12 September 2008

Loss Factor in Allowing a Low Listing Absorption/Conversion Ratio

Unsold listing inventory is arguably the biggest obstacle in our current real estate market. It creates downward price pressure which of course impacts consumers and real estate professionals alike.  I will save my discussion on strategies to effectively move listing inventory for my next post.  Before I do that, though, I feel it is critically important to preface this with an explanation of the impact of unsold inventory on financial performance and sales agent productivity levels.

Let’s assume we have an “average” brokerage (based on recent national results available).  This company has 24 agents who average 10 closed transactions per year at an average sales price of $212,000.  The average broker commission rate in this example market is 5{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c}.

Based on those figures, the company would have annual production of 240 transactions (assume for simplicity half are list-side, half are sell-side), $50,880,000 in sales volume, and $1,272,000 GCI.

Let’s assume that due to the glut of inventory, the company successfully sells only half the listings it takes (it therefore has a 50{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} listings ‘absorption rate’ aka listing ‘conversion rate’).  The company wants to see this rate back up to the 70{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} it was achieving only a couple years ago.  Here’s how the effect of that movement would play out:

If the company increased its listings absorption rate from 50{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} to 70{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c}, an additional 48 transactions (168 minus 120) would be created, or 2 additional listings sold per person.  Based on the company’s prior average of $5,300 GCI per transaction ($1,272,000 GCI ÷ 240 transactions), an additional 48 transactions would result in $254,400 of additional GCI.  No additional listings have been taken, only a sharper concentration on strategies to ensure that the right listings are taken so that the absorption rate increases.

If listing absorption is an issue for you, discuss it with your agents by posing this question to them. “Is it harder to control inventory that you already have, or to list additional saleable inventory?” Most agents will agree that acquiring good listings is no easy task today, or for that matter, at any time. Why then would we waste an opportunity when we have it?

Once this point is discussed and understood by all, you are off to the races to uncover the underlying reasons for the low absorption rate in your organization.  Sooner or later, the discussion leads full circle back to listing and marketing skill, but the specifics vary greatly from place to place and company to company.

2 thoughts on “Loss Factor in Allowing a Low Listing Absorption/Conversion Ratio

  1. I should have read this before I commented on Nicolai’s real estate phases post! If only it were as easy as not taking new listings and fixing the ones you already have. Unfortunately you will always fight the idea that the untaken listing is better than the one you currently have and human nature to avoid confrontation (talking to sellers about reality in the market) and towards “easy rewards” ( a misnomer, but taking bountiful listings at any price). Remember “Those who list last”? Only if they have a lot of money. Listings are still the grail, but quality is the holy grail.

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