Monday, June 6, 2016
By Jed Williams
Underpricing Your Home

Not Likely To Cause A Bidding War

There are some agents who will tell you that your best option for getting more money out of your home is to underprice it. They will insist that this will create a bidding war, and you will end up with the upper hand and more money. Few agents can actually tell stories about getting multiple offers on a home, and they sound like real estate heroes. In reality, the strategy of underpricing doesn’t work and can even cause legal complications with your home sale if it does eventually go under contract.

Just because your home is priced well below market value, doesn’t mean it will get multiple offers. The current economy is a buyer’s market. That means buyers everywhere are getting deals on the houses they desire. Rarely do potential buyers see a property and even offer full asking price. They know sellers are eager sell, and your home is no different in their minds. Even if you know your home is priced below market value, potential buyers do not know that. They are looking to get a deal on your home, and that means they’ll be under bidding your already too-low price.

On the off chance that your home does get bid on at or above asking price, which is statistically only 11% of homes, you probably won’t get much more than a couple thousand more than asking. Of the 11% of homes that do get bid up, the majority of them, about 7%, get bid up only a percent or two. That means, in this unlikely scenario, a home listed for $285,000 will probably sell for about $290,000, which is actually more of a rounding error on the home’s value rather than the home getting bid up. Only .5% of homes in this area sold for 10% above asking price. That means 99.5% of them sold for less than that.

To walk through a scenario, there is a home which has an actual worth of $300,000. A real estate agent prices it about 5% below market value at $285,000, hoping to get multiple offers and placing it in a lower price bracket to reach more potential buyers. Statistically, 80% of homes sell for 94%-100% of their list price – the low end of that means the home listed at $285,000 will sell for $267,000. Assuming the home does get more than asking price, realistically, it will get about 2% more than asking price, meaning it will sell for about $290,000, which is still $10,000 below what it is actually worth.

Because there is a .5% chance the home will get 10% more than asking price, meaning it sells for $313,000, there are a whole new set of problems once the bank gets involved. Banks do appraisals on properties before they give borrowers money to buy the homes. The listing price of the home holds a large amount of weight with banks when they consider the actual worth of a home. The $300,000 home will probably appraise for closer to $285,000 because that is what it was listed at. Very rarely will banks fund even the full amount of the appraised value of the property. Typically, they’ll lend about 80% of the appraised value. That means the bank will lend your potential buyer about $230,000. The buyer would then be liable to bring $83,000 to the table at closing. Most likely, the contract the potential buyer signed had a clause in it protecting them from this unfortunate situation. The contract could be void at that point, and the seller will have to either accept far less money from the potential buyer, probably closer to the $285,000 appraisal price, or put the home back on the market, again, probably at the $285,000 appraisal price.

A buyer’s market means that there are fewer buyers than sellers in the market. If you’re looking to buy a home, this is great for you. If you’re looking to sell a home, you need to understand that you probably aren’t going to get multiple offers on your home. If you do get multiple offers, it’s more than likely because your home stands out in the market rather than your agent’s abilities. If you are trying to sell your townhouse in Germantown, MD, where townhouses are almost literally a dime a dozen, to be unique, it has to be the only townhouse on the market and more helpful is if it’s the only one to have gone on the market in a while. If it’s not the only townhouse on the market in Germantown, MD, it could still be unique in its neighborhood location or its price point. If there is a particular neighborhood that is especially desirable for its school district or amenities, there are likely buyers looking specifically in your neighborhood looking to snatch up any home that goes on the market. Your specific home may not be any different from your neighbor’s, but if your neighbor’s isn’t on the market, yours is unique. Also, your price point can make your home unique. Hagan’s realtors would never underprice or overprice your home, but there are pricing strategies, such as putting it on the market at $299,900 when it’s actually worth $300,000, that will include it in more searches for people who are searching under $300,000. We also attract buyers who are looking at buying only over $300,000, and therefore put it on the market for $301,000. Either price is well within the margin of error, but can put your home on searches it wouldn’t have made it to before, depending on the target buyer.

Your home also can’t be too unique in the market. If you have a million dollar single family home in Germantown, MD, it makes you unique. There aren’t many million dollar homes in Germantown. There is probably a reason for that - the types of buyers who are looking for million dollar homes are looking for large properties not available in Germantown. In this instance, your home is too unique. Also, if you’ve done superior upgrades to your townhouse, turning it into a state-of-the-art smart house, the investment you’ve put in will probably not pay off. Your home is too unique – there aren’t many buyers looking at townhouses who can or want to pay what you will have put into it.

There are a few things your agent can do to make sure your home stands out. Most agents don’t do those things because they mean extra time and work. Because of the unique structure of Hagan’s office, the extra work falls on the shoulders of trained professionals in their respective fields. That is not to say that your agent is off the hook for advertising, staging, and creating the listing. Your agent knows you, the property, and the market better than any of the other staff. Your agent will be with the photographer when she goes to capture your home’s best assets, he’ll tell the writer what areas to emphasize, and will ensure the marketing materials are distributed to the right demographics of buyers.

Other agents know that underpricing your home may not solicit multiple offers, and truthfully, they’re probably not expecting that to happen. They know that if your home is priced below market value, it’ll get sold more quickly than if it were priced correctly, and that means a quicker pay day for much less work.

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Jed WilliamsJed Williams
Principle Broker and founder of Hagan Realty