Buying and Selling Land

Reading the “days on market” tea leaves

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“How many days has that parcel been on the market?”  Buyers call and ask me this question all the time.  They assume that the longer a parcel has been on the market, the more motivated the owner is to sell.  When the “Days on Market” (DOM) are high, buyers think that they can offer a price that is much lower than the listing price and the seller will gladly accept it.

However, as an agent, I know the opposite is often true.  A seller whose land has been on the market for 300 days may have turned down offers received at 30 DOM, 100 DOM, and 200 DOM.  Land owners like this have demonstrated a low motivation to sell not a high motivation to sell.  Sellers with high DOM are often waiting patiently for a buyer to come along who will pay them their target price.

It is my experience that when buyers try to read DOM, it’s like reading tea leaves.

That is, it’s an ancient superstition passed down through the ages.  And it’s not all that helpful in figuring out what price a seller will accept for their land.

To separate myth from the reality, I decided to look at actual data.  I compared the price difference (the percent difference between the listing price and the selling price) with DOM.  If the buyers who call me are correct, the percent “discount” the seller gives the buyer off the listing price should be higher for high DOM and lower for low DOM.  Let’s just see if that’s true or not.

Research

I obtained data from the California Regional Multiple Listing Service (CRMLS).  This Multiple Listing Service (MLS) system covers much of California.  I searched the MLS for the 2000 most recent land sales.  For these 2000 sales, I extracted the listing price, selling price, and days on market.

I eliminated four wonky data points.  For example, in one case the list price was $17,500 and the broker indicated that it sold for $175,000.  While it is not unheard of for land to sell over the asking price, these digits were so similar I assumed that there was a typo and the listing agent just added in an extra 0 when entering the selling price.  After eliminating these four weird cases, I ended up with a total of n=1996 land sales.

I calculated:  Percent Price Difference = (Listing Price – Selling Price)/Listing Price

In Excel, I performed a statistical linear regression to find y=mx+b, the equation for the line that best fits the data.  In this case, Percent Price Difference was y and DOM was x.  M is the slope of the line and b is the y-intercept.

The parameter m is of particular interest.  The m, produced as a result from the statistical regression, tells us how much Percent Price Difference changes with each additional DOM.  If m is a large negative number then the buyers who think DOM is important are right.  If m is zero then buyers are wrong.

Results

The following scatterplot shows Percent Price Difference and DOM for all land sales:

Two things jump out at me in this figure.  The first is that there were a fair number of parcels (n=144) that sold for over the asking price.  Second, 38 parcels were on the market for 3 years or more before selling:

Due to the clustering of points at the left, the scatterplots above, showing all data, are hard to read.  So below is a revised figure.  The scatterplot below shows a subset of the data for the first 365 days on market and for prices ranging from a reduction of 75% to an increase of 25%:

How do you read this figure?  As one example, consider point A.  This point reflects a land sale that occurred after 100 days on market.  The selling price was approximately 39% less than the listing price.  The land sale at Point B also occurred at approximately 100 days on market but this selling price was 0% from the listing price.  That is, the seller at Point B sold their parcel for full price.

Points C, D and E occurred at approximately 200 days on market.  Point C reflects a parcel of land that sold for approximately 25% less than the listing price.  Point D is a sale that also occurred at 200 days on market but this parcel sold at 50% less than the asking price.  Finally, point E occurred at the same 200 days on market but it sold at 18% over the asking price.

After performing the statistical linear regression on all data, the resulting equation for the line that best fits the data was:

y = mx + b

Percent Price Difference = m (DOM) + b

Percent Price Difference = -0.0000546341974725283 (DOM) + -0.103314904970139

What does this equation mean?  It means that the day a parcel goes on the market (0 DOM), the average seller will accept 10.33% less than the listing price.  Further, for every additional day a parcel stays on the market (DOM), that discount changes by -0.00005.

Note that -0.00005 is close to zero.  That means that the slope of the best fitting line will be close to zero which would make the line virtually horizontal.  The best fitting line is shown in pink in the above figure.

In other words:

  • At 1 DOM, the average seller may accept a 10.3% reduction in price.  (This was calculated as -0.0000546341974725283 (1) + -0.103314904970139)
  • At 30 DOM, the average seller may accept a 10.5% reduction in price.  (This was calculated as -0.0000546341974725283 (30) + -0.103314904970139)
  • At 90 DOM, the average seller may accept a 10.8% reduction in price.  (This was calculated as -0.0000546341974725283 (90) + -0.103314904970139)
  • At 180 DOM, the average seller may accept a 11.3% reduction in price.  (This was calculated as -0.0000546341974725283 (180) + -0.103314904970139)
  • At 365 DOM, the average seller may accept a 12.3% reduction in price.  (This was calculated as -0.0000546341974725283 (365) + -0.103314904970139)

Discussion

Are you a buyer interested in knowing the lowest price a seller will take on a parcel of land?  What is their bottom line – that’s what you really want to know, right?

This research shows that the amount of time a parcel has been on the market is a poor indicator of seller flexibility on price.  There is almost no relationship between the price a seller will accept and how long their parcel has been on the market.

For example, a parcel listed at $100,000 that’s been on the market 30 days might sell for 5%, 25% or 50% less than the asking price.  Or it might even sell for more than the asking price.

On average, a parcel that is sold the day it comes on the market listed at $100,000 will go for 10.33% less than the $100,000 asking price or $89,668.  In comparison, a parcel that’s been on the market 180 days might sell for an average of 11.3% less or $88,685.  The difference between $89,668 and $88,685 is only $983.

Fortunately, for buyers, there are better ways to figure out how flexible a seller may be on price:

  1. Pick up the phone and call the listing agent and ask.  (As a listing agent and fiduciary to the seller, I personally won’t reveal to a buyer how flexible a seller is on price, unless the seller has sent me strong signals that they want me to share their flexibility.  However, other listing agents might reveal this information.  Try it.)
  2. Ask the listing agent if the seller has received offers that they turned down.  What prices were offered but declined?  For example, if a parcel is listed at $100,000 and the seller has turned down offers of $80,000 and $85,000, that’s a pretty good indication that the seller will not accept your offer of $82,000.  (Again, as a listing agent I may or may not give a buyer this information, depending on whether I think it’s in the seller’s best interest.  But other listing agents might.  It doesn’t hurt to ask.)
  3. If the parcel recently fell out of escrow, ask the listing agent what price it was in escrow at.  While the seller’s motivation to sell may have increased or decreased since they accepted their last offer, the answer will at least tell you what price the seller was willing to accept historically.  (As a listing agent, the only time I might reveal this is if the seller was previously in escrow at full price.  This is because I want to convey to the new buyer that the previous buyer clearly thought the property was worth full price and, in any case, the seller is unlikely to accept less.)
  4. Float a verbal offer.  For example, ask the listing agent to check with the seller on whether they will accept $90,000 on that parcel listed at $100,000.  (Personally, I often decline to do this and insist that buyers submit a written signed offer.  Listing agents are required by law to present all offers.  However, a verbal conversation is not an offer.  A true offer is written and signed by the buyer and contains lots of other details such as how the buyer plans to pay for the land, who pays the closing costs, and the closing date.  Nevertheless, there are situations where I will present a verbal offer to the seller and other agents may too.)
  5. Submit a written signed offer.  Ask your agent or the listing agent to prepare an actual offer on proper forms with all the other details in addition to price.  Sign it.  Then the listing agent will present it to the seller.  A seller who receives a written signed offer is likely to respond, via the listing agent, and tell you whether or not they will accept your price.  The seller may counteroffer.  Then you’ll have your answer!

Conclusion

This research shows that it is a fallacy that the longer a parcel of land is on the market the more likely a seller will accept a significantly lower price.  This is because high Days on Market does not always lead to extreme motivation to sell as buyers assume.  High Days on Market could be an indicator of the reverse, low motivation to sell.

Attempting to read the meaning of Days on Market is like reading tea leaves.