Does Drastically Under-Pricing Still Work?

TorontoRealtyBlog

Does anybody still read the newspaper?

And no, I don't mean online.  I mean does anybody get up in the morning, head to the front door, bend down while holding a cup of coffee, and pick up that beautiful roll of newsprint, curled inside a blue plastic bag?

I'll admit, I stopped subscribing a while ago.  There are always those moments when you think you don't need a subscription, and yet you still don't cancel, for some reason.

When I got back from my Honeymoon in 2013, our front door had fourteen newspapers laying on the footstep.  Oops, I guess I forgot to pause the subscription?

But the real kicker came when I switched gyms.

For years, I read the newspaper on the stairmaster – the one with the upright handles and the curled plastic edge that made it easy to fold the paper into quarters, place it over the screen, and read even while hitting the top of the "hill" in the workout.

You know every gym has its cast of characters?  The guy that screams with every rep on the bench press, the woman that makes a "shoosh" noise with every step on the treadmill, or the guy that never touches a piece of equipment and is always talking?  Well, I was "the guy that throws newspapers."

A 40-minute workout on "fat-burner plus," and a full copy of the Globe & Mail meant that I was feverishly shuffling papers, and when finished, my attempt to gently place the paper on the ground often resulted in a sweat-covered newspaper being flung three machines to the left.

But I read every word, every section, every day (except for Wheels; I have no interest in cars), five days per week.

When I left Goodlife, and started CrossFit, my newspaper subscription was no longer needed.

And yet I still long for that first whiff of a fresh newspaper on a Saturday morning.

A friend of mine still reads the paper, every day (and does the crossword like he's twice his age…), and will often say, "Hey did you read the article in the paper today about…," and go on as though I also wake at 6:15am every day to check yesterday's news.

My response is usually, "No, but I did read that article last night, on my phone, before bed."

This past weekend, the article that was the subject of our back-and-forth was about under-pricing in the Toronto market.  Although it wasn't really about under-pricing, but rather a simple "snapshot" of the market that introduced the topic of under-pricing, but didn't really offer any analysis, or take-aways.

The article?

"Cricket Club House Gets 13 Bids; Sells $605,000 Over Asking"

First and foremost, we really see how a person that only reads headlines will never truly understand what's going on out in the world.  This headline offers only absolute numbers, but no relative ones.

But the article goes on to describe how a house that was essentially worth $2,000,000 was priced at $1.4M, and ended up selling for, you guessed it – around $2,000,000.

The agent said, ""I knew we'd probably get $1.9-million to $1.95-million based on a couple of recent comparable sales nearby, but I priced it really low to bring people to its door.

Then added, "I see some homes in the area take multiple offers, but at most you'll see a handful, so to get 13 is a big deal."

Perfect.  This leads exactly into what I want to talk about today.

So first and foremost, is this agent suggesting that had the property been priced at fair market value, that it would have sold for $1.9M to $1.95M, and that the "under-pricing" by $600,000 strategy was responsible for the $50,000 – $100,000 premium?

Secondly, is producing 13 offers, on a house that's under-listed by 40%, an accomplishment?

I'm not knocking the agents here.  These are top dogs, not just in that location, but in the GTA.

What I'm asking is: can you measure the success or failure of a massive under-pricing strategy by the number of resulting offers?

Or to take that a step further, can you actually apply a failure to the strategy if you obtain a certain number of ridiculously unacceptable offers?

I've written blogs before about the "strategy" involved with over-pricing, then under-pricing, and how I think it's so incredibly see-through.  Of course, I'm putting the word strategy in parenthesis, because it's usually anything but a strategy.  More often than not, the practice stems from inexperience, and even desperation.

Picture this: a house is listed for $1,200,000, with "Offers Any Time," and it sits on the market for 30 days.

The listing is terminated, and the property comes back out onto the market for $999,000, with "Offers Graciously Reviewed On Thursday, October 25th At 7:00pm."

Can this strategy really work?

Are buyers that naive?

Show me the buyer that sees the listing and says, "Wow, $999,000?  That's a great price!"

This buyer doesn't actually exist, right?

This strategy would never work, would it?

Well, if it didn't, then this blog post would be going nowhere.

Late in the spring market, a colleague of mine had a listing that was rotting on the market at $1,299,000.  Four weeks, no bids, and the seller was getting anxious.

So what's the move?  For all you armchair real estate agents, do you reduce to $1,279,000?  Does that reduction move the needle at all?  Probably not.  Wait, that's being generous; definitely not.  Any buyer who was interested in the home anywhere near that $1,279,000 price would have come in with an offer when the property was listed at $1,299,000.

Would a reduction to $1,249,000 move the needle?

I suppose it depends on value, doesn't it?

But in the end, my colleague decided to terminate the listing and bring the property back out at $989,900.

It was absolutely, positively, ludicrous.

What kind of buyer in 2018 would be fooled by this?  What kind of agent would bring his or her buyer through the house and allow the buyer to believe that the property was attainable at $989,900, or $1,100,000, or even $1,200,000?

What kind of buyer?  What kind of agent?

All kinds.

This strategy actually worked, and this time, I'm not putting the word strategy in parenthesis, because although it was a Plan-B, and it was borne of desperation, it worked.

It worked, really well.

Because the property didn't just sell for "around" the original list price, ie. the $1,250,000 that the seller might have accepted, when the property was on the market for a month at $1,299,000.

No, the property sold for $1,310,000.

(gasp)

I know.

And in between being shocked at the stupidity of a buyer who paid more than the previous list price, and far more than what the buyer could have purchased the property for just ten days earlier, you're also hating the game.

To be fair, you're probably also hating the player.

But be honest with me for just one moment.  If you're going to apply "fault" to this situation – that a buyer paid $1,310,000 for a house, listed at $989,900, that was listed for $1,299,000 ten days earlier, which probably could have sold for, say, $1,270,000 with ease, to whom, or what would you apply that fault?

It's easy to blame the system, or lack thereof.

It's easy to blame the listing agent for the tactic, er, strategy.

But isn't it the naive buyer's fault in the end?

Of course, that situation I just described is rare.

I just came out of a similar circumstance the other night with a very different result.

An east-end property was listed for $1,698,888, again, with no takers.  This property as well was listed for just shy of four weeks.

Low and behold, it was re-listed….wait for it……for $998,888.

Yes.  A $700,000 price reduction, now with an "offer date."

It was the talk of the industry, for both good reasons and bad.

Cynics were staying "it's stupid," without straining for a deeper argument, and yet some were saying, "The agent has balls for trying this!"

Now what do you, the general public, make of this?

Would it work?

Would buyers really line up to bid on a $998,888 list-price, when the house was just listed for close to $1.7M?

No.  Not a chance.

Couldn't happen, wouldn't happen, should never happen.

Except that it did.

This property received thirty offers.

Thirty.

And while I'm not privy to the contents of the two-foot-high stack of offers, I would hazard a guess that there were a whole slew of $1.1's, $1.2's, and $1.3's.

In the end, my buyer clients purchased the property.

That's right, my clients "out-bid" twenty-nine other people.

Except, did they really?

They bought this house for a paltry $1,562,000.

Almost $140,000 below the original list price.

A cynic might point out that they paid almost 160% of the list price.  But does a list price really matter in this case?  The property was effectively put up for auction at $1, and we won the auction, which, I might add, was well, well below our pre-determined reserve price.

And when I say that my clients "out-bid" twenty-nine other people, and add the cynical and rhetorical question, "Did they really," what I mean is that we were really only bidding against two other buyers.

Twenty-seven of the thirty offers were never in the game.

And how many of those thirty offers were absolute garbage?

So do you blame the listing agent and the seller for wasting the time of those buyers who submitted "garbage" offers?  Or can we buck the societal trend in 2018 and actually hold people accountable for their actions?

Sorry.  I always bring politics into it…

As far as the "drastically under-list" strategy goes, specifically after the property has already been listed once before, you can see that these situations can go either way.

Sure, I chose to write this blog after I personally represented a buyer when the situation went my way.  But the story is as fresh as your grandmother's apple pie, so the timing seemed right.

As for the buyers out there, you now (finally!) have access to sold data, but you don't have access to previous listings.  Make sure you know everything and everything about the property, including the listing history.

I know this is like telling somebody to wear their seat-belt in a car, but as is the case both in real life, and in real estate analogies, not everybody does the smart thing…

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