Here in Michigan we are seeing Ann Arbor homes stay on the market for longer periods of time. I remember the good ole days when a month was about average, and if it was over that we knew it was over priced. Here is a formula that I have been using for several years to determine how long it should take a property to sell.
IT is NOT hard...........I am not a math person, and I have found this easy to use. It helps when lising homes to be able to tell a seller a resonable time to get the home sold.
1. Days on Market (DOM). Average days on market is critical to your seller client for several reasons: it's important in setting realistic expectations about the time needed to sell a home; it will help you evaluate any offers that come in and make an educated decision about whether it's advisable for the client to wait for another offer or take what's on the table; and, if you know the DOM for your market (or, better, yet, for the client's neighborhood), you'll be able to guide him or her through the process like a professional - which is exactly what you are!
There's a problem with DOM statistics, however. Most MLS databases have a much-manipulated DOM number which is invariably skewed low. So how can you know what the real number is? Is it possible to determine the actual DOM for your market even if you're not a rocket scientist? Absolutely! Just use the absorption rate to calculate the true DOM for your area. Let me explain.
Here's how you get the real DOM. Find out how many homes sold in your market last year and how many are currently on the market. For example, if 10,000 homes sold last year, and there are currently 5000 on the market, what those numbers indicate is that the inventory turned twice last year (10,000/5000 = 2.0). Now, there are twelve months in a year, and 12/2.0 = 6.0, which is the absorption rate, meaning that the average time actually on market is 6.0 months. So to convert the absorption rate to days on market, you simply multiply this last number by 30 (6.0 x 30 = 180). And if you figure DOM this way, you'll eliminate all manipulation in your market by builders and agents who re-list stigmatized homes, which of course are those homes that have picked up a negative image due to their excessive time on market.
2. DOM Standard Deviation (STDEV). What?! Before you dismiss this concept (and me) as crazy, though, let me point out that it will be an easy statistic to calculate and a powerful advantage for you once you know it.
So how do you calculate it? The easiest way to calculate DOM STDEV is by using a spreadsheet such as Microsoft Excel. On your computer, pull up all the closed residential properties for your community from the last year. You'll want to pull them up in your MLS, using a one-liner format. Then copy and paste that data onto a spreadsheet.
Next you'll want to delete all but three of the columns: list price, sale price, and DOM. At the bottom of each of these columns, calculate the average and the standard deviation. If you're using Excel, the function will look like this: =average(b1:b20000) and =stdev(b1:b20000). Both of these examples assume that you're calculating the average and the standard deviation for column B and that there are numbers in the rows from 1 through 20,000.
Okay, you have the numbers, so let's assume that the standard deviation of the DOM is 53 days. Let's further assume your calculation of the absorption method indicates that the true DOM is 186 days. Now comes the fun part! Add one standard deviation (53 days) to your average of 186, and you have 239 days. Add another standard deviation, and you have 292 days. Here's what that means for your listing client:
You have a 50% chance of selling his home in the average DOM. If you add one standard deviation, you take the probabilities to 84%, and if you add another standard deviation, it's 93%. Another standard deviation would elevate the probabilities to 96%, then to 98%, and so on. Now let's say that a competing real estate professional tries to convince your client that his home can sell in a matter of days and that he should list for ninety days.
You can tell your client with complete certainty that the statistical probability of selling his home in a few days is nil, and that in reality he should expect the process to take the average amount of time plus at least one standard deviation. Using the illustration above, you should inform him that he has a 93% probability of selling his home in 292 days, using the typical approach. If that's how long, statistically, it'll take to sell his house, then listing it for ninety days will clearly be a waste of everyone's time.
Now, your immediate reaction may be that your clients will never go for this system - yet they will! In all but one of my listings I received one-year terms, and in the remaining listing I got a six-month term, knowing that I would sell the house even sooner. When you tell a client, with authority, how long it will take to sell his home, he'll inevitably respect your honesty and the fact that you know exactly what it takes to sell a home in your market. You're not guessing, like most agents, and in fact you're speaking with the voice of authority. Knowing your market better than any other agent will impress your clients while also giving your own confidence level a boost.
3. Average Markdown (List to Sale Ratio). Now let's go back to the statistics that we worked on earlier. Remember my asking you to calculate the average for list price and sale price? Here's the reason: you need to be able to advise your client as to the "typical" discount in your market. Let's assume that the average listing price is $175,000, and the average sale price is $169,000. Now, subtract the average sale price from the average listing price, and then divide the difference by the average listing price.
$175,000 - $169,000 = $6000
$6000/$175,000 = 0.034, or 3.4% markdown
In other words, your client should understand that it's normal in your market to expect a markdown (or discount) of 3.4% from the listing price. Setting expectations shows him that you understand the market and that you'll help prepare him for the offers that will be coming in. You'll also have an advantage in negotiating with other agents when you know that the average markdown in a certain neighborhood is only 0.5%, while they're offering 4% below the asking price! You can tell an agent that it's unreasonable to expect your client to accept such a figure and that he should encourage his client to make a more reasonable offer. I can't tell you how many times this simple formula has made thousands of dollars for my clients because I knew the market statistics, and the other agents didn't.
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