How the game is played
Originally appeared in Hills Publications, August 23, 2002 and ANG Newspapers, August 10, 2002
Is it wrong, maybe even unethical, for an agent to price a property so low that it ultimately sells for tens of thousands, possibly over a hundred thousand dollars, more than asking? Some buyers and real estate practitioners feel it is. Jumping to this conclusion, however, without understanding the complexity of the issue, could be costly to you as a buyer or seller.
Pricing involves many factors
According to a recent trade magazine article, the California Department of Real Estate does not deem the above scenario unethical. Nevertheless, if you are a buyer who has lost out in multiple bids, this may not give you comfort.
Like it or not, buyers must accept that the listing broker’s duty is to function in the best interests of the seller and work to achieve the highest possible price.
Pricing is not just a matter of taking an average of recently sold homes, or even setting a figure slightly above or below the highest recent comparable sale. No, precise pricing is a result of careful deliberation on the probable value of a property in relation to others.
Location, condition and style are among the important variables sellers and their agents consider in establishing a list price. A fabulous house in a less-than-desirable neighborhood, a home with substantial “deferred maintenance,” or an unattractive style all call for an asking price low enough to elicit excitement. Naturally, a combination of two or more of these factors makes the marketing even more challenging.
Condition is the one critical aspect of value that is often under-emphasized and overlooked by nonprofessionals. Bear this in mind: residential pricing is done almost exclusively on the basis of “comps,” comparable neighborhood sales. Condition is not usually apparent in reviewing these past sales.
If you, as a buyer or seller, are looking at a list of comps, chances are you have seen few, if any, of these homes on the inside. Your agent may have visited some, but it is a long shot that he will be familiar with the condition of each on the list.
The bottom line is that listing and offering prices are commonly arrived at without specific data on the condition, floor plan, number of steps up or down, proximity to unsightly neighboring houses and other items that have a bearing on value.
Most importantly, more than 80 per cent of homes in our area are listed without a clear picture of their own problems, i.e., they have not had a pre-sale, general home inspection.
Pricing for the positive and negative
Pricing low can be either a strategic advantage or a gigantic gaffe for the seller. If a house has a lot going for it, pricing too low could leave money on the table that the seller will never see, even if he receives multiple offers.
Conversely, a price perceived by agents and the public as “a bargain,” can erase objections that would otherwise surface. As an example, last year I listed a large, 3800 square foot, older house in a popular, Oakland neighborhood. It was designed by a prominent, local architect, and it had many charming features.
The home needed updating throughout and it had no backyard, only a small, concrete patio. Although most of the foundation had been replaced, it still required some additional foundation work. Most daunting, was the fact that it was “not a drive by.” The inside was gorgeous; the outside was not. One final, significant worry was that the market was becoming somewhat softer at that time.
Given all this, I explained to the sellers that we could list it slightly under $500,000 and expect to get offers a bit above that amount. At this price, I cautioned, buyers would most likely ask for some work to be done, thereby decreasing the sellers’ proceeds. I was also apprehensive about how many people would stop to see inside this home with little curb appeal.
Alternatively, we could ask $425,000, a price so low that it would cause a flurry of activity and eliminate all objections. The sellers chose the second option. They also took my advice and paid for pre-sale inspections, including pest control, general home inspection and engineering. These were given to prospective buyers.
We received 21 offers and the property sold for $600,000. Although the selling price was quite low on a square foot basis, a buyer, unaware of this background might feel “used” by the sellers and their agent. On the other hand, one who has been educated by a top-notch Realtor will have a more thoughtful reaction. If you are playing the real estate buying or selling game, knowing the nuances is crucial.
Even on a well-priced listing, the market may misunderstand its value. In November, 1999, I listed an exquisite, 1929, English cottage. It had been totally remodeled with high quality materials and workmanship. Systems from foundation to roof had been replaced. It was an old-world charmer with the “guts” of a new home.
We listed it for $569,000, a very reasonable price for its Oakmore location and features, which included high, beamed ceilings, leaded and stained glass, sensational master bath and much more. Agents told me the price was high and we received few showings. After ten days, we withdrew it from the market and re-listed seven weeks later for $485,000.
The new price was undoubtedly far less than its value, but we had to ensure an enthusiastic response. This time we had 11 offers and it sold for $669,000. Once again, a buyer, uninformed of this history, could have been indignant about a plot to artificially and unfairly raise the price.
Final Thoughts
A simplistic approach to the convoluted world of real estate does not work. As a buyer, rather than being resentful, find out how your local market is functioning.
It makes sense to decline making an offer on a property that will clearly sell above your maximum. Knowing how the game is played can help take some of the frustration out of being a buyer in this seemingly insane market.
Related Articles:
Pricing In A Rapidly Rising Market
Condition Is Critical
Confirm Competing Offers