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2009-05-05 21:31:13

The Real Meaning of Days on Market

Real estate is a tricky business. At some point, you’d expect things to “mean” what they say. Yet we’re an industry that can’t even decide what exactly constitutes a “bedroom.”  In some markets, it’s a broom closet; others extend the definition to unfinished attics.

Of course, small dens and breakfast nooks in big-city condos qualify as bedrooms as long as a curtain divides them from the next room. Funny stuff, but it gets more serious when you try to apply these definitions to market data. If we can’t decide what certain market data means, how can we plan a business strategy around it? When current listing prices are sketchy, foreclosures skew sold data and “for sale by owner” inventory makes it impossible to determine meaningful absorption rates, wouldn’t it be nice if we could just pin down the meaning of something simple - like “Days on Market”?

Ironically, even that market metric is sorely misunderstood.

Try this exercise at your next office meeting. Ask the agents to define what “days on market” means. Twenty agents will likely yield twenty-one answers. Even if we narrow the question down to, “What does days on market mean for sold properties?” proper definitions elude us.

For example, in some cases, agents will argue that there’s a “current” and a “real” days on market because MLS rules differ from market to market. In some systems, MLS calculates only the days on market since the property was last listed as “active” in the database. So if a home was listed for six months, expired, re-listed with another agent for three days and then sold it could have a “current” days on market of three.

Purists say that you should count the “total time” trying to sell it, even if the property changes brokerage hands, within a window of one or two years.

No matter how you slice it, the argument seems to revolve around how long it took a home to sell. Plenty of hairs can be split over how to calculate this number, but any choice would still be wrong. Because days on market has absolutely nothing to do with selling the home.

Days on market has everything to do with buying the home.

The industry obsession with listings has created a blind-spot in its ability to interpret data. Since most brokers think they must list as many homes as possible, they interpret data from the listing perspective. Remember, this is an industry that rewards agents for “most listings” and company market share according to “company listing inventory” while avoiding the cold, harsh spotlight of whether any of it actually sold (and for a profit, but that’s another story).

Yet a key performance indicator remains untapped if we only look at market data from the seller’s perspective. In fact, days on market would really be meaningless if we looked it as the total time it took a home to sell, because selling a home often has nothing to do with time.

In fact, proper positioning, staging and pricing are all people problems, not functions of time. So days on market, from a seller’s perspective, might really be a measurement of “argument time” between real estate professional and consumer. Sometimes shorter. Sometimes longer.

If, on the other hand, we interpret days on market from the buyer’s perspective, we find a very useful metric for sales performance. Especially for companies focused on leads management.

If days on market really measures the time it takes buyers to buy a home, not the time it takes sellers to sell it, then we’re measuring a completely different set of market forces - one that bears directly on the prospecting and leads management challenges facing the industry. Purchase decisions are influenced by seller-controlled factors, such as price or positioning; but when the market is flooded with similar inventory that still take long to sell, days on market tells us nothing about the inventory.

And everything about the buyer.

Actually, it doesn’t make any difference WHY the buyers are taking certain times to buy. Nobody could actually measure all of the reasons. Besides house prices, conditions and locations, there are millions of reasons why buyers take certain “days on market” to pull the trigger. Economics, demographics, consumer preferences and media influence may all factor into the average time-span it takes the average buyer to purchase the average house. Still, the average days on market looks like a better measurement of buyer activity than seller activity.

Agents experience this all the time: properly priced and staged homes often don’t beat the average days on market, even in the best locations. That’s because the buyers ultimately control the process. They will buy -  when they decide to. And REALTORS can measure that by monitoring the average days on market.

Why is it important to re-interpret the true meaning of days on market? It’s critical to overcoming one of the most troublesome performance problems in the industry: Leads management. Any company that bothers to track it’s leads will tell you their biggest problem is getting agents to nurture leads for the right amount of time. That super-secret amount of time is the key to improving prospecting practices. If managers can get agents to prospect long enough to be there when the buyer is ready, then we can create more deals. Yet most prospects are abandoned after a few days, maybe a week, by agents who can’t figure out how long to keep nurturing their leads.

All brokerages suffer from this problem. There are dozens of reasons for it - poor sales training, lack of manager monitoring and just plain diva-mentality. All of which can be fixed with training, technology and coaching and accountability.

The missing ingredient, though, has always been an answer to the agent’s question: How long should I incubate a prospective customer? Managers have tried every guess: Forever. Until I say so. Until the consumer dies. None of these were satisfying to the agent. Agents don’t like “shoot from the hip” coaching from managers. They want answers. They want clear guidance.

Now we can give it to them. By reinterpreting days on market as the time it takes buyers to purchase an average home, agents know exactly how long to incubate their average prospect. The mechanism is perfect. It keeps up with booms and busts. It can be sub-divided by property type, market area or price range. Days on market can be broadly measured or target analyzed. And it will keep answering the most important question for salespeople who are prospecting for business:

How long should I keep trying?

(Matthew Ferrara is CEO of Matthew Ferrara & Company, a technology organization that delivers training, consulting and technical support to real estate companies worldwide, including their new "Support on Demand" REALTOR help desk service available at 866-316-4209.)

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