The Tradeoff between Selling Single-Family Houses as Vacant or Lived-In: Evidence from the Bloomington-Normal Housing Market.

Author:Adanri, Adebayo A.
 
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Abstract

A widely held view in the residential brokerage industry is that vacant homes have longer marketing times and sell at a price discount compared to non-vacant single-family homes. The purpose of the current study is to explore whether this widely held view is true for the Bloomington-Normal, Illinois, market area. The study uses data from the local multiple listing service, and the analysis employs a hedonic regression model. Findings from the study show that vacant homes have longer marketing times than non-vacant homes, but occupancy status has no significant effects on home sale prices, which is a departure from the generally held view that vacant homes sell at a discount.

Introduction

Selling a house can be a stressful exercise because of the various issues and decisions that surround it. Sellers try to minimize the sale time and maximize the net gain from the sale of a house. Sellers consider whether to use a broker or real estate agent; previous studies have shown that listing a property through a broker or real estate agent could expose the property to a large pool of buyers. However, there have been limited studies on the most effective and efficient approach to selling a house.

The purpose of the case study presented in this article is to explore whether vacant houses have fewer days on the market or sell at a higher price compared to non-vacant houses. The study is guided by the market theory that suggests sellers desire to sell at the highest price and in the shortest time possible, while buyers are guided by the desire to choose, from the available homes in the market, a property that maximizes the utility derived from housing. (1) Based on this theory, and assuming all else are equal, the objectives of the study are to find (1) whether selling a house as vacant (at the time of sale) reduces the number of days the property is on the market, and (2) whether vacant homes sell at a premium or discount compared to non-vacant houses. In other words, do vacant houses have fewer days on the market and sell at a higher sale price compared to non-vacant comparable houses?

The study hypothesis is that vacant houses do not have fewer days on the market and do not sell at a higher price compared to non-vacant houses. A hedonic regression model is used for the analysis. The study used the median days on the market to explore whether vacant houses sell faster than non-vacant houses, while median sale price was used to explore whether vacant homes sell at a premium compared to non-vacant houses. The study used 2016 home sales data extracted from the Bloomington-Normal (Illinois) Association of Realtors (BNAR) multiple listing service (MLS). Bloomington-Normal is a twin city area in central Illinois, about 130 miles south of Chicago, with a population of approximately 170,000. Major employers include State Farm Insurance, Country Financial, and Illinois State University.

Literature Review

One theory in the real estate literature is that vacant houses do not show as well as occupied houses. According to Peng and Cowart, (2) vacant homes experience longer marketing periods because they generally do not have a warm emotional appeal to buyers compared to non-vacant homes; they also note that the absence of furniture makes homes look smaller rather than bigger. To address this type of concern, it is not uncommon for real estate brokers or agents to stage vacant homes in order to create emotional appeal to prospective buyers.

Other factors may affect a home's marketing period. One school of thought is that seller motivation determines how long a property stays on the market. (3) The research shows that sellers who at the time of listing had a planned move date are inclined to sell more quickly than those that have no time constraints. In general, the shorter the planned time to move, the shorter the duration of the marketing time. Another factor that impacts marketing time is overpricing. (4) Findings by Knight suggested that overpricing is costly to the seller both in time and money. Although properties with high initial pricing stay longer on the market, the literature suggests that it is the seller motivation that ultimately determines the listing price and how long a property stays on the market. (5)

Analytic Approaches

Most existing studies have used a hedonic model to predict property sale prices using the factors of seller motivation and time on the market. According to Taylor, a hedonic model is an indirect valuation method where the value that consumers place on certain characteristics is inferred from observable market transactions rather than direct observation. (6) Cannaday and Kang note that "the word hedonic has to do with pleasure; i.e., a hedonic price is related to the pleasure derived from the various attributes of a given commodity." (7) Hedonic analysis is a statistical model that describes the relationship that exists between a property's characteristics and its sale price. The existing studies, however, have noted the likely difficulties with using statistical models for real estate analysis because the models are prone to problems related to multicollinearity and stability of the regression parameters. (8) Findings from these studies show that nonlinear regression models are superior to linear models. Kang and Reichert suggest the use of ridge regression methods to reduce adverse effects of multicollinearity that are common in linear models. They note that the regression parameters must be stable in order to use the same adjustment factor over time, because the...

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