There are many different applications of an absorbtion analsyis, but we will focus on an application most applicable in real estate market – Using an absorption analysis to help a seller determine the best price to list their home for sale at, with a goal of selling in a certain period of time.
The scenario. Seller wants to sell their 5 bedroom, 4 bathroom, pool home in <SUBDIVISION NAME> within 90 days, and thinks that $1.59 Million is the right asking price based upon real estate activity in their neighborhood. The seller would like to conclude the sale within 90 days.
A typical approach to applying an absorpion analysis in this scenario was to prepare a local subdivision/neighborhood analysis, but this example caters to the buyer mindset when searching for homes – a general area or city.
Some terms to know.
Subdivision (or neighborhood) area. This is the defined as the properties immediately surrounding the subject property, typically defined as the sub-division.
Larger Area. These are home outside the immediate area of the subject property, but close enough that buyers will be searching those properties when looking for a home. It is best to define these by municipality, school district or within a certain radius. Choose the best method of defining the larger area for your specific subject property. Buyers do not always define or limit their search for homes to a specific sub-division or neighborhood.
Price Ranges. When buyers are looking for homes, they typically look at homes that match their pocket book, and limit their search to specific price ranges. When preparing an absorption analysis, make sure to include homes both below and above the estimated subject property price ranges in suitable increments.
Time Period. Define the historic time period that you will use for your analysis. It can be 6, 9 or 12 months. Ensure that the time period chosen generates enough data to provide an accurate reflection of the past real estate activity.
Current Inventory. This is the number of homes for sale at the current time.
Closed Sales. This is the number of closed sales within the defined ‘time period’. (e.g. 10 homes sold in the past 6 months)
Steps to create the market absorption analysis. For the defined ‘Time Period’;
Determine the ‘Current Inventory’ for each ‘Price Range’.
Determine the ‘Closed Sales’ for each ‘Price Range’.
And you will now have something like this for each area.
Price Range Current Inventory Closed Sales
$1.2Million-$1.4Million 10 5
$1.4Million-$1.6Million 20 5
Defining our ‘Time Period’ to be 6 months
The Absorption Rate is calculated as follows;
Current Inventory / (Closed Sales/Time Period)
- $1.2-$1.4Million 10/(5/6) = 12 Months Inventory, and
- $1.4-$1.6Million 20/(5/6) = 24 Months Inventory
The Absorption Rate for homes in the
- $1.2Million-$1.4Million range is 12 months.
- $1.4Million-$1.6Million range is 24 months.
This is indicative of a buyers market, and if the seller wants to sell in the next 90 days, it may be advisable to price the home for sale in the lower $1.4Million to $1.6 Million price range, rather than the current thinking of $1.59Million. A clearer picture will be apparent in the complete absorption analysis.
Copyright © Raymond Property Group 2007