The Strategy of Under Pricing Your Home
Does anybody still read the newspaper?
And no, I don’t mean online. I mean does anybody get up in the morning, head to the front door, bend down while holding a cup of coffee, and pick up that beautiful roll of newsprint, curled inside a blue plastic bag?
I’ll admit, I stopped subscribing a while ago. There are always those moments when you think you don’t need a subscription, and yet you still don’t cancel, for some reason.
When I got back from my Honeymoon in 2013, our front door had fourteen newspapers laying on the footstep. Oops, I guess I forgot to pause the subscription?
But the real kicker came when I switched gyms.
For years, I read the newspaper on the stair master – the one with the upright handles and the curled plastic edge that made it easy to fold the paper into quarters, place it over the screen, and read even while hitting the top of the “hill” in the workout.
You know every gym has its cast of characters? The guy that screams with every rep on the bench press, the woman that makes a “shoosh” noise with every step on the treadmill, or the guy that never touches a piece of equipment and is always talking? Well, I was “the guy that throws newspapers.”
A 40-minute workout on “fat-burner plus,” and a full copy of the Globe & Mail meant that I was feverishly shuffling papers, and when finished, my attempt to gently place the paper on the ground often resulted in a sweat-covered newspaper being flung three machines to the left.
But I read every word, every section, every day (except for Wheels; I have no interest in cars), five days per week.
When I left Goodlife, and started CrossFit, my newspaper subscription was no longer needed.
And yet I still long for that first whiff of a fresh newspaper on a Saturday morning.
A friend of mine still reads the paper, every day (and does the crossword like he’s twice his age…), and will often say, “Hey did you read the article in the paper today about…,” and go on as though I also wake at 6:15am every day to check yesterday’s news.
My response is usually, “No, but I did read that article last night, on my phone, before bed.”
This past weekend, the article that was the subject of our back-and-forth was about under-pricing in the Toronto market. Although it wasn’t really about under-pricing, but rather a simple “snapshot” of the market that introduced the topic of under-pricing, but didn’t really offer any analysis, or take-aways.
The article?
“Cricket Club House Gets 13 Bids; Sells $605,000 Over Asking”
First and foremost, we really see how a person that only reads headlines will never truly understand what’s going on out in the world. This headline offers only absolute numbers, but no relative ones.
But the article goes on to describe how a house that was essentially worth $2,000,000 was priced at $1.4M, and ended up selling for, you guessed it – around $2,000,000.
The agent said, ““I knew we’d probably get $1.9-million to $1.95-million based on a couple of recent comparable sales nearby, but I priced it really low to bring people to its door.
Then added, “I see some homes in the area take multiple offers, but at most you’ll see a handful, so to get 13 is a big deal.”
Perfect. This leads exactly into what I want to talk about today.
So first and foremost, is this agent suggesting that had the property been priced at fair market value, that it would have sold for $1.9M to $1.95M, and that the “under-pricing” by $600,000 strategy was responsible for the $50,000 – $100,000 premium?
Secondly, is producing 13 offers, on a house that’s under-listed by 40%, an accomplishment?
I’m not knocking the agents here. These are top dogs, not just in that location, but in the GTA.
What I’m asking is: can you measure the success or failure of a massive under-pricing strategy by the number of resulting offers?
Or to take that a step further, can you actually apply a failure to the strategy if you obtain a certain number of ridiculously unacceptable offers?
I’ve written blogs before about the “strategy” involved with over-pricing, then under-pricing, and how I think it’s so incredibly see-through. Of course, I’m putting the word strategy in parenthesis, because it’s usually anything but a strategy. More often than not, the practice stems from inexperience, and even desperation.
Picture this: a house is listed for $1,200,000, with “Offers Any Time,” and it sits on the market for 30 days.
The listing is terminated, and the property comes back out onto the market for $999,000, with “Offers Graciously Reviewed On Thursday, October 25th At 7:00pm.”
Can this strategy really work?
Are buyers that naive?
Show me the buyer that sees the listing and says, “Wow, $999,000? That’s a great price!”
This buyer doesn’t actually exist, right?
This strategy would never work, would it?
Well, if it didn’t, then this blog post would be going nowhere.
Late in the spring market, a colleague of mine had a listing that was rotting on the market at $1,299,000. Four weeks, no bids, and the seller was getting anxious.
So what’s the move? For all you armchair real estate agents, do you reduce to $1,279,000? Does that reduction move the needle at all? Probably not. Wait, that’s being generous; definitely not. Any buyer who was interested in the home anywhere near that $1,279,000 price would have come in with an offer when the property was listed at $1,299,000.
Would a reduction to $1,249,000 move the needle?
I suppose it depends on value, doesn’t it?
But in the end, my colleague decided to terminate the listing and bring the property back out at $989,900.
It was absolutely, positively, ludicrous.
What kind of buyer in 2018 would be fooled by this? What kind of agent would bring his or her buyer through the house and allow the buyer to believe that the property was attainable at $989,900, or $1,100,000, or even $1,200,000?
What kind of buyer? What kind of agent?
All kinds.
This strategy actually worked, and this time, I’m not putting the word strategy in parenthesis, because although it was a Plan-B, and it was borne of desperation, it worked.
It worked, really well.
Because the property didn’t just sell for “around” the original list price, ie. the $1,250,000 that the seller might have accepted, when the property was on the market for a month at $1,299,000.
No, the property sold for $1,310,000.
(gasp)
I know.
And in between being shocked at the stupidity of a buyer who paid more than the previous list price, and far more than what the buyer could have purchased the property for just ten days earlier, you’re also hating the game.
To be fair, you’re probably also hating the player.
But be honest with me for just one moment. If you’re going to apply “fault” to this situation – that a buyer paid $1,310,000 for a house, listed at $989,900, that was listed for $1,299,000 ten days earlier, which probably could have sold for, say, $1,270,000 with ease, to whom, or what would you apply that fault?
It’s easy to blame the system, or lack thereof.
It’s easy to blame the listing agent for the tactic, er, strategy.
But isn’t it the naive buyer’s fault in the end?
Of course, that situation I just described is rare.
I just came out of a similar circumstance the other night with a very different result.
An east-end property was listed for $1,698,888, again, with no takers. This property as well was listed for just shy of four weeks.
Low and behold, it was re-listed….wait for it……for $998,888.
Yes. A $700,000 price reduction, now with an “offer date.”
It was the talk of the industry, for both good reasons and bad.
Cynics were staying “it’s stupid,” without straining for a deeper argument, and yet some were saying, “The agent has balls for trying this!”
Now what do you, the general public, make of this?
Would it work?
Would buyers really line up to bid on a $998,888 list-price, when the house was just listed for close to $1.7M?
No. Not a chance.
Couldn’t happen, wouldn’t happen, should never happen.
Except that it did.
This property received thirty offers.
Thirty.
And while I’m not privy to the contents of the two-foot-high stack of offers, I would hazard a guess that there were a whole slew of $1.1’s, $1.2’s, and $1.3’s.
In the end, my buyer clients purchased the property.
That’s right, my clients “out-bid” twenty-nine other people.
Except, did they really?
They bought this house for a paltry $1,562,000.
Almost $140,000 below the original list price.
A cynic might point out that they paid almost 160% of the list price. But does a list price really matter in this case? The property was effectively put up for auction at $1, and we won the auction, which, I might add, was well, well below our pre-determined reserve price.
And when I say that my clients “out-bid” twenty-nine other people, and add the cynical and rhetorical question, “Did they really,” what I mean is that we were really only bidding against two other buyers.
Twenty-seven of the thirty offers were never in the game.
And how many of those thirty offers were absolute garbage?
So do you blame the listing agent and the seller for wasting the time of those buyers who submitted “garbage” offers? Or can we buck the societal trend in 2018 and actually hold people accountable for their actions?
Sorry. I always bring politics into it…
As far as the “drastically under-list” strategy goes, specifically after the property has already been listed once before, you can see that these situations can go either way.
Sure, I chose to write this blog after I personally represented a buyer when the situation went my way. But the story is as fresh as your grandmother’s apple pie, so the timing seemed right.
As for the buyers out there, you now (finally!) have access to sold data, but you don’t have access to previous listings. Make sure you know everything and everything about the property, including the listing history.
I know this is like telling somebody to wear their seat-belt in a car, but as is the case both in real life, and in real estate analogies, not everybody does the smart thing…
Libertarian
at 10:38 am
You’re very polite David for not calling out your fellow agents. The person who should be blamed for paying $1.31 million is the buyer agent. So if anyone reading this is looking for an agent, do yourself a favour – don’t hire just anybody and don’t just take their advice on how much to bid. Ask the agent to do some homework and prove to you that the price is justified.
This shows why agents still have a bad reputation – they’ll do anything for a buck. Perhaps that’s why Hudak came out last week with the story that he’s going to ask the government to change the process. Any plans on commenting on that David?
GarryG
at 3:24 pm
This of course is the same Tim Hudak who was a member of the Ontario legislature for twenty-one years, including the Mike Harris and Ernie Eves majority governments, and was a cabinet minister from 1999 until 2003 (including, ironically, serving as Minister of Consumer and Business Services).
Not Harold
at 3:40 pm
Prove the price is justified?
Do you want to buy a house that you can afford, or do you want to be right?
No one should buy a house that they can’t afford, regardless of whether it’s market or not. So that leaves us with a buyer who can afford the house and paying over the “ideal” price.
If you’re in a competitive situation, you need to decide if you want the house. There are lots of reasons why a house can be worth more to one person than to others: distance to school or work, the right school district, love/hate of a pool/grass yard/hardscaped yard, need for 2 kitchens (Bathurst St…), imminent school registration or baby arrival… Being able to take the subway rather than driving can easily save $400 a month per office worker, which makes a huge difference in effective price for 2 people who work at King & Bay vs a couple where one person works at Steeles & Vic Park or 404 & 7 and the other stays home.
The other big difference is how long you reasonably expect to stay in the home. If you likely will want or have to move in 3-5 years then you need to be much more careful in exactly how close to the ideal price you are. A near guarantee that you’ll stay for 10+ years makes a 5-10% difference in price much less important.
As to price cutting strategy – staying under major psychological barriers is really important in getting your house seen. This is especially true since buyers have been conditioned for over a decade that houses will likely sell for substantially more than ask so don’t look at houses that close to your hard price ceiling. 30% under market seems reasonable given recent market dynamics and usual psychology if someone falls in love with your house: 20% for “always goes over list” and 5-10% for falling in love (or exigent circumstances). 60% is just too far away from where most people who are looking at “under a Mill” can get to financially and psychologically.
DeaconBlues
at 9:42 pm
“As for the buyers out there, you now (finally!) have access to sold data, but you don’t have access to previous listings.”
Housesigma.com provides sold data and the prices of previous listings. You can see the price and date when the listing expired.
Condodweller
at 1:51 pm
So does Bungol. It goes back to 2014. I also came across one site that showed all prior listings on a given property going back to 2000 or so but I can’t remember which one. I thought it was 99% either Bungol or Housesigma but could have been a different site.
Jennifer
at 2:21 pm
It’s crazy that wouldnt already be offered or looked into by the buyer’s agent. Isn’t that supposed to be part of their job?!?!?!?
Appraiser
at 10:23 am
TREB Q3 rental report is out: Demand for housing in T.O. is firm. Rent control legislation should be repealed (why? Because it doesn’t work, it makes things worse).
1 bedroom condo rent increased 9.5% on a year-over year basis to $2,163 … The number of 1-bedroom condos leased totaled 5,344 – up 10.3 %… The average 2-bedroom condo rent increased by 8.3%… The number of 2-bedroom condos leased amounted to 3,289 – a 1.7 per cent decrease compared to Q3 2017.
“Average rents are continuing to increase at annual rates far beyond the rate of inflation in the GTA as rental demand remains very strong relative to the supply of units available. We will need to see a sustained period of time within which growth in the number of rental units listed outstrips growth in the number of units leased before we see the rental market return to balance. Policies like the recently expanded rent control provisions contained in the Fair Housing Plan will hinder sustained growth in the supply of rental units,” said Jason Mercer, TREB’s Director of Market Analysis.
Housing Bear
at 1:04 pm
They were saying the same thing about price appreciation last year.
Here’s an interesting study that just came out from the CMHC. Survey conducted in April of 2018 looking at buyers who had bought in the last 12 months.
https://www.theglobeandmail.com/business/article-cmhc-survey-reveals-a-vast-majority-of-first-time-home-buyers-maxed/?cmpid=rss&utm_source=dlvr.it&utm_medium=twitter
85% of first time buyers maxed out to buy their first property. The number one search criteria was “affordability”, ranking above proximity to work, neighborhood and condition of the home.
Translation. A huge chunk of first timers maxed out every cent they could borrow to buy whatever piece of junk they could.
The most shocking part – only 76% of those above, are still confident they can make their monthly payments………. 24% have only been in the market for a year and are NO longer confident they can pay the bills. INSANE.
Condodweller
at 2:12 pm
that 24% stat doesn’t make sense to me but it depends what their definition of first time buyer is, sorry no time to read the article if it indicates it. Anyone who bought since the new rules should be fine since rates have only increased by 1% and they should have a buffer of 1% more with the 2% stress test. If people who bought prior to the new rules haven’t given themselves a 1% margin of error on a huge mortgage, well, I don’t know what to say.
I highly doubt that 24% had job loss issues to deal with over the past few years.
As always, stats are lies, damned lies….
Housing Bear
at 2:37 pm
Well survey was conducted in April of 2018. So the period I assume was March 2017-March 2018, which means only 4 months of those who were making purchases with B-20 in effect. A 120 day pre appoval granted towards the end of December 2017 would have also carried a would be buyer up to almost the end of the reporting period as well.
Either way, 85% of first time buyers who maxed I assume includes those who maxed out pre b-20 as well as those that maxed out whatever they could get approved with b-20 in place. The later group would not be as concerning as you indicated above. They would have had wiggle room built into their payments. For those that maxed out prior to the first rate hike, I would be very concerned.
I am not sure how exactly the concern question was asked. If very broadly posed, it could also be picking up individuals who are just concerned that rates will keep going up and up and up, rather than those that are concerned about what renewal would mean at today’s rates. B-20 doesn’t actually effect what you pay, it only effects what you can borrow (other than perhaps not being able to get a competitive rate when you renew) Worth noting, is that the rate hikes only started in July of 2017, and have now gone up by a full percentage point. More hikes to come. I do not think this has anything to do with job loss. Economy/ job growth numbers have been solid so far.
Housing Bear
at 1:08 pm
Should also add that we have had record new starts and applications for PBRs since the fair housing plan came out.
Carl
at 3:58 pm
The TREB rental report covers the rentals arranged through TREB MLS, so it leaves out a huge portion of Toronto rentals. There is nothing wrong with publishing and using those numbers, any information is good, as long as we understand what those numbers do and don’t mean.
Appraiser
at 9:03 am
@ Carl,
If you have data to rebut that which has been presented, please share.
Offering up hollow “what ifs” makes it difficult to accept your argument.
TREB provided a data set of over 8,600 lease transactions in one quarter. Any pollster or statistician would be pleased to have such a credible and reliable representative sampling from which to draw potential conclusions.
Carl
at 11:35 am
As I stated, it’s useful information, as long as it is understood that the TREB numbers are for MLS rentals, not about the whole rental market. It may or may not be a representative sample, I don’t know.
Appraiser
at 10:39 am
TREB Q#3 condo sales report out:
Sales up 2% year over year. Prices up 8.4%. Active listings down 2.1%.
Another sad day for the bears.
Housing Bear
at 1:07 pm
Next week rates going up again, will be another sad day for debt slaves.
Chris
at 3:16 pm
Correct as usual, Housing Bear.
“The household debt service ratio in Canada – that’s the interest and principal we pay as a percentage of disposable income – is already at its highest since late 2008. And now at 14.2 per cent, Toronto-Dominion Bank expects it to shoot higher still.”
https://www.theglobeandmail.com/business/briefing/article-juggling-your-debts-will-soon-cost-you-hundreds-more-and-thats-if/
Appraiser
at 9:24 am
Tight supply is trumping rate increases, for now.
As you know, It’s only the mortgage renewers that feel the immediate impact of rate increases, and they will all adjust their lifestyles accordingly. Sorry, no jingle -mail.
In any case, most people are on 5 year loans. The systemic impact will be incremental and very gradual.
But hey, if rates go up 2% overnight – all bets are off.
2% over the next 2-3 years, not so much.
I know, I know – the crash is just around the corner.
Housing Bear
at 10:06 am
Each rate increases lowers the total amount each new buyer can spend on a house. These buyers will be the ones setting comparables.
If rates go up 2-3% over the next 3 years and you have to renew in year 4, than you feel the full 2-3% in one shot.
Whole market doesn’t get screwed over at once. But as some people are forced to sell to buyers who can no longer borrow as much, benchmarks go down.
Chris
at 10:17 am
Also wildly inaccurate to state that it is “only the mortgage renewers that feel the immediate impact of rate increases”.
“Between 2000 and 2016, total outstanding HELOC debt rose from $35-billion to $211-billion…The numbers speak for themselves: 40 per cent of Canadians do not make regular payments toward their HELOC principal, and 25 per cent only pay the interest…What will happen if the Bank of Canada raises its key interest rate by 1 per cent in the next 12 months, as some economists have predicted? “People don’t have any leeway. We see many retirees who have overestimated their government benefits and, on top of that, have gone into debt to look after their children or grandchildren,” Leblanc says.”
https://www.cpacanada.ca/en/news/canada/2018-06-06-home-equity-lines-of-credit-double-edged-sword
Condodweller
at 2:03 pm
Using your own logic you are saying that David also called out himself given his client got their house “for a paltry $1,562,000”. I mean he did get a great deal for $140k below original asking but how do you know if he didn’t over pay by $300k? What if the “junk” offers were around 1.1mil and the other two “competitive” offers were say 1.2mill and 1.26mil?
It would be intresting to know the dispersion of the other 29 offers.
Condodweller
at 2:05 pm
This was a reply to Libertarian’s post at the top.
Carl
at 3:43 pm
Yes, it would be interesting to know the other 29 offers, but we will never know, and neither will the buyer.
As I understand the latest OREA proposal, they want to allow the seller to specify up front that the house will be sold by open bidding (as opposed to secret bidding, which is the practice now). The seller would be allowed, not required, to do that. So this would really only work if (when) we move to buyers’ market in which sellers compete against each other.
Jennifer
at 2:26 pm
the seller still didnt have to accept. so highly doubtful he could’ve gotten it for that low a price.