What I’ve always loved about working in the appraisal field is the opportunity to get out into the community daily. Being immersed in the local real estate market has helped me develop a keen insight into the economic factors that influence properties in my community of Massachusetts. Part of the reason we write this blog is to share with you what we’ve learned from our practical experience. There’s not a lot of public education out there regarding the subject of appraisal and the valuation process, so we’ll bridge the gap here.
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For fix n’ flip investors, private lenders, credit unions, hard money lenders, and small lending institutions, it’s important to consider Days on Market (DOM). The number of days a property took to sell (or the number of days it has currently been on the market) can help us understand how the property performed and whether any other factors may have influenced the value of the property. Additionally, the average days on market for a community can give us clues about how well the market is moving and what types of properties and locations are in demand.
What DOM Can Tell Us About Pricing
The main use of DOM in valuations is to tell us if the property in question (subject and comparable) was or is properly priced. We typically expect an appropriately priced listing to sell in less days than one that is comparatively over-priced. In a brisk market, you might expect a listing to sell within 10-30 days if priced competitively, and 30-90 days as the original list price increases beyond fair market value (FMV).
DOM can also indicate potential transactional issues. Financing, inspections, repairs, and funding can cause delays that are reflected in the Days on Market. When you have a comparable that demonstrates a high DOM, don’t assume that the cause is pricing. It may be a variety of market, situational, and property factors contributing. If issues are present that clearly increase DOM, opt to eliminate as a comparable when better comps are available. Poor quality comps lead to skewed values.
Very High DOM – Distressed Sales
When the DOM is very high, there are several common issues that will explain the figure. A primary cause is a distressed sale. Short sales, probates, and other legally-intricate transaction types tend to take time and involve frequent delays caused by the due process of law and personal concerns of the parties.
Sometimes such listings in the MLS and other data sources aren’t properly marked as distressed sales. If you don’t see any other clear indication as to why the DOM is high, check the notes or contact the listing agent to inquire about the circumstances of the sale.
Expired and Relisted Listings
Closely related to excessive pricing, an expired listing is a likely explanation for a high days on market. If the listing has expired and been subsequently relisted, the total cumulative days on market (CDOM) may be shown instead of the DOM. Depending on the local MLS you may find DOM and CDOM displayed together or interchangeably. Even if some time has passed between the expiration and new listing, the DOM figure may be inflated (and may not indicate a problem with the property or pricing).
High Initial List Price
High DOMs also indicate a potentially high initial listing price. Subsequent price reductions often can’t make up for a price that was too high in the first place and deterred ideal buyer prospects. Listings lose momentum and credibility with buyers when priced excessively at the start. Ideal buyers for a property in a given condition or location (similar to the subject) will tend to give less weight to listings that have had subsequent price reductions.
Very Low DOM
A very low DOM can also tell us something about the listing or sale. If the DOM is extremely low, as in 1 day or less, it may indicate a private sale or immediate cash transaction; in some markets, agents must post the listing to the MLS, even if sold immediately.
Unless the market is very competitive and average DOM is low, DOMs of less than 10 days can signify an initial price that was too low. Either way, it pays to price properties at FMV. Low pricing will deter buyers that may suspect latent issues or be opposed to ‘fixer uppers’ or properties needing perceived ‘TLC.’
In your analysis, if you have sufficient comps, discard those of lesser quality, especially when they are outliers in terms of DOM or other factors.
Hidden or Less Than Obvious Defects
Any reasonable buyer or investor would suspect: Why did it take so long for X property to sell? In the absence of any other concrete property or market data, potential buyers will draw their own conclusions, leading to sensible concerns regarding latent (hidden) property defects, environmental hazards/nuisances, and the like.
Another thing to look for are repair requests and concessions that may have delayed closing. As you evaluate comps or consider the listing history for your subject property, it’s in your best interests to have the same suspicions and ask questions or do further research to better understand the factors influencing the days on market and final selling or listing price.
Average Days on Market, Market Direction, and Absorption Rate
Days on Market is useful in gauging the pace of the market when looked at as an average across all properties of a specific type, class, or criteria. Of course, the lower the DOM, the more rapid the market. You’ll often see stable and rising prices, and a quickening absorption rate (inventory turnover) in conjunction with a low average DOM.
Choosing comps for your property isn’t as complicated as it looks. In fact, you probably already have some experience with this. As professional appraisers, we just want to offer our take on the process and hope it is of value to you in selling your home.
What’s a Comp? Comps, or comparables, are properties that are similar enough to your property to be useful for comparison. Selecting the best comps is a straightforward process and requires you to evaluate each property objectively.
To start out, we generally want to look at properties that were recently sold, and those that are currently on the market. The traditional number of comps that appraisers and agents select are three sold and three active listings. You can include more in your own analysis but use that number at a minimum.