Absorption Rate and Pricing a Chico Property
October 7th, 2007categories: Chico CA Real Estate Market Stats, Chico Sellers
The term “absorption rate” is one you may hear a Realtor use when discussing pricing Chico CA real estate property.
Columnist Jerry Rossi explained it beautifully in the June 2006 edition of Realty Times. The application of his example allows us to explore, based on fact, the liklihood of selling a Chico, CA property at the price you are considering listing it at.Jerry’s example!An investor wants to sell his 4-plex for $300,000. After doing a Comparative Market Analysis on the property, a competent Realtor knows that his 4-plex is probably only worth $275,000. To help him understand why he should NOT list it $25,000 over value, you apply the formula to figure out the absorption rate.
In simple terms:
- Take the number of 4 plexes sold in the past 12 months at $300,000. (let’s say 5 sold)
- Divide this number by 12 to get the absorption rate. (5 divided by 12 = .42)
- Find the number of 4 plexes available at $300,000. (10 available)
- Divide this number by the absorption rate. (10 divided by .42 = 23.80)
It will take 23.80 months (yikes!) for the market to absorb the 4 plexes currently for sale at $300,000.
It would take 7.5 months on the other hand, if the investor was to list at your suggested price of $275,000… and there were 5 4-plexes available at $275,000.
If the difference in the number of months doesn’t help in the understanding of the dangers of overpricing, try considering the amount of money the seller will pay OUT during that extra 16.3 months the property could sit on the market.
If the seller is paying $1900 per month on a mortgage, their SAVINGS could be $30,970 in payments.
Ultimately, they will save $5970 by pricing their 4 plex $25,000 LESS!!
Like what you’re reading?
Click here to SUBSCRIBE to Chico CA Real Estate Blog and MLS Search
