Underpriced listings, what's the point?

Everyone’s seen it before. A house appears on the market for an incredibly low price, and piles of offers are placed on the home within hours, and a bidding war ensues. Some realtors feel this is the best way to get top dollar for their seller. If the realtor knows what he or she is doing, many times it works too. However you’ve got to consider the pro’s and con’s to this method of selling, and whether it’s worth it or not.

If the most common reason to underprice a home is to end up with a higher selling price than if it were listed at market value, consider the following scenario:

Your realtor tells you that the value of your house is approximately $300k. He then tells you that he’s got a marketing strategy that will net you top dollar for the house, and have the house sold quick. Simply list the house for $250,000. Set the offer presentation date for a week after showings begin, to allow the home to get some exposure. Come offer presentation time, there will be many offers on the table, and we’ll have one for at least $300k, and hopefully for far more. This home is in a demand location and we should take advantage of that.

The house goes on the market, obviously gets a ton of buyers walking through it, and offer presentation day arrives. Many many things can happen at this point, a few of them being:

  1. You get no offers at all
  2. You get some offers, all under asking price
  3. You get some offers over asking price, but well below the $300k value.
  4. You get some offers, one way over the asking price, but has many conditions attached to it.
  5. You get some offers, one slightly over the house value, no conditions attached.
  6. You get some offers, one being way over the aking price, no conditions attached.

No 1, is bad. What do you do now? You under priced your property in order to get some quick offers, and nothing happens. Perhaps the house isn’t work $300k? Perhaps the market changed, and the buyers are holding off? I’m not even sure what to do if this happens. The realtor is in a tight spot and has some explaining to do. I’ve seen some realtors then adjust the price up to where it should be. That can’t be good, the public has already seen the original price that didn’t entice any offers. od luck selling it now.

No 2, is also bad. You get some offers, but you’ve run into speculators who want to make a buck and will only buy a property if they can make a “deal”. What now? Refuse all the offers and wait for more? What if you only get one offer next time, and no one is competing against that buyer? Then it’s negotiation time between buyer and seller. od luck getting $50k over asking.

No 3, same as number 2. You could be in trouble getting the dollars you deserve for your house.

No 4, not bad, but not good either. You get a bunch of low offers that have no conditions attached, and one very high offer with a home inspection condition, and a finance condition. If you decide to take that high offer, there’s a chance that a condition won’t be met, and the deal falls apart. For example, what if the high rolling buyer doesn’t qualify for financing? The deal falls apart, and the house has to go back on the market, starting the fun all over again. Are you ready to wait another week before offer presentation in order to entice another multiple offer situation? I thought you were trying to sell the house quick!

No 5, this is probably the best thing that can happen. You get some offers, one slightly over the $300k value, no conditions. You accept the offer, you’ve gotten more than $300k for it, the deal is firm. If all goes well between now and the closing date, the plan worked. But see #6.

No 6. Wow, have you hit the jackpot. You are in love with your realtor now. You accept a firm offer for $330k, and feeling pretty good about it. Guess what though? If the house is only valued at $300k, how do you expect to get a mortgage for this house? Banks are not in the habit of placing a mortgage on a house for more than it’s worth. They will do an appraisal, and make sure that the money they’re lending is protected by the value of the home. Even if the buyer has 5% down ($16,500), where’s the other $13,500 coming from? If the buyer doesn’t have it, or can’t come up with it, the deal will not close. Not good.

There’s also the ”side effects” of using this method, such as wasting many peoples time, including the buyers, and realtors who represent them. If you’ve got 20 offers on the table, 19 realtors and buyers are wasting their time, since they’re not getting the home. But you just never know who’s going to get it, do you? Visiting the casino is sounding pretty appealing right now…

Despite all the scary but very realistic scenario’s I’ve drummed up, I’m not totally against underpricing listings just yet. To my knowledge, they’re not against the law, and many times they do work. But considering the potential pitfalls, why bother? Why not just price the home accurately, get your offer, let a professional realtor who knows his stuff negotiate for you, and get top value for your home? I just don’t get it.

Joe Scalabrelli

Joe Scalabrelli

Sales Representative
CENTURY 21 Leading Edge Realty Inc., Brokerage*
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