Real estate farming is possibly the most proactive position an agent can take to build inventory, especially in today’s short-supply market. The method includes a series of steps that analyze a given neighborhood, ZIP or market area to determine how many homes are most likely to sell, at what price range, and how long they will be on the market.
A good farming strategy involves working through a set of five exercises to determine the area’s viability.
1. Average Price
Predicting your average commission per transaction will determine how many properties you will need to close to make a profit in your farm area.
From your area, pull all of the sold listings over the past two years to calculate the average price range of homes sold, and then calculate what your commission would have been. Then jot down the number of closings you need to succeed.
2. Amount of Homes
Your number of needed closings (from above) needs to be proportional to the number of homes in the farm area and the area’s turnover rate (which we’ll address next). Real estate experts recommend those just starting out choose a neighborhood that has up to 500 homes to make the effort worth the investment. That number is negotiable, though, as you don’t want to choose an area so large that your marketing effort is spread too thin to make a difference.
3. Turnover
One of the most important aspects of identifying a farm area, turnover rate, is a simple calculation that helps to identify whether the area has enough sales activity to sustain your prospecting campaign.
Most agents look for areas with a 7 percent or higher turnover rate. For example, an area with 500 residences but only 25 sales in the past year only yields a mere 5 percent turnover rate––not high enough to earn a decent profit, even though there are so many homes in the area.
To figure out the turnover rate in your potential farm area, divide the number of homes in your farm area by the number of homes sold in the last two years.
4. Months of Inventory
Another important measure of potential success is “months of inventory,” a calculation used to indicate how long it would take for the homes currently available to sell at the market’s present pace. The figure is primarily used to help REALTORS® predict how many listings are needed to keep their pipelines active over a given time period.
A healthy market usually has between five and six-months supply of inventory. To calculate months of inventory, from your farm area, divide the number of active listings on the market by the number of homes sold per month on average during the previous 12 months.
5. Competition
Lastly, knowing who is currently marketing to your potential farm area can lead to a make-or-break campaign. If one agent dominates the area, you may want to look elsewhere. An area with a variety of agents will more than likely be more open to a new face.
Ready to launch your next farming campaign? Learn how by downloading this free eBook from Realtors Property Resource®, The RPR® Guide to Geographic Farming.
Laurie M. Brown is marketing and communications manager for Realtors Property Resource® (RPR®). For more information, please visit www.narrpr.com.
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