Underpricing a Home - Smart or Suspect Strategy?

Listing a Home For Sale at a Price Well Below Current Market Values

I recently received the following question from one of my clients regarding "list prices" for some newly listed homes that were clearly well below market values.  I wanted to share the qeustion and my response since I know this issue has been top of mind with others.   What do YOU think?  Feel free to share your comments and thoughts.

QUESTION:
I receive your local market updates and have noticed some new listings coming on the market and listed for sale at a price which is significantly below (for instance, $250,000 to $500,000 below) the average sale prices we typically see in our neighborhood.  Is significantly underpricing a home a smart strategy for homeowners? 

I am seeing the same thing, as are many of my savvy homeowner and buyer clients. My simple answer is that knowingly underpricing a home by a significant amount is a terrible strategy that is not in anyone’s best interest, except for possibly the listing agent who would suggest it. 

For those who are unfamiliar with this phenomenon, underpricing a home is listing the home for sale at a price that is below (or well below) current market values.  While some justification could be made for slightly underpricing a home by a few thousand dollars to generate a higher amount of qualified buyer interest and traffic, significantly underpricing a home by hundreds of thousands of dollars from the start is an extremely poor (and some might say lazy and unethical) strategy.  When homes are significantly underpriced, they typically end up selling for less – if not far less – than the actual fair market value of homes in the area. Here’s why: 

• Wrong buyer pool.   Buyer/visitor traffic is important but what’s more important is qualified visitor traffic.  If the fair market value for your home is $2 million but it’s listed for sale at $1.5 million, your significantly underpriced home is likely to attract buyers and offers from people who could never afford your home. 
• Buyer psychology.  Buyers know the market is competitive and overbids are common in today’s marketplace.   Knowing this, would you rather have a buyer overbid starting point be at the fair market value of your home (for instance, $2 million) or overbid starting point set on a significantly underpriced value for your home (say $1.5 million)?  The reality is that overbids are common right now with both fair market pricing and significantly underpricing a home so why not establish a realistic and fair asking price for your home from the start and possibly reap the rewards of an overbid that you know to be beyond fair market value.
• Confusion and hassle.  A homeowner who significantly underprices their home could be faced with 20+ offers that need to be carefully reviewed and responded to quickly.  Most of these offers are going to be well below the seller’s threshold for acceptance or even made by buyers who could never purchase or afford the home at fair market value.  Meanwhile, a neighbor’s home (which was listed at fair market value) may only receive 3 offers from well-qualified buyers but end up selling for more with less hassle.  As a seller, which scenario would you prefer?
• Ethics and the law.  Significantly underpricing a home carries ethical considerations. Some arguments have been made that it could be considered a violation of the Realtor Code of Ethics (which among other things, states that Realtors must be fair and honest in their dealings) or even a possible violation of California’s Business and Professional Code Section 17500 which states that false and deceptive advertising is prohibited and those in violation could be held both civilly and criminally liable. In my opinion, placing a significantly underpriced home on the market and making buyers think they have a chance at the house is unethical, especially if a seller would never take the price the house was listed for in the first place.

My advice is to avoid the false promise of underpricing and hire for skill and results. Anyone can sell a significantly underpriced home however the goal shouldn’t be to simply sell a home.  In my opinion, there is no skill required for selling a home “auction style”.  When interviewing listing agents, beware of claims such as “my last listing sold for $500k over asking!”, “20+ offers received”, or “sold for 150% of asking price” since those statistics mean nothing on an underpriced home but at face value could make an agent’s statistics look better.  Instead, look for final sale prices relative to average sale prices for your neighborhood.

In conclusion, my strong recommendation to sellers when determining a listing price is to work with a proven, result-driven local Realtor who can help price the home at fair market value from the start and then list, prepare, aggressively market, and sell their home for maximum profit.

ABOUTH THE AUTHOR

Learn more about the author, Renee Adelmann of Bay Area Modern Real Estate.