What’s Worse?

It’s a simple question, but the subject matter is even simpler.  Perhaps that’s why I find such fault with the content of the two scenario’s I’m about to lay out.

Allow me to detail two different examples of mis-pricing, or transparent “strategies” in the real estate market, and you let me know which one is worse.

Both are prevalent in today’s market, and while I know which one I despise more, I’m curious to see how the general public feels – especially the buyers…

BadWorse

I’m not exactly a fan of how properties in Toronto are sold.

I’ve made no bones about this in the past.  I don’t love the “offer dates” and the “hold backs” on offers, nor do I like the rampant under-pricing.

Having said that, it’s the way it is.  I can’t change that.   Although, some would have me try…

A reader once accused me of being a liar, hypocrite, or something of the story, essentially saying that I don’t practice what I preach.  The reader said that while I wrote about my disdain for under-pricing properties and holding-back offers, I do it myself, therefore I am a fraud.

True.  Well, the first part, but not the second.

Under-pricing and holding back offers is the only way residential resale single-family homes under $1 Million (and even those over…) are sold in Toronto these days, and it’s been like this for the 12 years I’ve been in the business.

Not only that, the “strategy” is effective, and it works.  The opposite – pricing at fair market value, believe it or not, does not work, and backfires, as buyers often think, “There’s no offer date?  Something must be wrong here.”

So let’s say I’m called in to a listing presentation, and I tell the sellers, “Even though the market expects your $700,000 home to be priced at $599,000 with a set offer date, I don’t like the way things are done in real estate, and I’m going to pick today as the day we change that, and pick you as the guinea pig, so let’s price at $719,900, offers any time.”

Do you think I’ll get that listing?

Right, right – it’s all about me.  I know, I’m awful.  Imagine me trying to, you know, get business.

But I’m in the business to get business.  I’m not a social worker.  I don’t work for Green Peace.

I can’t change the industry.  I can’t stop 44,000 agents from under-pricing and setting offer dates.

So if a blog reader feels that by openly admitting I don’t like the system, while adhering to it, that I’m somehow a fraud or a hypocrite, then I wonder if that reader would like his or her house to be the test-project in the “Change The System” real estate pilot project…

In any event, with the way the market is today, a seller and/or agent would be a fool not to set an offer date for the sale of a home.  You need those six or seven days to market the property, and ensure all the interested parties are able to get through for a viewing.

Offer dates are not going away, folks.  And as for the “pricing games,” you could argue that in today’s market, nobody really knows what a house is truly worth anymore, so under-pricing isn’t going away any time soon either.

So it’s along those lines today that I want to present two tales of “mis-pricing” and “offer dates,” both of which bother me, and both of which are prevalent in the industry today.

Scenario 1: Pricing Low, Holding Back Offers, Not Selling, Pricing Higher

We see this all the time!

A property is listed for sale for $699,900, and offers are set for next Wednesday.

Offer date comes and goes, and the property re-appears on MLS the next day at $789,900.

What happened?

Well it’s obvious – the seller and the agent “strategized” to under-list the property for $699,900, thinking the property was probably worth somewhere around $770-$780K, and they set an offer date, and expected to get multiple offers.  But, that didn’t happen…

Sometimes, the offers and the prices that sellers want don’t materialize because they didn’t stage the property, or market it, or clean it, or all of the above and a half-dozen other reasons.

And sometimes, the offers and the prices that sellers want don’t materialize because the market had a look, and said “no thanks.”

Either way, we see this all the time.  Every day, I see a property on “New Listings” and I wonder, “Where have I seen that before?”  I’ll run a search, and see that I had indeed seen the property up for sale before – last week, for $100,000 less.

In my opinion, coming out at a higher price often sends a signal to the buyer pool that you’re nuts, and to stay away.  It might say that you’re unrealistic, or that you think you know best, or that now you’re priced too high.

But on the flip-side, if you really did under-price the property – say for $699,900 when you know it’s worth $770-$780K, and you got two offers, the highest of which was for $740,000, you don’t have to take that offer; nothing is stopping you from rejecting it and re-listing at a higher price tomorrow.

That’s often what happens in these cases, but it still seems a bit ridiculous.

Imagine somebody coming from another place – a different market, and offering $740,000 on a $699,900 listing, and having the seller say, “no.”

The buyer might ask, “Well what do you want for your property?”

The seller might reply, “$780,000.”

And the buyer might wonder, well why didn’t he just list the property for the price he wanted?

It’s so simple.

It’s like when you ask both an adult and a 5-year-old, “How do you get an elephant inside a fridge?”  The adult over-thinks things, and considers all kinds of options and scenarios.  The 5-year-old simply says, “Open the door, and put him inside.”

Scenario 2: Pricing High, Not Selling, Pricing Lower, Holding Back Offers

I viewed a home up by 427 and Bloor a few months back, listed for sale at $1,229,900, and I didn’t love the place.

It wasn’t so much the price that was the issue.  It was the flow of the house and the way it was laid out, and thus the issues weren’t something you could fix at a worthwhile cost.

I saw the house come out again at $1,219,900, and then again at $1,219,900.  It sat on the market for months.

Then last week, the house was listed for sale at $999,900, and I hovered my mouse over the listing as I thought, “Please don’t tell me they’re doing what I think they’re doing.”

I clicked on the broker’s remarks, and low and behold, “Offers To Be Presented On Thursday, March 24th At 7:00pm. Please Register By 5pm.”

Right.

So if you can’t find a buyer at $1.2 Million, you think you’re going to create a bidding war by listing it at $999,900?

It boggles my mind.  The “strategy” that listing agents will employ.

How about this – your house is over-priced, plain and simple.  It’s nice, but the layout is crap, and that’s why it’s not selling.  You’re obviously a first-time home-builder, and you did a terrible job.  So forget your $1.2 Million, because it’s not happening.

But alas, that’s too simple.

Instead, we’re going to get into the first layer of what will undoubtedly be an onion’s worth of pricing games!

First level: under-pricing, holding back offers, not getting any, and then asking, “Now what?”

A client of mine actually went into this magical $999,900 offering, and he said the listing agent, who was pushy as hell, was asking him about his mortgage pre-approval.  She was asking, “Are you approved for $1.2 Million?”

The agent was flaunting the idea that “There’s a ton of interest, and the house could get bid up to $1.2 Million.”

But I have to wonder, does the agent really think people are going to fall for that BS?

It’s shameless!  Not the pricing and re-pricing, but rather the idea of standing there and telling people that there would be a slew of offers and all kinds of interest, when you know for a fact that this damn house isn’t getting any interest!  The odds of a “bidding war” are next to none.

Or maybe, and possibly worse, is that the agent does believe this “strategy” could work!  Maybe the agent is so inexperienced and so helplessly naive that he or she figures, “I read about multiple offers in the newspaper all the time, so maybe that’s what I should do!  Set a fire under this house and start a bidding war!”

But the problem with this idea is that it ignores the basic fundamentals of supply and demand.  There’s very little demand for this house in general, let alone at various price points, some of which might be fake.  And you couldn’t create enough demand to result in the price that you want in the end anyways!

This “strategy” also assumes that every single buyer out there is a moron, with no access to information.

If you saw a house up for $1.2 Million, and then saw it up for $999,000 with a set offer date, how much do you really need to know about real estate to know what’s going on?

This “strategy” only works if there’s no property history, people in general have no long-term memory, and well, people are also stupid.

So just for fun, and because I knew I was going to write about this on my blog, I called the listing agent and asked her, “What do you want for the property?”

She told me, “We are reviewing offers next Thursday.”

Yeah, thanks.  I can read.

I told her, “Yes, I see that, but you had the house up for $1.2 Million and now you’re hoping you get a windfall of offers based on your $999,900 list price.  So why don’t you just tell me what you’d take, or give me a ballpark, and maybe I’ll bring that to my client and we’ll bring you an offer.

This was her chance!  This was her moment to make a deal!

But she stuck to her routine.

“I can’t speak for the client,” she told me, which is a great way to get out of a conversation by the way – just blame the client, even though the agent is the one who really makes the calls here.  “We’ll see what happens on offer night, and we’ll go from there.”

At this point, I had no reason not to, so I simply asked, “If I brought you an offer for $1.2 Million right now, would you take it?”

Do you think she said “yes?”  Or do you think she stuck to her rhetoric?

Both of these pricing situations demonstrate the sad truth that until a buyer and a seller sign an Agreement of Purchase & Sale, no price, whether advertised or offered, means anything.

And both of these situations bother me to no end, as I see them every day.

So assuming you’ve read this, and answered my question: “What’s worse?” I’ll tell you that without a doubt, I find the second situation more egregious.

The first situation is simply a case of “Well, that didn’t work.  Let’s price the property at market value and wait for a buyer.”

But the situation is a case of, “Forget first impressions!  Forget about eyeballs, and brains, and things that can help a buyer see this farce for what it really is!  Let’s trick the market!”

I bet my next paycheque that the house from the second scenario comes back on the market next week for $1,199,000, and I wouldn’t be surprised to see them get zero offers, as the buyer pool just isn’t stupid enough to waste their night on a game, and a gimmick.

Time will tell, and I’ll keep an eye on this one.

I won’t be writing a blog for Friday as it’s a holiday, and I really would love to get off the laptop before 1am on a weeknight.  Thursday could be the night!

So if you’re looking for a real estate fix on Friday, you can always watch Thursday’s Pick5 video!

12 Comments

Post A Comment

Your email address will not be published. Required fields are marked *

  1. Julie says:

    The house from the second scenario sold for just under $1.2 – can I get your next paycheque?? This is why agents keep pulling this stunt – there are apparently enough dumb people out there for this to work often enough!

  2. Free Country says:

    As a prospective buyer, I do not get so worked up about these mind games and tactics. Keep it simple. Know what you can afford. It’s very easy — you should know how much your equity/down payment will be, everything else must be borrowed. A buyer should know what sort of interest rate he/she can get, and whether you will pick a 20, 25 or 30 year amortization (or some other tenor). Suppose your budget is $700k, $400 of which is debt. If you were to buy at $800k, your debt will be $500k. Run the numbers on excel and you can figure out your monthly payments, without going back to your lender. Ask yourself – can you really afford to spend that cash flow out each month. If so, great, your budget is $800k! Then, just accept that if someone else were to offer more than $800k, you are priced out, the same way you are priced out of buying a Picasso if you only have $1000. Don’t fall in love with the house or get caught up in the emotions of the bidding war. Simply know how much you can afford, and accept the fact that if someone else will pay more, it’s not the house for you, and walk away. There will be more houses on the market next week, and the week after that, and the week after that…

    1. condodweller says:

      You are exactly right, the problem is people get attached to a house emotionally and get fatigued after losing a few. To take your strategy one step further, If the budget is $700k and your agent knows prices are going to be ~20% higher you should start looking at houses for $590k so you know you can comfortably afford to bid up the 20%. I mean David is so proud to predict what the selling price is going to be, therefore, one should be looking to match their budget to the eventual price, not the asking price. If every agent did that, the buyers wouldn’t be so exasperated.

  3. Wut says:

    You don’t say what you would do in that situation. What if you held back offers, and when the day came you only got one and they tried to low ball the property because they knew they were the only one? What if you had at least a few interested people (multiple visits) and were expecting more but they just didn’t materialize? How do you proceed, keep the price the same and get more showings with people who may not know you want 5-10% more than asking, or do you just give up and put the price where you think it will sell eventually? If you’re no longer holding back offers a low list price doesn’t make as much sense any more.

  4. amy says:

    last spring when i was in the market I looked at a house on one of the dead end streets off pape. It was a very nice sized house/property. But it was flip, and a very poor flip at that – eg. none of the doors were fit properly and therefore didn’t close…including the front door (lol). it was listed for 749, we passed. I was so annoyed that ppl out there think they can do such a bad renovation and expect to be rewarded (i know, naive me), so i obsessively followed its progress on the market. These numbers might be a bit off, but you’ll get the picture: It never sold on offer night. It relisted at around 900, never sold. it dropped back to 799, never sold. went off the market at some point. Re-listed at 989, never sold. Dropped to 799 and eventually sold this past winter for around 879! i couldn’t believe it. i could not believe it! but that’s the reality of this market I suppose. I do feel bad for the ppl who bought, hopefully some the reno issues were fixed.

    1. Libertarian says:

      I agree with your last sentence Amy. I having a feeling though that the renos weren’t fixed and that the sellers simply waited for one person to come along willing to pay the “right” price. David always has stories about these scenarios. The outcomes are always usually the same – the seller ends up finding a buyer willing to pay their price. The question I have in these scenarios – what buyer agent would recommend to their client that they pay that price? That’s what scares me. David says that buyers aren’t morons, but these games keep working, so either the buyers or their agents are morons. Probably both. On a side note, it would be interesting to crunch the numbers for the house in your story considering they had carrying costs of at least another 6 months.

  5. Joel says:

    I don’t think either of them are bad. The agents and sellers are trying to maximize the amount they sell for in both situations.

    The much more annoying and root of these problems is the original under pricing strategy. Not knowing what a house will cost a buyer is extremely frustrating. I know under pricing not going to go anywhere, but the other two situations let you know the amount the seller is after. With under pricing what they want is more.

    1. Geoff says:

      But its seems that good realtors can actually ballpark what a house will sell for, regardless of listing price, by ignoring list price and just looking at neighbourhood comparable selling prices. I think it’s when there’s no recent comps that are a problem, otherwise I know that no one is picking up that leaside semi for $600K, I don’t care that the listing is $420,000.

  6. RT82 says:

    As a recent 1st time detached house buyer in TO who witnessed both scenarios a few times, I feel Scenario #1 was way more annoying for us. Its just so lame and a waste of my time as a buyer (actually its a waste of everyone’s time except the seller I guess).

    Scenario #2 is not really frustrating as a buyer. The sellers look incompetent (to me) and I agree they’ve shown their hand. I trust my agent will do their work properly and point out the pricing history to me. Maybe more work for my agent, but as a buyer not really that frustrating.

  7. Kyle says:

    In many legitimate cases, scenario 1 gets a pass in my book. I’ve seen situations were a house held back offers but failed to generate the interest it “should” have, due to unforeseen things: another house happened to be taking offers the same night, buyer fatigue setting in, property is unique and maybe needs more exposure, etc. But what is inexcusable are the cases where a bidding war ensues, and the seller decides, “still not good enough”

    Scenario 2 strikes me as a widely used strategy by amateur flippers and their amateur Agents. And i think how they price reveals quite a bit. The first list price tends to be their fantasy price, while the second list price tends to reveal what they need in order to break even and make a small profit. Knowing this, you can do the math and roughly back out how much they spent on the renovations, which then can give a sense of the quality of the renovations.

    1. jeff316 says:

      Agreed. Scenario 2 is a buyer’s dream because the seller has shown their hand.

  8. Marina says:

    To be honest, the first situation is not really a problem for me. If you hold back offers and get nothing (or a couple of low-balls), then I have no issue with the seller paying carrying costs for however long it takes them to get the money they want. At least it’s open – i.e. “Here is the price I want.” Maybe the seller is overpricing, but they are putting it out there, and you can act, or not, at your leisure.

    The second situation bugs me because it reeks of trying to “game” the system. The system is not that stupid, but it still rankles. AND it is almost always accompanied by a smug pushy agent that you want to throw off a cliff, Loony Tunes style. Hard pass.

TWEETS