Good real estate agents need to have a variety of unique skill sets and be prepared to wear many hats. Professionalism amongst our customers and peers, a skill set with respect to marketing is important, an understanding of technology is key, a general understanding of construction, home maintenance, familiarity with their area of service including government entities, code, zoning – the list goes on. One often overlooked skill is understanding the basics of appraisal (though we are not appraisers) and valuation when it comes to market data, how it conforms with the local area and it’s nuances, different valuation methods and tying it all together with absorption data and recent sales.
Most real estate agents use a comparable sales method of valuation. Basically, we look at recent sale data (that usually only real estate agents in the area have access to), and form an opinion of value based on that data. However, it runs deeper than that. Not only do we need to find the most appropriate data, but we need to make adjustments based on unique attributes of the property we are valuing. In addition, we need to look at market conditions, including absorption.
Absorption is usually calculated by looking at the number of sales in a specific time period as well as the current supply. As real estate agents, we generally measure absorption by the number of months’ supply of inventory in that particular sector of the local real estate market. We then have to look at trends to understand if the amount of supply is likely to increase, or decrease in the coming months as we begin marketing your property. It’s easy to get caught up in markets. Most recently, we saw unprecedented demand and historically low supply. We need to take this into consideration when we value property, and it’s hard to convey this information to the public. Sellers want the highest price possible. The public needs to understand that it is our job to obtain this. We have a professional duty to do so for those we represent. This is why it’s so difficult to explain changing market conditions, particularly when things are slowing. As an example, we might look at comparable sales from the past 6 months, which were historically high. Not only do we need to make adjustments for the specifics of the property we are valuing, but we also need to take into consideration the changing market conditions and the increasing supply as mentioned above.
Now, let’s take a deeper dive into absorption as it relates to valuation. If we had one month’s worth of supply (a very low number) 5 months ago, four months’ of supply today and the market conditions are indicating we may have even more in a few months’ time, we also need to manage expectations on timing. Essentially, if we absolutely nailed a valuation and properly account for changing market conditions to the best of our ability with predictions and market indicators, the home should sell at the then calculated absorption time. In other words, if on the date of sale the current absorption is about 6 months’ worth of supply, and you were on the market for 6 months, everything tied together properly. Do we want to take offers in advance of that? If it’s the right offer, absolutely. If things take longer what’s going on? Well that’s an indication that the property may be overpriced. The challenge with this? Teton Valley is very seasonal in terms of its peak sale seasons. If we wait 6 months to learn that a listing is overpriced or agree to list at a higher number because our client asks us to do so, we spent quite a bit of time on the market with conditions that are indicating a slowdown. These are the risks of pricing without basis, or based on ill advice. To summarize, it is always in a Seller’s best interest to find a professional in the marketplace (any marketplace), that understands all of the aforementioned nuances to the real estate industry. A great marketing agent that doesn’t understand local trends is not necessarily a great agent at all. In addition, it’s easy to get caught up in crazy markets, and it’s even easier to enter into a phase of denial when hoping to capitalize on your investment, which should be everyone’s goal. Take your real estate broker’s advice if they have a clear understanding of the market if it is in fact your intent to sell at the highest price.