How To Show Value To Clients Using Statistics - Absorption Rates
Sometimes, the best way to demonstrate value when someone asks the question “how’s the market?” is by using custom statistics. Today I’m going to show you how to find the absorption rate and relate it into meaningful information that shows your professionalism and expertise to win a new client and you can do this literally in less than 10 minutes
Not everyone wants to know all the details when you dive into real estate market statistics so first make sure you know your audience. It can demonstrate your professionalism and your expertise for some and it can bore someone else to death.
This is something that is relatively easy to do and once you are proficient, it can be done pretty quickly so let’s get started.
I’ve got a hypothetical potential client that’s on the fence about selling his home and buying a new one. He’s asked me about the market and heard it’s a good time to sell. I’ve already asked what it would take to get him to sell and he’s unsure. Since he hasn’t made a decision about selling or even to use me as his agent, I’m going to position myself as his go-to expert for all things real estate. I’ll use market statistics specific to his situation and relate it to the surrounding market as an opportunity to further our conversations and demonstrate my expertise and value to help secure this person as a client. If I can demonstrate, objectively, that this is a good time to sell and not just because I say so, I build trust and rapport because I get to keep communicating with him and I give him something he currently doesn’t have - market statistics which are repeatable, provable and objective to decide if it’s a good time to sell.
The first thing I need is the location of the house where he lives. Since these stats are custom, you’ll need to decide on some of the parameters for your stats. It can be cities, neighborhoods, school districts, price point, or something else and it will usually be an area + a price point.
When I sit down at the computer to do this, I’ll usually start with the neighborhood if possible and work my way out until there is enough data to be meaningful. If the neighborhood is large, you may have all you need. If not, you may need to look within a mile of the home or something different, like the high school district. Try to keep this part small if possible.
This is the data I need to get started: # of active listings, # of under contract listings, and # of sold listings (I like to use 3 months back if possible but it can be different, and most real estate is seasonal so think about that also) and make sure you are using a bracketed price range around your client’s price.
I’ve gone to my MLS and looked at his neighborhood and his price point and I don’t have enough data to be meaningful so here is what I used for my example:
I extended my search to the high school district and price point and found there are 8 homes for sale, 8 more under contract, and 10 sold in the last 3 months. I’m going to write this down somewhere so I don’t forget. Now I need to find the absorption rate for homes like his. This is also known as the supply of homes or inventory levels. This is the time it’ll take to sell the current active listings. Remember, 6 months or less is basically a buyer’s market, and 6 months or more is a seller’s market for most homes here in Atlanta but it may be different for you and it changes for the luxury market as well. To find the absorption rate, you take the number of available homes divided by the average sales in a month.
We know that in the last 3 months, 10 sold so 10/3 = 3.3 homes sell on average every month.
Stay with me here…
Remember that we found that there are 8 homes available and now we know that 3.3 sell each month. Simply divide those 2 numbers and you’ll have your absorption rate so 8 active listings / 3.3 sales per month = 2.42 months of inventory and now we know it’s a seller’s market for this home and homes near him that are at his price point.
You could stop here but in my experience, you will be making a mistake if you do. When working with small data sets, it’s possible that an outlier can dramatically alter the reality of what’s really going on so we need to repeat these steps on a larger and comparable sample to verify that what we found is in fact correct. By doing so, you increase the likelihood that your stats are correct.
Since we used a high school district for our starting numbers, now let’s use the entire city and compare it to the high school stats.
So, the same thing here again, but more quickly this time. In my example case, the logical next larger size up from the high school district is to use the entire city so that’s where I’ll start. But wait - when I ran the city numbers at the price point, there were only 17 homes available. I’d really like a sample that’s bigger than that since it isn’t really much bigger than my original sample in the school district. Only you can figure this part out because you are the expert in your area. For me, I’m going to draw a map search in my MLS of what I know to be a mostly homogenous housing stock so I can get more data.
So in my bigger “example” area, there are 50 active, 72 pending, and 74 sold homes at his price point in the last 3 months which is 74 homes/3 months=24.67 sales/month. Divide 50 active by 24.67 and we see an absorption rate of 2.02 months. Even lower than in our small sample.
What we’ve done is confirm the small market is probably accurate for what’s really going on anywhere near my potential client’s house and I can inform him that it’s a seller’s market and a great time to capitalize on selling.
Now, if you were paying attention, I had you pull pending listings also and I haven’t talked about those yet.
Remember these 2 statements:
Closed sales are lagging indicators
Pending sales are leading indicators
One is based on the past (closed sales) and one on future sales (pending).
In our larger sample area, we had 50 active listings and 72 more under contract. If the number of pending sales is greater than the active listings, it’s likely to continue as a strong seller's market. This is additional information you can use to illustrate “how’s the market?” Answer.
When I go back to him with this information, I’m going to explain that I ran some custom statistics on homes like the one he owns and compared it to the larger market around their home to be sure that we had some very accurate information that’s critical to helping him decide if now is a good time for them to sell his home.
I'll explain what an absorption rate is and let him know that with only about 2 months of inventory, now is as good of a time to sell as we’ve seen historically. It could stay like this for the next several months or it could change. None of us are smart enough to truly predict what will happen in the future but we do know what’s happening now and that’s the best way to make an informed decision.
So that wraps up a quick how-to on generating custom market statistics for clients to demonstrate your expertise and value.
If you can learn how to run these stats for your clients, you’ll be seen by them as a trusted ally and someone who’s a true professional and worth doing business with.
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