YOUR EBOOK TITLE THE NEW CMA: COMPETITIVE NOT COMPARATIVE
Assumption Three: There are no new entrants to the market. Zero new homes are coming on the market. How often is that true? Technically never since you’re home coming on the market would change that, but more importantly if new construction comes into the market it will destroy the absorption rate pricing math. New construction is the monkey wrench that will dilute absorption and increase supply quickly. So you can’t have any new construction for absorption rate to work correctly Assumption Four: Your subjectivity is correct. There will always be some subjectivity or judgement calls in pricing homes. For absorption rate pricing, you have to be correct on yours. When you rank your home in value to try and position it in order correctly, you have to be spot on for what the buyers are looking for. This step amazingly enough is the saving grace for many agents. A good hunch has saved many an agents bad pricing.
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The inability for absorption rate pricing to truly account for market variability, seasonality, price range versus area market conditions, and its extremely high reliance on correct subjectivity, i.e., guessing, means this pricing method doesn’t really meet the mark.
Pricing Model #3: Compare 3
This method is the one you’ve likely seen the most, whether it be on an appraiser sheet or in a college course. The idea is that you take 3 homes that sold recently and look at their features and inclusions, and the difference in their sales price. You try and find one that is most like your subject property and assign value to features that are different to buffer your price up or down. When using this method, the difficult part comes with assigning “value” for each of the features that are included on one property or subtracting the “value” for a feature for one of the properties. How exactly does someone determine what a fireplace (for example) would be “valued” at? Even if you were able to determine an accurate replacement cost for that specific fireplace with the mantle, brick or tile, and other features of that fireplace would be, you would then need to depreciate that value based on the age of the fireplace. As you can image, this process becomes incredibly time consuming and meticulous. Eventually, one tends to just make their best “guess” on what these incremental values might be and sometimes the guesses are fudged to “justify” the price they are looking for. Once this type of “analysis” is shown to a se- ller, if the seller has any kind of analytical or technical background, they will “argue” over every one of the “values” provided to push their property as high as possible. Usually when this model is used, the price per square foot model is included to adjust for difference in size. Of course, the adjustment will be different when comparing square footage above ground compared to square footage below ground. Also, as we stated before, both the price per square foo t pricing model and the compare 3 model tend to focus on comparing the subject property to other comparable properties, in the same area, that sold in the last six months. This opens the compare 3 model to the same issue that price per square foot faces with market movements. So, what about the situation where home prices are dramatically increasing or decreasing in a short period of time? How do you adjust your pricing when the market is moving dramatically up or down using this method? Again, this method really struggles when you are out of the
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