Priority Pricing: Are You Positioned to Sell?

 Pamela Ermen  |    February 05, 2014

I started in the real estate business in 1978 and still remember the first words of wisdom that crossed my path, which were prefaced with "don’t ever forget." The words of wisdom went: "Location, location, location! It influences a home’s market value and salability like nothing else." This may be a hard statement to argue with, but as the years have passed, I’ve learned one very important lesson: an overpriced listing in a great location is still an overpriced listing. "Proper" pricing is the key to becoming a successful listing agent and delivering the results your sellers deserve, while "priority" pricing involves comprehensive pricing efforts to accomplish one of two goals: either position your listing to sell within an appropriate market time, or give you the confidence to walk away when your pricing research and the seller’s expectations aren’t even close! Priority pricing is accomplished by applying three important steps.

No. 1: Analyze the supply and demand patterns affecting your property

This process will help you determine both the current and future status of your local market by studying two of the most fundamental market elements:

  • Supply: represented by the total number of listings taken during a projected period of time. 
  • Demand: represented by the total number of closed sales over that same period. 

By using a formula that divides the total closed sales by the total listings taken, you can calculate what’s known as an “absorption ratio” — not to be confused with absorption rates! 

A ratio that is in excess of 50 percent and trending up is usually indicative of a market that's improving, even favoring the seller as the ratio moves closer to 60 percent. Tracking this statistic every 30 days is the key to successfully interpreting the direction of your market. Who said there’s no crystal ball? Try it in your local market and see the results! 

In addition, paying attention to whether listings are increasing and sales are decreasing, or vice versa, is another litmus test of whether your market is trending toward a buyer’s or seller’s market or leaving it — something you should know when counseling your sellers. 

No. 2: Calculate the absorption rate

While absorption rates are actually meant to reflect the number of months necessary to clear the current inventory, I like to use the information in a more useful manner. An absorption rate study allows you to “drill down” and analyze more specific criteria and competition that will affect the sale of your property. I compare the absorption rate process to a horse race. How many competitive properties are at the starting gate the day you enter the market? How many will actually cross the finish line and qualify as a winner, selling in the next 30 days?

To calculate an absorption rate study, you first must “look back” by calculating the number of closed sales that occurred over a specific period of time. Those sales should have been limited to properties that were similar in size, location and amenities to your subject property. The most effective use of this tool is to study the average number of closed sales over a previous three, six and 12-month study period. This will provide an indication of whether market activity was slowing or improving prior to listing your property. 

Next, you must “look forward” and assess the number of properties competing with your property as you enter the race. Based on your “look back” research, you can project that a specific number of properties will sell over the next 30 days. If, for example, that number is five, will your property take priority position? Does it qualify as one of the “top” five homes currently on the market? Is it “priced right and parade-ready”?

Keep in mind, there could be 50 homes that have similar prices, terms and conditions. Your job is to determine the five most competitively positioned properties out of the 50 and help your seller determine just how competitive they are willing to be! This part of the absorption process reminds me of the joke about two friends who run into a bear in the woods. One man looks at the other and yells, “Hurry! We have to outrun the bear!” But the other replies, “Sorry buddy, but I don’t have to out run the bear — I just have to outrun you!” Just remember, as long as you qualify as one of the top five, you’ll outrun the rest of the competition. It doesn’t matter how many competitive homes are in the race! 

Here’s an effective dialogue for the seller who wants to list their property, but isn’t willing to compete with their greatest competition:

“John, I’ve shown you our greatest competition, and I believe your property can be one of the five homes that sells instead of sits over the next 30 days. I want to make sure we are on the same page; you are not willing to: (list the home in this price range/perform the repairs or improvements/offer the following concessions/whatever you determine is required to compete), and therefore, have chosen not to compete for the next 30 days, correct?”

Keep in mind, no seller wants to be “off” the market on purpose. 

No. 3: Perform a "right price analysis"

Preparing a comparative or competitive market analysis, also known as “CMA,” has been at the forefront of basic training programs for decades. Perhaps a “Right Price Analysis” is the better term! Most “CMA” processes include the analysis of active, pending, sold or closed and expired properties that are similar in nature to your property. 

While it is important to understand all factors influencing value, we must also remember that the appraiser — the one who ultimately defines the value of your property — is concerned with only one category of property: closed sales. Explaining this process to your seller can help you control the impact of listed property prices that don’t reflect true market value. If you’ve spent any time in real estate, you’ve dealt with the seller who is determined to price their home according to “active” property values instead of the sold and closed properties that matter the most. 

To determine the right price, consider making marketing adjustments to sold properties. In doing so, you’ll find that the no. 1 adjustment usually taken by an appraiser is in the category of square footage. If your property has 2,000 square feet and a comparable sold property consisted of 1,800 square feet, what type of price adjustment will you make to give your home credit for 200 extra square feet? In my experience, most agents dramatically over-estimate the average cost per square foot, which leads to overpricing the listing. 

Here’s a great method of determining the value of a square foot in your particular area. Ask any of your buyers if they would share a copy of their appraisal, specifically the adjustment page. As you review them, you should find a predictable cost per square foot range, usually varying slightly from appraisal to appraisal based on different price ranges. You may be surprised how much lower that figure is than what you thought it would be. Make it a point to keep a file on as many actual appraisals as possible. The more you get, the better! Keep in mind, if your subject property is better than a comparable sold property, you will add value. If the comparable property is better than your subject property, you subtract value. Adjustments should be made to each comparable property’s sales price and an appropriate range established for your property. 

So, is your property positioned to sell? Will it take priority position, being one of the first out of the gate, prepared to compete, and headed for the finish line? Or, is it destined to take a few laps around the track? By applying these three steps and compiling all your research, you will be prepared to tell your seller what they must do to see their yard sign go from “for sale” to “sold”!

Virginia native Pamela Ermen is a national speaker/trainer, coach and corporate consultant, and serves as the supervising broker of one of Virginia's fastest-growing real estate companies. She has been a senior instructor with the REALTOR® Institute for 15 years and has taught numerous state GRI and CRS courses. As President of Real Estate Guidance Inc., Pam travels throughout the U.S. and Canada and provides both individual and corporate coaching and training.

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