Pricing For A Successful Sale
In my last blog post we discussed Absorption Rate and how this “metric” can help a seller to gain an advantage in a competitive housing market. Today, we are going to delve into the metric of Sale Price to List Price Ratio (the “SP/LP Ratio”).
The SP/LP ratio is the spread between the final list price of a particular property and its final sale price. Let's look at the numbers:
From March 1, 2010 to present, the average final list price of the more than 570 single family homes that sold in the Morgantown area was $251,440, and the average sale price was $239,868. If we divide the average sale price by the average list price, we see that the average home sold for 95.4% of its final list price. This is the SP/LP Ratio.
Why is this important to you, the seller? As a seller you want to:
a.Establish a list price that will enable you to successfully sell;
b.Achieve a final sale price that satisfies your financial needs;
c.Complete the transaction within a time frame that achieves your relocation goals.
The 95.4% Sale Price to List Price Ratio tells us that within this market, your house is likely to sell for 95.4% of your initial list price (which, as we learned in my last blog post, should be established by paying attention to Absorption Rate).
The comparisons that are made and the conclusions that are drawn from the analysis of Absorption Rate, SP/LP Ratio, and likely Days on Market (the third side of the Comparative Market Analysis pyramid, and the subject of my next blog post) can have a significant impact on your achievement of the three goals I mentioned above.
Pricing your house at a number far outside the range suggested by the SP/LP Ratio, while offering a potentially wonderful profit, is likely to result in a longer period of Days On Market. In this scenario, you are entrusting your house's sale to good fortune in the hope that the “right” purchaser - presumably one ignorant of market trends - will come along.
In my experience, you will likely wait a long time before that purchaser knocks on your door. As a result, your final sale price has a good chance of being impacted by psychological factors unrelated to your house's true value, such as the number of Days On Market.
If the Comparative Market Analysis indicates a final Sale Price Range of say, $350,000.00 to $370,000.00, one approach to pricing strategy would be to take the average of the range of value ($360,000.00) and apply the SP/LP metric (95.4%) inversely (95.4/1=1.048218029) to arrive at a statistically accurate list price of $377,358.49 or $377,500.00 (rounded).
In over thirty years of real estate sales, we at J. S. Walker Associates have learned that paying attention to metrics such as Absorption Rate and SP/LP Ratio from the outset will result in a more effective, efficient and satisfying process.