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A Model for Time-on-Market and Real Estate Prices

Background Information

How long should a real estate listing remain on the market in order to maximize the value for an investor? The answer to the question is not as simple as you may think. There is tons of academic research proving that the longer you are willing to wait, the higher your expected sales price. BUT, the longer you wait, the more holding costs you incur and the lower your overall return.


The paper at hand suggests there is a significant positive relationship between sale price and Time-on-Market (TOM), however the marginal benefit of increasing selling price diminishes with increased TOM.

How Sales Price is Impacted by TOM

Studies suggest there is an optimal amount of time your listing should remain on the market in order to target a large enough pool of potential buyers and obtain a desired sales price. As you continue to wait, the benefit of increased sales price diminishes with increased time on market (illustrated in graph below).


The impact of TOM on the sales price varies depending on the type of asset you are selling and the market conditions. In a hot market, listing will see many more buyers, and increasing TOM will lead to a higher sales price much quicker than in a cold market. Also, selling a common real estate asset will lead to less dispersion in offer prices. This means that increasing TOM for a common real estate asset will not increase your sales price by much. On the other hand, if you are selling an uncommon/unconventional asset, increasing TOM will lead to a higher sales price.

Marginal Benefit of Each Additional Offer on Expected Sales Price



Conclusion

When a developer starts selling a new residential condo/apartment building, properly monitoring and planning how long the asset should sell out in is critical to optimize the profitability of a new development. Selling out too quickly suggests you have not captured a large enough pool of buyers, meaning you left a significant amount of money on the table, and taking too long to sell would cause your profitability to fall because of large holding costs.


SquareFeet.ai helps manage this process for you. We create and monitor customizable launch graphs based off our client’s specific financial needs, ensuring maximum profitability for your new development.

Book a demo to learn more about how SquareFeet.ai optimizes revenue!


Source: Cheng, P., Lin, Z., & Liu, Y. (2008). A Model of Time-on-Market and Real Estate Price Under Sequential Search with Recall. Real Estate Economics, 36(4), 813-843. doi:10.1111/j.1540-6229.2008.00231.x

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