Monday, March 12, 2012

Real Estate Strategy: Low-ball Pricing to Create Bidding War

A guest post at Where Does All My Money Go? described a strategy for selling your home where you offer a low price in an attempt to create a bidding war. This type of strategy may or may not help the homeowner get a better price, but it will definitely help the real estate agent.

In a nutshell, the strategy is to price a home at the bottom end of a reasonable price range and advise buyers that all offers will be reviewed on a particular day less than a week away. The hope is to generate a lot of interest quickly and create a bidding war that takes the price up to the top end of the price range. Note that this is likely to create a fast sale.

Real estate agents benefit most from fast sales rather than higher selling prices. Higher selling prices increase commissions a little, but faster sales lead to more sales and this helps agents a lot.

In almost all scenarios, this low-ball strategy helps the agent. If it works as planned, the house is sold quickly, and both seller and agent win. If only one offer comes in at the asked-for price, the seller must either accept the low offer or pay the agent’s commission. Either way, the agent gets paid. If no offers come in, then there wouldn’t have been any offers at a higher price anyway, and the agent can focus efforts on new opportunities instead of wasting much more time on this house.

Some might argue that agents would only try this if it is in the best interests of the seller. For this to be true, the agent has to be both competent and honest. I’m sure this is true in some cases, and I’m also sure that it is false in some cases. Overall, I would be very wary if a real estate agent suggested this strategy to me.

7 comments:

  1. I never understood the fanfare over selling over asking (i.e.: in a bidding war). To me, it should be regarded as a colossal failure of the agent in setting the asking price (and of the buyer's agents for participating in the frenzy).

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  2. I agree realtors come in all shapes and sizes Michael - but I can personally attest to the veracity and professional ethics of Boris Kholodov - the interview subject.

    Only last week, one of my clients asked him to come to her home as she had decided to sell and go back to renting. She intended to sign a listing agreement with Boris. He refused, advising her it would be a mistake to sell, and that she should hold rather than sell.

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  3. @Potato: What you say makes sense from the point of view of the buyer and seller. Agents who measure success in commission dollars may see things differently.

    @Ross: I don't know Boris and am not worried about his ethics. I'm more concerned with popularizing a sales method that less ethical agents can use to benefit themselves rather than their clients.

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  4. Interesting thoughts. I had also come up with this price significantly lower than asking idea, but only as a theoretical idea (I don't own a home). I just figured this would avoid the situation of you pricing the home at market value, and everyone offering a low ball offer to get it for a steal. Eventually you end up with a 5-10% less than asking agreement. This way you could potentially get more, or you could at least get what you would have been asking. If the prices you are offered is too low, just don't accept any of the offers and re-list.

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  5. One reason to offer a lower-listing is to attract 'moveup buyers'. So if you list at $700,000 (common in TO) anyone using mls who sets a max at $650 won't see you. So you set it at $650.

    PS Ultimately the homeowner decides what to do, and the homebuyer sets the price. The homebuyer doesn't HAVE to accept the lower offer, afterall.

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  6. @Alex: It can be difficult to re-list a house for a higher price. Agents know that it used to be listed lower.

    @Anonymous: The real estate agent agreements I've read say that if an offer is made for the asked for price, then the agent is owed his or her commission whether or not the homeowner accepts the offer. So, it is dangerous to offer a price that you're not willing to accept.

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  7. The strategy isn't that dissimiliar from running an auction. Houses around here frequently are sold via auction. I understand they get more money than going through real estate, I think the commissions to the auctioneer may be less, and of course the house is sold that day, no waiting around.

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