The Dangers of Under Pricing Real Estate

House is listed at X and offers A, B and C come in. They know they are competing but C, who was willing to pay X+$20k figures that the seller thinks the house is worth less than he did so puts in an offer at X+$10k. It happens to be the best offer and terms. Seller is thrilled; got $10k over asking. Listed higher, the seller would have netted around $9,400 depending on the commission rate if C had come through as he had planned. Though C paid more than asking, he can brag to his friends that he paid $10k less than he would have at the same time the seller is bragging that they got $10k more.

It’s psychological and theoretical because we can’t get inside the head of C to really know the thought process. Setting the price at X sets the expectation. At X, C’s expectations about the property dropped so the offer reflected it. We can’t confirm if the house had been listed at X+$20 that C would have walked in and paid full price but our research shows that might have been the case.

A seller is not obligated to sell a home at any price, regardless of the offers (though there may be some contractual issues with the earning of a commission by choosing not to sell). We’ve previously discussed that an overpriced home will sell for less than it would have had it been priced accurately on day one. We’ve discussed that an accurately priced home will sell in any market. This is a consideration that even in an open market, an under priced home MIGHT sell for less than it would have had it been priced higher. We’re not talking auction here- in that case, the price would have to be low enough that at the asking/reserve price, the bidders would be knocking each other over to put their bids in. The scenario above applies to the fine tuning of the listing price in a conventional sale.

Nor can we ignore that every seller has a different motivation. If get out quick is the desire, under pricing and taking a little less may be the stated goal. We can’t know that either. Sellers probably shouldn’t beat themselves up if their home sold quickly and they possibly left some money on the table. It is completely possible that buyer C really only wanted to pay X but in the heat of battle paid X+$10k and never would have paid a penny more.

Pricing and offers are both about thresholds. The buyer’s smartest offer is usually the one that the seller can live with and doesn’t counter for risk of losing the buyer altogether. The seller’s best listing price is the one that gets the buyer hooked instead of passing up the property in lieu of another one.

12 Comments on “The Dangers of Under Pricing Real Estate

  1. I have to ask…did you buy two new Lexi? Or did you just remove the C and J stickers off the rear view windows?

  2. Nope, same two Lexi. Mine had “an incident.” It involved a keg of beer and a steep hill. When keg meets glass, keg wins every time.

  3. Must have been a great house warming party!

    Steep hill…Forest Heights? Why wasn’t I invited;O)

  4. This is an interesting theory Charles. I see this more as a theoretical discussion rather than one that can be based on some sort of data. My feelings have been when selling my own personal property I want to sell it and quit making mortgage payments. If no offers come within a few weeks, pricing is wrong and it is reduced enough to make some offers come in.

    When I compare that to different individuals trying to sell their homes and ‘maximize profits’, I see most of those homes sitting on the market with no one visiting or writing an offer. I believe that buyers do not perceive any value in buying a house that is currently overpriced, thus limiting offers or even the writing of an offer on these homes trying to sell at a higher price.

  5. “The buyer’s smartest offer is usually the one that the seller can live with and doesn’t counter for risk of losing the buyer altogether.”

    This happened to us (as buyers). The seller listed the property at $365K. We offered $350K, which was a generous premium over their August 2006 closing price of $325K. The seller countered at $358K. We walked away.

    We may offer again. We will keep our eyes on lending rates. But our next offer will be closer to $325K. Meanwhile the seller is chasing the Portland RE market downward: they recently reduced the asking price a second time to $355K, but they are still behind where the market is really heading right now.

  6. There is data you can look at, just experience and theory. Three sellers will view the same offer differently.

    I think I’ve recounted where our buyer made an offer that was reject by virtue of no response. I urged the listing agent to at least counter but we “were to far apart” and it was too much effort for the seller to find a fax machine. Months later, and numerous mortgage payments later, my buyer bought the house for his original offer which was $5000 less than they would have paid on day one.

  7. Lots of things can happen to this house. We are still interested in it, but it needs a lot of work to get into a position we could use it. It just isn’t worth what the sellers want for it.

    As a seller we ignored a couple offers. They were ridiculously low offers where the buyers were just bottom feeding the market. We did sell a few weeks later much closer to our asking price. We attempted to price the house fairly from the outset, but kept more firm on the price. I am not into haggling–just set your limits within the given market conditions and stick to them, and be prepared to walk away.

  8. We just had a buyer who made an offer $20,000 under asking about 4 weeks ago. The seller countered at $10,000 under asking and our buyer walked away. Three weeks later the seller reduced the price $10,000. The listing agent called me and said that they were willing to go $15,000 under the original price and asked if we were interested (good for him for calling!). I said that my client wasn’t interested but would still pay his original offer ($290,000 – now only $10,000 under the newly lowered price). He said no thanks and hung up. I still got together with my buyer and we made the same offer again. This time the seller accepted and we had the inspection today. No promises, but it looks like my buyer will get the house. It pays to be patient. 🙂

  9. Thanks for sharing that info, Jenny. It’s a little snap shot of today’s market. Yes, if the house is priced low it will get multiple bids like some readers have observed but many sellers haven’t come to terms, yet, with today’s environment. And with soooo many houses on the market it is a bit easier to be patient.

  10. “No promises … it pays to be patient.”

    I prefer “snapshots” that are based on real sales.

  11. Squeezed, would you prefer not to have heard the anecdote at all? Why do people comment just for the sake of being an ass?

  12. Under pricing is real estate is really a dangerous one and if it cost much its nature that usually other person says i brought it low cost than you.

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