possible within the timeframe established by our sellers.  In a rising market you may be able to safely price your home slightly above market so long as you don't go crazy.  In a market that is appreciating 12% a year you can possibly get away with pricing your home 1-2% higher than market if you hope to sell within a month or two.  It may be a while before we see that kind of market again.

Regardless, in any market, sellers have to understand the principle of substitution.  If there are 3 or 4 other homes that offer the same utility, buyers will make an offer on the lowest priced one first. 

Apr 21, 2009 02:57 PM
Judy Boyle
RE/MAX Signature Properties - Northborough, MA
MBA CDPE CRP

I enjoyed reading your post, Phil!  Now we just have to get the Consumers to buy in to this well documented...and proven....strategy.

Apr 22, 2009 01:15 AM
Marc Warshawsky
Keller Williams - Austin, TX

Phil - nicely stated.  I am sure most, if not all of us would agree with your logic.  I certainly do.  The more difficult situation for me arises when comps and actual sales are few and far between and the general market (at least in a particular price point) appears to be suffering simply from a lack of buyers, versus inventory at the right price.  For instance, one high end area that I work in the greater Austin area has multiple homes priced between $800 and $1M ... but virtually no sales in the last 12 months.  Now everyone is simply dropping prices and there seems to be a herd mentality bording on panic.  Is the issue pricing or is it simply a lack of buyers?  Should a house priced at say $899 be reduced by 5%, see no activity, much less offers, reduce again, and again?  Thoughts here?  price is our primary tool, but we certainly seem to be living in extraordinay and unusual and non-standard times.   

Apr 22, 2009 02:03 AM
Phil Hutsler
Keller Williams Realty St. Louis Kirkwood - Florissant, MO

Marc,

I have very little experience with that price point and none at all in Austin, although I LOVE to go to Austin for KW training and hang out on 6th street in the evening!

It seems to me that the principals of real estate don't change much from price point to price point though. For instance, in our market here in St. Louis, the median price of homes has dropped from the mid $180s to the mid $150s. That seems like a lot. But when you plot what is selling you find that 99% of the market activity is under $250K. The chart looks like a camel hump up to about $250K then drops like a rock and remains low and flat for every other price point. Price for condition, and what else can I get fo the same money, are the determiners of Buyer's decisions. If nothing over $800K has sold in 12 months, there weren't any $800K+ buyers in the past year.

Real estate is a bottom up industry. A guy may not need to sell his Chevy to buy a Mercedes, but he almost always needs to sell his $200K to buy his $400K to buy his $800k house and so on. Until the inventory at the entry level gets back into balance, the higher end homes it seems to me can't move.

The script I use with frustrated Sellers in a situation like yours is first determine their motivation. Do they NEED to or REALLY want to sell and can they take what the market will pay? If not, they truly are better off staying out of this market for now. To put it coursely, its a knife fight out there right now and if you want to win you gotta bring a gun. If they're motivated, then it just becomes like fishing, there's no fish here, gotta go deeper, if you still don't find fish, gotta go even deeper. The only way I can guarantee a Seller how much we can get for their house is to buy it myself, and I only buy wholesale.

Good luck!

Apr 22, 2009 07:30 AM
Jamie Stimpson
Keller Williams West Monmouth - Freehold, NJ

Here in NJ I follow Jeff Otteau. He gives us charts at his seminars to help show clients what the projections are for the housing market. It really helps as the client knows it comes from someone other than the "Realtor'.

May 12, 2009 07:22 AM
Ryan Shaughnessy
PREA Signature Realty - www.preasignaturerealty.com - Saint Louis, MO
Broker/Attorney - Your Lafayette Square Real Estate Partner

Phil - I like the commentary and explanation provided by this post.  It is a misperception that homes aren't selling and languishing on the market.  What is true is that the general public is searching for value, that fairly price homes sell quickly, and that 95% sales price to list price is still the rule in most areas.  DOM is only part of the story.

Jul 14, 2009 02:59 PM