Days on Market Definition: What Is It and How Do I Use It?

Days on Market

Days on Market (DOM) counts the number of days a house is listed as active.  It starts from the date the house is listed and stops when the house goes off market (shows as “pending”).  If the house does not actually sell, it will go back to active and the number of days will start counting again.

This number is not precise, can be manipulated, and is measured differently in each market.  But acting as an average, it is still a really good metric for analysis.  DOM is useful for evaluating neighborhood trends (average time it takes a given house to “sell” in a specific neighborhood), as well as determining how much rehab a house needs in comparison to how quickly it will sell.

It is also important to know that DOM is not the total time it takes from initial listing to when the keys and cash change hands.  DOM is often seen as how long it takes for a house to “sell.”  A more accurate way to define days on market is how quickly a listed house gets a contract that the home owner accepts.  Once the contract is accepted, the closing process starts and this can take one to two months, on average.  I’ve seen them take longer, and it could be done in as little as two weeks, but we will talk more about this at the end.

Definition: Days on Market (DOM)
The number of days it takes for a homeowner to get an offer that they find acceptable.

How Do I Use DOM When Selling My Home?

When I buy and sell houses, one of the first things I’m looking at is Days on Market.  The key to making good decisions is to base those decisions on facts and not feelings.  The value of a house has nothing to do with my opinion but has everything to do with what buyers in the market are willing to pay.  We need a way to ask them what they are willing to pay. Studies have shown that “people ascribe more value to things merely because they own them.”  This is called the endowment effect.  By using hard data to make choices, it takes out emotions and sentiment.  It creates a logical, systematic way to make decisions and not get stuck in the trap of overpricing my house.  I have found that DOM is one of those incredible tools to help make these logical decisions.

DOM tells me:

  1. How long it should take to sell a house
  2. What level of rehab we should do on a house
  3. What price level we should pick
  4. If houses are selling faster or slowing down over time

There are three steps I take when using Days on Market to sell a home:

Step 1: Research Comparable Properties

Comparable Properties or “comps” are houses in close proximity to the house I’m evaluating.  They are houses that have recently sold, look like my house, and have the same features (size, age, etc.).  These comps are like taking a market survey and asking homebuyers what they are willing to buy and how much they are willing to pay.  Find a realtor to run your comps with the following conditions:

  • Pull houses that sold in the last year, but focus on those sold in the last 6 months or less.
  • Limit your search to half a mile radius around your target house.
  • Sort those that are about the same size as your target house (within 200 square feet) and the same age as the house (5 years newer or older).
  • Look at number of bedrooms/bathrooms/garage and look at amenities like pool/brick exterior/lot size/etc.
  • Pick the most comparable 2 or 3 houses that match your house’s current “As-Is” condition, and 2 or 3 at the top end of the market so you have something to aim for.

Tip: Look at price per square foot ($/sq. ft.) and not the sales price.  Houses are usually evaluated for what they are worth based on their size.  Dollar amount by square foot reduces house size and price into one number that lets you compare apples to apples.

Step 2:  Evaluate DOM and Sales Price of Comps

HelpOnce I have a pool of similar properties, the next step is to see how long it took them to sell.  Remember, we are trying to figure out what our future homebuyer will want to pay for our house.  DOM tells us how long it took someone to come along who thought the house was worth the price they paid.

I’ll look at:

  • DOM and Market Health: Pulling comps over the last year lets me see if houses that sold a year ago sold faster or slower than houses sold in the last month. This tells me if the market is getting better or riskier.  I won’t use the year-old sales for our current value, but it tells me where the market is going.
  • DOM and Price: DOM is usually directly related to price. Typically, houses priced with a cheaper dollar per square foot sell faster than those at a higher price point.  This makes sense.  If two houses are equal and one is priced less, who wouldn’t jump on a good deal?
  • DOM and Level of Rehab: Now I take a look at the houses that don’t match up with the previous rule of thumb—a cheap house that took a long time to sell or a higher priced house that sold faster than the rest. These houses are telling me minimum levels of rehab and what I could expect if I fix up a house.

If a house is in rough shape, even at a low price, it may take a while to find a buyer willing to tackle the repairs.   At the same time, I watch for those at the high end that took a long time to sell; these are overpriced and probably overly fixed up for what the neighborhood will sustain.  Our target price is the highest price that sells as fast as I need it to for the least amount of rehab.

  • DOM and the Extras: I also look for trends, such as: houses with pools that are selling faster/slower; houses on busy streets that are selling slower; houses with different lot sizes selling the same; etc.

It is very important that you pick comps that match these extra things, as well.  If your house is on a busy street, DOM comps might be telling you your house will take longer to sell.

If you need to sell fast, take a look at those with smaller DOM and see how your house compares to them.  If you want top dollar, take a look at those that sold for the top-dollar amount per square foot and see if you are willing to wait that long or fix up your house to that level.

Step 3: Pick Your Purchase Price

Pricing is the most important decision you will make in selling your house.  It is so important; this is where a real-estate professional really starts to earn the money they get.  You can actually hurt the value of a house if you price it too high.  At the same time, it is a shame to not get as much for a house as the market is willing to pay.  So if you price it too low, or price it in the wrong price “pocket,” you could lose out on potential buyers.

Lastly, if you fix it up too much, you may not be able to recapture all the money put into the house.  When it comes to picking prices and evaluating level of rehab, I like to remember Warren Buffett’s rules: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

[quote]“The highest price a willing buyer would pay and a willing seller would accept, both being fully informed, and the property being exposed for sale for a reasonable period of time.[/quote]

— West’s Encyclopedia of American Law, edition 2

Copyright 2008 The Gale Group, Inc. All rights reserved

To pick a purchase price, you’ll need to put your tools together to figure out how fast you can sell and how fast you want to sell.  If you don’t care about how long it takes, then you may have more flexibility to price it higher.

It is really hard to sell something quicker than the average DOM is showing you. If things are not selling fast, the market is telling you that they are not as interested in that neighborhood and price.  It takes the right person coming along who wants the house or a dramatic change in price.

Tim’s Rule of Thumb on Pricing:
You should be able to get a contract on your house in 30 days.  If you do not have an acceptable offer in the first 30 days, you are priced wrong and the market is telling you that they are not interested.

In picking your price, the main question you should ask is:  “Can I afford to fix up the house?”

  1. If the answer is yes, look at the top end of the market to make sure you do enough but not too much. Investing in rehab takes time and money so keep a firm grip on Warren Buffett’s rules.
  2. If the answer is no, look at the as-is comps and pick the price that sells faster. If the as-is comps are in better shape than your house, you’ll have to decide to drop the price even more or do the minimal amount of work.

Best Part of Using DOM to Pick Your Purchase Price

Because I use DOM in setting price, I now have good information about how long this process should take.  Granted, this assumes we picked the right comps and market conditions don’t change.  It is not a guarantee, but if I did a proper evaluation, it is surprisingly accurate.  This tool is very valuable and is something you can use to decide what work you should do and at what price point you want to list your house. A good professional can give you 30-, 60-, 90-day price points and the level of rehab required for those different prices.

Caution: DOM Does Not Tell You How Fast You Get Your Money

As I mentioned at the beginning, DOM only tells you how long it takes to get an acceptable contract after you first list the house.  Once the house is sold, then you enter into the closing process.  This includes inspections and title work with a title company or closing attorney.  It includes getting bank approval for loans, re-negotiations after the inspection turns up a book of things wrong with the house, making agreed-upon repairs, the buyer being able to sell their other house, etc.  The actual closing date picked in the contract can even end up getting pushed back.  So you should plan on another month or two to close the house. 

Here’s a quick timeline of when you can expect to get your money if you’re selling your house yourself.

What if I Need to Sell Faster Than the Average Days on Market?

Inside HouseBut what do you do if you need to sell quicker than your 30-day goal, or quicker than the average DOM in your neighborhood? There are two things you can do:

  1. Reduce the price to a point someone is willing to buy.
  2. Fix up the house better than all of the other houses to make it a very attractive offer.

Some things just can’t be fixed.  You can’t change the house’s location.  For example, bad school districts will push house values down and keep some people from moving there. I just evaluated a house that is a perfect example of this problem. When I evaluated the neighborhood, nothing had sold in less than 150 days, which told me there were not many people willing to buy a house in that neighborhood.  The homeowner had updated the house with high-end fixtures, a new roof, fresh paint, tank-less water heater, etc., and still could not sell it.  Fixing up a house will get you only so far, and in this case, it actually hurt the home owner because the house was overly fixed up. Their best bet to sell was to cut the price of the home comparable to what had sold and take a loss on the extra repairs they had done.  If they needed to sell fast, they would have had to cut the price a lot to make it an “irresistible deal.” (I actually advised them not to sell and look at renting the house).

The #1 way to get people to buy is the price.  If you have to sell fast, you need to consider taking a much lower price.  Given time and the right price, someone will buy it.

If you are in a situation where you have to sell quicker than the market will allow, consider talking with a real-estate investor to see if they can buy it at a price that you could agree to.  They usually have cash on hand to buy and close in as little as 2 weeks.  That is not DOM; that is from start to finish—getting your money in two weeks!  They can also take care of repairs for you.  Investors will usually offer what the house is worth in “as-is” condition, minus costs and enough to make a profit.

Conclusion

Days on Market can help you:

  • Evaluate the health of a neighborhood
  • Decide what price you should be asking for your house
  • Anticipate how long it will take to get an acceptable offer
  • Make logical and informed decisions just as if you had interviewed your potential buyer

It does not tell you how long it will take to get your money, and it can be manipulated to make things look better than they are.  But as a whole, it is a powerful tool and should be used by everyone trying to price out a house.

 

Author Bio:
Tim Watts is the owner of W6 Property Solutions, LLC—also known as Watts Buys Houses.  The company specializes in helping people that have real-estate problems.  This includes consulting, as well as buying, fixing, and selling houses and land.  The following article is the method that Tim uses to evaluate the value of properties as part of his value analysis.