Is under pricing a property to get top dollar a foolproof strategy?

Our most popular blog in 2013 was titled “Are buyers and sellers living on the edge". In this blog we addressed that many sellers expect to get multiple offers and some will resort to intentionally under list their property by a significant amount, set an offer date 5 to 7 days from the time it’s listed and hope that oodles of buyers will fight for their house on offer day and deliver a mega sale price. If a property has a market value of $975,000 then a seller may opt to list it at $899,000 or less hoping for a roaring bidding war but never intending to accept $899,000. This is a controversial pricing strategy so this blog touched a nerve with buyers and agents alike. 

Roll a dice
Roll a dice

In actual fact, there are many factors that influence whether an under listed property will ultimately achieve a market value price or higher. Some of these factors are: 

  1. Home’s price point - properties that are priced under a million dollars have a greater chance simply because there is more demand for lower priced homes and the property could potentially procure more offers.
  2. Supply versus demand - the lower the supply with high demand, the more likely the property will procure more offers.
  3. Neighbourhood - houses situated in prime school areas or that are more walk able to neighbourhood amenities will have higher buyer interest and procure more offers.

Considering the criteria, it's clear there are no guarantees this strategy will deliver a market value price or higher on every property. 


Bulletproof vest
Bulletproof vest

How did this strategy play out in 2013? Well let’s analyze what actually happened:

  1. Some properties sold for 10% to 25% higher than the list price or even more. It's difficult to quantify the success rate but obviously, if this materialized, sellers popped the champagne bottle.
  2. Some properties sold but didn’t get market value because the asking price set was too low. We appraised a property and determined, after reviewing sold comparables, that the most effective list price would be $789,000 estimating that it could sell for up to $820,000. The seller opted to under list it for $699,000 and sold it for $780,000 with another brokerage. In this case this strategy failed to deliver what we considered to be its potential market value. Based on our experience this happened often enough on other properties listed in different parts of the city.
  3. Some sellers were disappointed to receive an offer with a price that did not meet their expectations and consequently opted to relist at a later date at a higher price or they chose to sign one offer back at their expected price. Sometimes buyers reluctantly played along with the seller and sometimes they walked away from negotiations.
  4. Some sellers, with no motivation to sell, took their property off the market.
Failure and loss
Failure and loss

Why did the strategy to under list hoping to generate a roaring bidding war not work 100% of the time?

  1. One day, for no apparent reason, some buyers woke up after playing this game for a few months, dug their heels in and decided they would not play the seller's game and compete for the property. Surely this has happened many times and usually leaves the listing agent and seller perplexed as to what went wrong. What happened is that buyer exhaustion set in and some properties did not receive the offers expected. Agents cannot predict when this will happen but it assuredly happens sporadically year in and year out at some point.
  2. The real estate market was unpredictable as usual. It was a frenzied seller's market one week and, for no apparent reason, cooled down the next delivering fewer or no offers at all on offer day.
  3. Some buyers changed their mind and, although they were willing to make an offer as soon as they saw the property, they changed their mind by the time the offer date came around.

So why would some sellers intentionally choose to under list their property considering all these risks? The answer lies in human nature’s allure of the mighty dollar. It’s like playing the lottery – the possibility might exist that they could come into a wind fall and sellers just can’t help themselves.

Sometimes it isn’t sellers who intentionally choose this option but their listing agent suggests it and they sign off on it. Why would a listing agent use this strategy if it’s risky?

  1. The agent is unsure about the property's market value and is not intentionally under listing the property at all.
  2. The agent is a firm believer of this pricing strategy and is willing to roll the dice even knowing, from working the Toronto market, that it does not work 100% of the time.
  3. The agent does not have an alternative and effective marketing strategy and takes the easy way out or wants to look like a hero by proclaiming "Just sold X house for 20% above the list price” potentially without considering all the risks to the seller.
Lock on the wheel
Lock on the wheel

The fallout of listing a property at a price the seller was never willing to accept is that it leaves a trail of frustrated buyers who consider this to be manipulative and deepens their mistrust of the buying and selling process. Many buyers resent the participating seller and listing agent for wasting the buyer’s precious time in viewing the property, doing a home inspection and wasting money to pay for it, getting approved for financing, finding an insurer for the home and spending many hours in discussion with their agent about a buying strategy for a property marketed at a price the seller was never prepared to accept.

Sometimes there are consequences even when an under listed property is successful in selling for well over the list price. It leaves a market that is very difficult to gage which makes it challenging to appraise properties coming on the market in the future accurately. Sometimes when a buyer pays well above the list price the buyer is doing so armed with emotion or the mentality that “I have to win.” This kind of emotion is impossible to quantify so this property may sell for $900,000 while another similar property without that emotional element sells for $840,000 the following week.

Even buyers who were the successful bidders became embittered if the bank refused to appraise the property at the over inflated price they paid especially if their agent did not highlight this risk. Now these buyers were faced with having to come up with a higher down payment to close on the property to avoid any legal fallout.

Sure there are many sellers that get well above the list price but as a seller you have to ask yourself “have I considered the potential risk especially if I bought another house”? If you have and are willing to take the risk then go for it.

Overall 2013 was a year that took buyers, sellers and agents on a roller coaster ride once again. So what can we expect for 2014? Probably more of the same. But hopefully, with a more educated consumer, we can reach a harmonious process of buying and selling real estate one transaction at a time.

Note: Prices have been changed to protect all parties.

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7 Responses to Is under pricing a property to get top dollar a foolproof strategy?

  1. michael facella says:

    Hey Josie
    great article and definitely something agents, buyers and sellers should read. I have personally been on both ends

    Reply
    • Josie says:

      Thank you Michael. Your feedback is appreciated. Wishing you a happy holiday season.

      Reply
  2. Jeffrey Joseph says:

    Hi Josie & Valerie;
    I have never believed in that scheme, have never done it, and never will. I have seen evidence at one Forest Hill Village listing, whereby 5 of the 7 offers, although all over the asking price, were well below the next 2. Further, even though the next 2 offers were $139,000 & $144,000 over, the Seller still left $57,000 on the table. I know, because I had the 2nd best offer, and checked with the successful Buyer, and spoke to the other 5 Agents who had the wrong Buyers.

    If, as, and when there have been some successful and publicized law suits by Sellers, the practice may slowly grind to a halt. Would you agree?

    Best regards,
    Jeffrey.

    Reply
    • Josie says:

      Hi Jeffrey,

      I absolutely 100% agree with you except that negligence would be difficult to prove in court because:

      1. the seller signed off on this price on the multiple listing agreement
      2. it would be challenging to prove the price it sold for was not fair market value

      One of the most irresponsible ones I have witnessed is with a property that sold for $887,000 in 2010. An agent lists it for $849,000 12 months later and we bring the buyer and sell it for $946,000. If the property sold for $887,000 in 2010 please tell me what sense it makes to list it at $849,000 12 months later? Then the agent sends out flyers bragging “Sold X property for 12 % above the list price”. He actually undersold it by about $30,000. It’s fair market value was closer to $975,000.

      I have changed the prices so as not to be able to identify the property.

      Have a great day my friend.

      Josie

      Reply
  3. Jeffrey Joseph says:

    Based upon your scenario above, I rest my case. As for proving it, the Agent is the professional who makes
    recommendations based on research and experience in the market place. Even a 1st year Litigator will be
    able to prove negligence and unprofessional-like conduct. The Sellers are not expected to know, and are
    expected to rely upon the Agent they chose to represent them notwithstanding the signing of a listing.

    Signing the listing in my opinion, and I am not now, nor have I ever been a Lawyer, is not enough to save the
    Agent(s) from a successful suit against him/her/them. Further, fair market value is not that hard to prove. You probably do
    it every day as you are an expert in your area, as you are expected to be, and probably hold yourself out to be,
    and any Judge will deem you to be, based upon your track record, which is rather stellar! I doubt an Agent like
    you could escape if it ever happened to you, only I know it will not happen to you, as you would not do such a
    thing; neither would I.

    In the scenario I described earlier, the property was listed at $799,000. I thought it should be $1,000,000.
    the 1st 5 offers were all over the asking price, but not one was over $850,000, hence the wrong Buyers.
    My offer was $938,000. The winner paid $943,000. About a year later I bumped into the Buyer, who I knew,
    and asked, “if the price was $1,000,000, what would you have done”? He said, straight to my face, “I would have
    paid it”! The Owner left $57,000 on the table due to the inept marketing of the Agent. It was like paying the
    real estate fee twice!

    The practice is a test case just waiting to happen if it hasn’t already.

    I did not change the numbers. They are real, and it serves the Seller right for not choosing me to represent her,
    instead of the person she did, right? (LOL)

    Reply
    • Josie says:

      Jeffrey I respect your opinion and you may be right. You make some excellent arguments as to why agent negligence can potentially be proven if this strategy were to fail. It would certainly be tested if a law suit were ever to be filed.

      Josie

      Reply
  4. Mahnoor Khalid says:

    Great article josie. You picked up very definite points, but not all fingers are same. I also want to share something I really found helpful for selling and buying homes i.e. binayah.com.

    Reply

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