Why do Realtors Grossly Underprice Homes?
Ask Phyllis: a blog series of frequently asked real estate questions.
Dear Phyllis,
I recently read an article in another paper about a home in South Pasadena listed for $1,349,000 and selling for $2,105,000. My daughter has been looking at homes for six months and has made three offers. Each time getting outbid. It’s an excruciating and emotional process for her. My question: Why do Realtors grossly underprice homes? It seems cruel to get people’s hopes up to waste everyone’s time.
Donna,
Dear Donna,
A popular real estate pricing strategy is to underprice a home to obtain multiple offers and a bidding war. Pricing a home 3 – 5% below market value typically results in the home selling at a higher price than if originally priced at fair market value. According to Wikipedia: Herd mentality, or mob mentality, describes how people are influenced by their peers to adopt certain behaviors, follow trends, and purchase items. In today’s market, buyers are more confident about their home purchase when someone else desires the same home. Pricing a home on the lower end of the value range stimulates interest among buyers. As a result, herd mentality takes over.
A home seller should negotiate the selling price up rather than down. However, I agree that grossly underpricing is cruel and wastes everyone’s time. Once a seller has at least two offers, they are already in a position for multiple offers and a bidding war. When I list a home, I try to list about 5% less than where I think it should sell.
I have learned that when pricing a listing, my client will walk away with more money if I price somewhat aggressively. However, your home sold more than 50% above the asking price. I don’t know how many offers the Realtor had. I find it extremely difficult to deal with more than ten offers. There are numerous calls, emails, and texts to answer.
To answer your question: Why do Realtors grossly underprice homes? My partner, Kris Jardino, and I often ask this question ourselves. The only answer we have been able to come up with is that they are inexperienced. Or perhaps it makes them feel like the most popular girl at the dance. I wish I had a better answer for you.
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I’ll tell you why. They have sales quotas. They need the sale and are willing to take less for minimal work. They simply want cash flow when it comes to the lower end of the market. They get very anxious to lower the price before the average days on the market even with steady showings and no price objections from other buyers/realtors.