Are There Risks To [Underpricing] Your Home & Why It’s Done!

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When I meet with new clients to discuss selling their home I always tell my clients  there are three pricing strategies to consider when choosing your listing price or asking price.

And each pricing strategy comes with its own risks and rewards.

Because I take more of a consultative approach with my clients I always like to get to know as much as I can about them, so I can help them choose which pricing strategy best suits their goals, their objectives,  and their level of comfort and confidence or anxiety as the case may be.

The first strategy is what I call the “old-school“ strategy.

I call it that because it’s how listings were priced on the real estate market when I was a little kid.

Home sellers wanted X dollars for their home but buyers never offered or paid full asking price back then.

So home sellers would price their home higher than what they wanted for it, and what their Realtor told them fair market value actually was for the home at the time, and they would expect a buyer to automatically offer them less money which would effectively be the price the seller ultimately wants.

I remember when I was a kid my friends parents would say they don’t really want to move. They listed their house because they were just testing the market. In other words they want to know what their house is really worth.

And if someone miraculously gave them their pie in the sky price then they would take it.

But what is very important to remember is that back then there was no Internet available. There was no Realtor.ca website, and Realtors themselves didn’t even have their own electronica MLS system way back then for references.

They had binders with listings in it. And people relied solely on word-of-mouth and what the Realtor could find out comparable homes actually sold for.

I always advise against that strategy and here is why.
These days with data readily available and the information available to Realtors, there is no need to “test“ the market.

Realtors can do a Comparative Market Analysis and tell you very accurately what your home is worth.

But the other reason is that in today’s world this strategy isn’t really testing the market because buyers also know, thanks to readily available data, if a house is actually overpriced or not.

So the ultimate result of overprice in the home is that you won’t get any showings.

People won’t get off the couch or spend the time and gas to come look. They assume you wouldn’t even consider a low-ball offer and there’s no way they will pay over fair market value for your home.

There is a reason it is called fair market value.

The reason is because the “market” knows what is fair!

So if you are serious about selling your home and you do overprice it, then you will get very few to no showings at all.

Your property will sit on the market for an extended period of time.

It will be stressful for you and a lot of work for you because you have to keep the house in showing condition for many months.

And then if you intend to lower your asking price later on then the listing will look stale.

Buyers will start to question why it didn’t sell quickly when everything else is selling in much less time on the market. People love to assume things. So buyers might assume that there is either something wrong with your property, or they might assume that the sellers are greedy, or the house simply isn’t worth it.

The result is that you get no offers and also a lot of time and money and stress is wasted.

The second pricing strategy is to price your home at fair market value.

If your home is listed at fair market value and it shows very well, and is staged very nicely, and you have an agent who really works hard to market your property to potential buyers, then based on our regular real estate market conditions in Toronto, the home should sell in a reasonable amount of time for 98% to 100% of full asking price.

But then there’s the ultimate question and the topic of this vlog which is all about under-pricing.

Often when you hear in the news or you hear word-of-mouth about all of the bidding wars or multiple offer situation on properties you wonder what this world is coming too.

Well in an active market where homes are selling regularly and buyers are actively looking [which is also known as high demand], many of those bidding wars are created by the strategy of the Realtor who listed the property.

How you might ask? They under price the property to catch the attention of anyone and everyone who might be interested in that that type of home in that area.

Also, the seller agrees to NOT consider offers if they come in sporadically, and will hold off on considering any and all offers for a period of time which is specified in the M.L.S. listing. There will be a specific date and time to review and consider all offers.

Holding off on considering any offers for a period of time will allow time on market for many more people and potential buyers to see the home.

That will create hype, let them fall in love with the property, get the buyers excited about owning it, and ultimately want to make an offer and compete for the winning bid.

Then, by forcing everyone who is interested in the property to submit offers at a certain date and time means there will be people bidding against each other. Ultimately trying to outbid each other.

Which not only drives the price up which initially started under fair market value but usually it will go over fair market value if the Realtor is experienced at this strategy and they did their job well.

I should caution you that this strategy is based on some criteria that must be researched and considered by the Realtor at the time of listing.

Number one, it depends on market timing. Sometimes it only happens in certain demographic areas during peak seasons.

Number two, it depends on supply and demand in that specific area at the specific time.

If supply were higher than demand then this would not work.

Number three, it depends on having a high skilled Realtor who knows how to successfully execute this strategy.

Not only must the Realtor know the market conditions surrounding the property, but he or she must also know how to effectively market the property more than any other marketing efforts so as to ensure they successfully create hype and interest for that property.

And they must really know how to manage multiple offers on offer date.

There is a negotiating strategy and many legal parameters that Realtors must adhere to properly when negotiating in a multiple offer situation and trying to get buyers to bid against each other without the Realtor violating the rules.

So here’s the big question. When I meet with clients to list their home and we talk pricing strategies, some sellers occasionally get scared with this strategy.

They are afraid of giving away their home for less than fair market value.

So here is the big answer to that big question.

No it is not risky to under-priced your home, assuming research shows that the market has more demand than supply along with active buyers in that area, because … if you don’t get any offers that meet your requirements, or at least equal to fair market value, you simply do not have to except any offer.

Nobody can force you to accept an offer or sell your home.

Many years ago when I was a kid I do remember that my father had a business partner who overpriced his home. He was content to let it sit on the market for an extended period of time just to test the market and see what happens.

He actually stopped paying attention to the listing and just waited patiently to see if an offer did ever come in.

Well over the summer the real estate market heated up rapidly.
Demand increased and although they were not bidding wars at the time, a buyer did offer the seller full asking price.

The problem was that when the offer came in the seller asked his agent at the time what was currently going on with the real estate market because they hadn’t checked in a while.

Well now the house was actually worth more than the offer itself.

However, the offer was unfortunately at full asking price because the buyer knew he was getting a deal, and the seller had to except the offer.

That was the law at the time and so the seller Sold his house at a discount.

But during those times the law required that if someone offered you full asking price for your home you had to take it.

That law was abolished many years ago.

So the bottom line is that even if you under price your home, if a buyer does offer you less than fair market value then you simply don’t have to except it.

If someone offers you full asking price but you in fact under-priced it then you don’t have to except it.

In fact, even if a buyer offers you more than asking price but you think the market could likely generate a higher bid if you wait patiently then you don’t have to except any offer.

Under pricing a home is a strategy that can work very well but must be executed flawlessly with many facts and data to be considered before making that decision.

If you are thinking of selling and want to talk about pricing strategies or under pricing to create a bidding war, I am happy to discuss the details further with you.
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