Pricing a home for sale can be a daunting task. In a transitioning market, it can make the difference between selling your home on the first try, or having to cancel, change strategy, and re-list your home.
We are seeing several pricing strategies happening in the current real estate market. This is due to a change in the seasonal activity, neighbourhood dynamics, and factors of supply and demand.
What pricing strategies should you consider when selling your home for sale? How do you know what pricing strategy you should use? And what happens if your pricing strategy fails?
First let’s talk about the various pricing strategies being used in today’s real estate market.
Underpricing
Underpricing a home to attract a lot of buyer interest and potentially stir up a multiple offer situation has been the most widely use strategy during the latter part of 2020 and early part of 2021.
The strategy is quite simple: price your home below market value (sometimes waaaay below market value), set an offer date in a few days or up t o a week of your listing date, let a lot of buyers come in to see it, and let them fight it out to see who will pay the highest price.
Underpricing worked effectively in recent months due to the extremely low number of homes listed for sale combined with huge buyer demand. This literally created a frenzy on most offer nights resulting in sellers receiving an insane number of offers, and selling prices in the hundreds of thousands of dollars over the asking price.
We can question whether or not underpricing is ethical… if it can be considered as false advertising or misleading the buying public… but one thing is sure — this pricing strategy worked… in recent months.
In the best interest of the seller, if you didn’t underprice your property, buyers would be wondering why your home is ‘priced so highly’ and what could possibly make it worth so much more than a comparable, yet attractively underpriced home.
If you listed your home for sale in late 2020 to early 2021, you either followed the strategy every other seller was using to create a bidding frenzy… or you ‘priced right’ but had to wait and see how many offers and what eventual selling price you got on offer night.
During this transitional period in the market, where seasonal sales tend to decrease and the number of listings start to rise, some neighbourhoods will still see underpricing work, while others will not.
In neighbourhoods that are in high demand, where the number of homes for sale remain low, and where prices are attractive to begin with (think under $1 million), underpricing is still a strategy that’s widely being used.
If you live in a neighbourhood where there is a moderate amount of listings on the market, and your home is valued at a higher price point, this strategy may not work as well — and the only way to see is to try it out.
A common question I get asked is — if I list my home for such a low price, and if I only get an offer for that price, am I obligated to sell it?
Again — we run into ethics here — but the straight answer is no.
Your real estate agent will have a bit of a tough time explaining to the buyer and their agent why you’re not taking the amazingly low price that they’ve offered, which you happened to give them an offer on — but tough luck. If you don’t attract the price you ultimately want, your real estate agent will have to cancel and re-list your property at a higher price.
Market Pricing
Listing at the market price is the most common practice in a normal market, when homes used to take up to 30 (or more) days to sell, and there was a healthy amount of inventory in the marketplace.
Market pricing is when your real estate agent does a proper comparative market analysis of recent home sales (compared to homes that didn’t sell and homes still sitting on the market), and strategically positions your property for sale at a price that a reasonable buyer would pay.
In a high supply, low demand — or even in a balanced market — listing at the market price could still attract multiple offers, but most often it encourages buyers to haggle or negotiate the purchase price and terms of your property.
Market pricing is the most ethical thing to do, since you’re basically advertising your home for sale at a price you actually expect to get. In normal market situations this is the most common thing to do.
But there are instances when listing at market price won’t get the result you want, even though you do it out of pure intention and proper consideration of the buyers in your market.
In transitioning markets, if your market priced listing competes against an underpriced listing, the underpriced listing will gain much more traction, more showing activity, more offers, and a seemingly ‘higher’ selling price — even if they only end up selling for what the market would have paid to begin with.
I hate to say this — but even if you try to be a ‘good’ seller and price your listing properly, you may have to adjust your strategy and price more attractively just to get exposure to buyers looking for your type of home and hoping to pay the amount of money you’re looking for.
Why?
Here’s an example.
Consider a home that’s worth $1.2 million — and lists for $1.2 million — in a market where buyer agents (and thus their buyers) expect to pay $100k to $200k over the asking price.
Now imagine a nearby comparable home, listed on the market for $999,999.
A buyer browsing for homes online would see these two homes, and though they are comparable to each other, they would think both homes are expecting ‘over asking’ — and so they might think the $1.2 million dollar home is expecting to get $1.3 million maybe even $1.4 million… and they’d think the $999,999 home is expecting to get $1.1 million to $1.2 million.
Sure, they may end up looking at both homes, but when offer night comes, which one do you think they’ll bid on? And how much do you think they’ll offer?
This is one of the tough situations we deal with during a transitioning market. Properly market priced homes mixed in with underpriced homes creates a bit of confusion in the market, with agents scratching their heads and thinking — hmmm… do they really expect to get $100k to $200k or may even more over their asking price?
You end up having to cancel and re-list your home at the much more attractive price, just to keep in line with what the market is doing.
I get it — this is a frustrating thing to try and understand. There are certainly ethical questions around it even though real estate agents will justify this by saying they’re using a marketing strategy that best serves their seller clients (which is the right thing to do by the way… for a seller client).
When comparing underpricing versus market pricing, you and your real estate agent have to look at what is happening in your specific neighbourhood and plan a pricing strategy accordingly.
Which Pricing Strategy to Use
Choosing the right pricing strategy depends on what market you’re in — a seller’s market, or a buyer’s market.
In a seller’s market, few homes are available for sale in the market, homes sell quickly (measured by the sales-to-new-listings ratio), and generally, demand is outpacing supply.
In a buyer’s market, there are a lot of homes available for sale, they are taking longer to sell, and supply is greater than demand.
An effective pricing strategy is also based on what your competition is doing. How much is the home down the street listed for? What pricing strategy did previous property listings in your area use? What result did they get from it?
This is where your real estate agent comes in (and why homes for sale by owner tend to sit on the market for a long time).
Ask your agent what’s happening in your area, how much homes are listed for, what pricing strategy they are using, and what selling prices recent home sales achieved.
Sometimes you’ll get it right and sell your home at the first try.
In some cases, you won’t — and you’ll have to cancel and re-list your home again to get a fresh start.
Find out what market situation you’re currently in, and work with your real estate agent to use the correct pricing strategy to sell your home.
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