New Way Of Pricing?

Remember when properties were laughably, egregiously, and pathetically under-listed to try and “fool” the market and its participants?

And remember when that worked?

The game has changed since the busy spring, 2017 market, and sellers and listing agents are looking for new tools and strategies.

So it should come as no surprise that the new strategy is the complete and utter opposite of the old one…

PricingPyramid

What do you think of that graphic above?

Love it?

Hate it?

Well, I suppose it depends on where you find yourself in the real estate market…

This pricing pyramid has been around since my very first day in real estate.

As I’ve always said, I didn’t invent this whole “under-price, set an offer night, solicit multiple bids” process of selling real estate, but rather it was like this when I arrived in 2004.

The public hates the way real estate is sold in Toronto, and frankly speaking, they should.

But if the shoe was on the other foot, and it often is – when buyers go to sell their homes, every seller out there understands the way the Toronto market works, and why this “strategy” has always been around.

The supply of homes in Toronto has always been low.  Since I got started in 2004, I have never seen a period where supply outpaced demand.  Not even close.

As a result, we’re continuously in a seller’s market, and buyers can’t take their ball and go home.  They have to play by the rules, set out by sellers, or they will simply never buy.

The idea behind under-listing, and setting an “offer night” is twofold, and market participants often overlook the second point:

1) You want to attract clueless, hapless, and helpless buyers (and their agents), who see $1,000,000 houses listed for $799,900, and think they can get it for $799,900, thereby increasing the number of offers you receive on offer night.

2) You want to expose the property to the market for at least 5-7 days, since in a truly red-hot market, you aren’t interested in what one person, or the first person would pay for the home, but rather what the entire buyer pool thinks, after they’ve had a week to see the property, and decide what they want to pay.

I know, you all hate this.

You’re cringing as you’re reading this.

Bring on the calls for real estate regulation!

Call Kathleen Wynne – she’ll do whatever you want to the free market, so long as you vote for her next year.  “Henceforth, all Realtors shall wear puffy shirts.”  If you want it, just ask for it – she’ll do anything right now, in any industry, and any arena of society.

Phew.  That risked getting way from my point…

Bottom line, as far as under-pricing and offer nights go: there’s nothing really wrong with them.  I don’t like it; I never did.  But it makes sense when supply is low, demand is high, and if all the market participants understand the process (which many don’t – a big problem), and the process is presented, and worked through, in a fair, reasonable, and efficient manner (which often it’s not – also a big problem).

So having said that, I think you’ll be happy to report that the days of under-listing, setting offer nights, holding back offers, and seeing double-digit offers, are for the most part, over.

No?  You don’t think so?  You doubt me?

Well, that’s fair.

You read the Globe & Mail article HERE about 16 offers on a crappy 1-bedroom in King West last week.

You also read THIS article, also in the Globe & Mail, about a Realtor that is now under-pricing even more drastically than before, in efforts to bring back the “glory days” when properties sold for 150% of the list price.

Now as for the latter article, I know the agent in the article – he’s one of the top listing agents in the city, and not to sound like I’m siding with anybody wearing their sparkly Realtor-pin, but I don’t fault him for what he’s doing.  That house on Castlefield that was mentioned in the listing – the property listed for $895,000, it was a $1.3M house, and anybody that went to that open house, or booked a viewing, thinking it was an $895,000 house, needs to get a new buyer agent, and/or take some more time to learn about the market.

Do I like that it was severely under-listed?  No.

But I don’t blame the agent.  Because what he did, worked.

A lot of really, really stupid people got involved in a mess that was artificially created, by, you guess it, themselves.

So while you might be reading articles like the ones above, keep in mind that sex sells.  And in the media, whether it’s about restaurants or real estate, sexy stories are the ones that get newsprint on your fingers.  Er, I guess in today’s world, “likes” and “shares.”

From my perspective, I’ve seen a drastic shift in the market, away from under-pricing, and toward pricing at fair market value.

But as I said in the intro, we’re seeing most sellers and listing agents taking things even further, and pricing above fair market value!

Wow, the market has completely turned on its head!

Why price above fair market value, when the market is slower, and listings are up?  Two reasons:

1) Sellers are still greedy, and still fearful.  Just as a seller who under-prices will hold back offers, for fear of missing out on buyers if the property sells too quickly, a seller in today’s market over-prices, for fear of leaving money on the table.

2) Sellers are building in a negotiating cushion, since many of the buyers out there today are looking for perceived “deals,” or automatically coming in with a offer of X% under the list price, no matter what that list price may be.

Fear of missing out still exists in this market, and sellers may be greedier now than they’ve ever been!

If you think sellers were greedy back when the market was red-hot in the spring, and everything was selling for a 40% premium over the list price, you’d be shocked at how many greedy sellers out there are refusing to sell, in July, for July’s price.  They want March’s price, and they don’t care what you have to say.  Statistics?  Screw you.  Data?  I don’t care.  Evidence?  Shmevidence.  “I know what my house is worth,” they will tell you.

And as a result, we’re seeing more and more homes priced well above fair market value, in part because of the misplaced greed, but mainly as a strategy, that runs opposite to what we were so accustomed to seeing, for such a long time.

Maybe that’s the problem, or at least part of it?

Maybe for so long, sellers priced at stupidly-low numbers, and were spoiled because the market (and a good listing agent) would take the property up, up, and away, and now, sellers and listing agents don’t really know how to price in a balanced market.

On the market right now, are more freehold properties with over 30 “days on market” than I think I have ever seen.

There are also more properties on their 3rd, 4th, or 5th listing, than I care to count.

Buyers of freehold houses, save for those still being under-priced for competition like the one in the article above, are being patient, and biding their time.

A house might be listed at $1,099,000, and you might target this in the low $1-Million range, and say, “If they get to 30 days on the market, they’ll have to reduce the price.  That should fall down to $1,049,000, and then we could conceivably pick this thing up for $1,030,000 or so.”

In the meantime, it might sell.  Maybe for $1,099,000, and if that’s the case, then you say, “We weren’t willing to pay it,” and move on.

Now before the readers make a point that I know they’re going to make, let me say one thing.  In a blog post a few weeks ago, readers were confused as to why you wouldn’t just, say, offer $1,300,000 on that new $1,500,000 listing.

I believe I had written about a property that was listed for $899,900, and was re-listed at a ridiculous $1,330,000 after a failed “offer night,” and buyers suggested that there was nothing wrong with offering, $950,000, or even $1,000,000.

Nothing wrong, no.

But any point?  No.  None.

Simply put: houses listed at $1,500,000 don’t show up as “SOLD” on MLS at $1,300,000.

You might suggest, “You don’t know, until you try,” but I’m telling you, it’s a fool’s errand.

If a seller, listed at $899,900, is going to re-list the next day at $1,330,000, your $1,000,000 offer isn’t going to entice them, nor change their mind.

And if a house is listed at $1,500,000, and you think it’s over-priced, and could be had for $1.3M if it sat on the market for two months, there is no way the seller is going to forego those two months, and take your $1.3M offer today.  It just doesn’t happen.

I love my readers, and the comments are never misplaced.  But sometimes wishful thinking trumps reality, and sellers are not going to cave after one day on the market.  It takes time to wear them down, and for them to absorb what the market is telling them.

After two months, the market has spoken: your house is not worth the price at which you have it listed.

And this can be almost more frustrating than the rampant under-pricing that buyers hated in the spring – the fact that now, you have to wait four weeks, or two months, for an over-priced seller to come to his or her senses.

Call it a strategy, call it greed, or call it a complete inability to determine fair market value, but sellers are really starting to over-price in this market, and we’re seeing the “DOM” rack up to new heights (that’s days on market for those that don’t live and breathe real estate), and properties are undergoing price changes, and being re-listed over and over at new and lower numbers.

As a result, properties are taking longer to sell.

So you’re either jumping into a bidding war for a laughably under-priced house, in a market that doesn’t warrant it, or you’re “waiting out” a house that’s over-priced, and sitting on the market into its fourth week, with the rest of the buyer pool.

Damned if you do, damned if you don’t.

Surely there’s a middle-ground just around the corner.

But in real estate, transitionary markets can often be the hardest to navigate…

6 Comments

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  1. DJL says:

    “transitionary markets can often be the hardest to navigate”

    So the question becomes, when do you think the market will stop being “transitionary”? When will we be able to tell if the crazy days of March are returning, or the days of offer nights are truly over? Predict for us the future oh great and powerful oracle. What are the magical indicators? 🙂

  2. steve says:

    Excellent post about the psychology of determining value. I know such a person who missed the spring madness and now is bitter that his house is not drawing multiple offers. He is unwilling to accept buyers have turned from FOMO to fear of paying too much.

  3. josh botheb says:

    This guy is just trying to rob you of your hard earned real estate gains. Don’t be a chump and sell for less. Pittbull says buy high and sell higher!

  4. Ed says:

    The supply of homes in Toronto has always been low. Since I got started in 2004, I have never seen a period where demand outpaced supply. Not even close.

    me thinks you have the second part backwards?

    1. Francesca says:

      Ed I was thinking the same thing when I read this..probably a slip on David’s behalf.

      1. Sorry, I had that backwards! I put this up really late last night!

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