Should I underprice my home to start a bidding war?

Overpriced homes actually sell for more, according to a U.S. research study

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Q: The real estate market in Barrie is really hot right now, which won’t come as a surprise to anyone. But as a home seller, we still want to make sure we get the highest possible sale price. I’ve read about all these bidding wars and wonder if we should underprice our home to try and start a bidding war?

— Want more for my home, Barrie, Ont. 


Answer from Romana King, senior editor and real estate specialist at MoneySenseListen, if you’re selling in today’s real estate market, your biggest concern is whether or not you can get top dollar for your home. In recent years, one tactic that has dominated the bigger markets—and stolen headline space—has been the use of bidding wars.

The idea behind a bidding war is to attract competing potential buyers with enough interest that they’ll increase their maximum purchase price and, ultimately, raise the final sale price for that home. The most obvious way to create a bidding war is to underprice a home. Would-be buyers will flock to—what should be—a great-looking home that appears to be competitively priced. In a rush to be the new owner, these buyers will submit bids above the listed price. Very often, the buyers, through their real estate representative, will have additional opportunities to increase their bid, until, eventually, there’s only one buyer left presenting the highest possible market-price for that home (on that particular day, in that particular neighbourhood).

Good strategy, right? Turns out that some studious professors were actually studying the impact of under- and over-pricing on final sales prices.

According to a study published in the Journal of Economic Behavior & Organization overpricing and underpricing a home for sale actually has counter-intuitive results.

According to researchers:

–> sellers who listed their homes 10% to 20% higher than other homes in the neighbourhood saw a slight increase of 0.05% to 0.07%, on average, in the final sale price (which translates to an extra $117 to $163 in the final sale price);

–> however, sellers who listed their homes 10% to 20% lower than other homes in the neighbourhood saw a slight decrease of 0.05% to 0.08% in the final sale price (which translates to a loss between $117 and $187 from the final sale price).

According to the co-authors, Grace Bucchianeri, former assistant professor at the Wharton School of the University of Pennsylvania and Julia Minson, a lecturer at the University of Pennsylvania, the research findings were evidence of a behavioural trait known as “anchoring.” This trait assumes that, as rational decision-makers, we’ll rely on the first piece of information offered (known as the anchor) when making decisions. Once buyers have an anchor, they’ll examine and interpret all other information in relation to the anchor.

The takeaway: as a seller you want to establish the anchor that will be used as the framework for evaluating your home and the price a buyer is willing to pay for that home.

Still, there are always exceptions to the rule. According to one New York-based real estate broker, overpricing a property works best when inventory is low. Still, other real estate agents take the opposite approach: stating that an underpriced property in a low-inventory market sparks activity in buyers.

So, what should you do? The best advice is to collect as much information as you can. For instance, is it a buyer’s market? Or a seller’s market? (To learn about the difference and how to determine what type of market it is read my previous column on this topic.) Also, what were the final sale prices of other, similar properties that recently sold in your neighbourhood? Finally, do you have any features that other properties don’t have (a larger backyard, a newly renovated kitchen)—properties that could be considered extra value to potential buyers? The more information you can get about the overall market and, specifically, about your neighbourhood, the better armed you’ll be when settling on your list price.

 

RomanaKing_322Romana King is the senior editor and real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook.
If you have real estate concerns or questions, please email Romana directly at 
romana.king@moneysense.rogers.com or call her on her direct line at 416-764-1382. 

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3 comments on “Should I underprice my home to start a bidding war?

  1. We start looking at the Canadian market and then just to data detailed in another country. That would be like buying a home in Japan and talking about Taiwan. Americans (and maybe Chinese with money) are very motivatable. Canadians are not. USA mortgages can be deducted against income; not in Canada. House inventory for two reasons is low in the USA right now; not in Canada except in Vancouver and Toronto. Apples in Canada and Avacados in the USA. Canadian data deserves Canadian research.

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  2. Romana, that is actually a pretty good peace of advice backed by research which is hosted on the harvard academic site. I actually couldn’t agree more. I believe that the key advantage of a bidding war is that it may help you sell your home faster as you set a deadline and pick the best offer in this small window of opportunity, however, I do not think it necessarily garners a premium.

    I think what garners a premium is the ability to have patience, or to wait, with your home selling until you get a good offer. Also, I think that “selling over asking” means nothing in this market. The key question is how the property sells in comparison to equivalent properties sold recently in order to know whether this was a good deal.

    Roy Tal, Co-Founder, Homenova Inc., http://www.homenova.com – buy or sell your home on your own.

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  3. Interesting article, and I was pleased to read it.
    What it does tell me though, is it’s better not to list too high. All in all, a couple of hundred dollars is pretty much lost in the noise on a house sale. If it’s the difference between selling right away, and risking having the house languish on the market, I’ll forgo the $163.

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