The old adage that price reigns supreme in real estate is always at play. Sellers usually want to price their home at the top or above their agent’s suggested range to test the upper limits of what the market might be willing to pay for their home.
In reality, most real estate agents agree to do so with the caveat that if showings do not yield any serious interest or there is little to no showing activity, then the price will need to be adjusted. Any savvy agent’s gut always tells them what the home should be priced at to make it move.
Underpricing
Conversely, what happens when an agent convinces sellers to underprice their home with the intention of sparking immediate interest and perhaps multiple offers? There is underpricing and underpricing.
Pricing at the low end of a suggested range or by a couple of thousand dollars within reason is one thing. Pricing the home well below comparable sales is another. What seller in their right mind would even agree to such a thing?
In low inventory markets where there is an abundance of strongly qualified buyers such as Silicon Valley, this practice has become quite commonplace; it’s referred to as “auctioning.”
Only in the land of tech can a property go up for sale and receive multiple cash offers well above the asking price — not just by a little bit, but by $500,000, or even $1 million — or more.
The question becomes: How much is too much and at what point are these prices even sustainable? Because of the leverage of cash, listing agents and sellers are often willing to throw caution to the wind because the pressure and feeding frenzy of such offers causes buyers to forgo important contingencies such as an appraisal or inspections.
Is such a practice deliberately misleading? Where do agents strike a balance between letting market dynamics take over and intentionally creating a scenario to spark out-of-control bidding wars in the first place?
Where are the ethics?
This touches on a couple of ethical issues with regard to the Realtor Code of Ethics, and it starts with the preamble that states: “Realtors should eliminate practices which may damage the public or which might discredit or bring dishonor to the real estate profession.”
It goes on to say, “Realtors having direct personal knowledge of conduct that may violate the Code of Ethics involving misappropriation of client or customer funds or property, willful discrimination, or fraud resulting in substantial economic harm, bring such matters to the attention of the appropriate Board or Association of Realtors.”
And lastly, the preamble concludes with reference to the golden rule that, “In the interpretation of this obligation, Realtors can take no safer guide than that which has been handed down through the centuries, embodied in the golden rule, ‘Whatsoever ye would that others should do to you, do ye even so to them.'”
The golden rule is a basic foundation of the Code of Ethics itself, however, agents should be reminded of this when deciding to underprice a home with the intent of driving up the price.
It’s important that transparency reign supreme with such practices so buyers and their agents aren’t mislead into believing that the listed price is, in fact, the asking price for the home.
Could underpricing that results in a buyer paying $1 million over asking price be considered substantial economic harm?
This may be hard to say as the value of something is typically in the eyes of its beholder, however, it’s possible buyer’s remorse could creep in after purchasing or when they learn their home sale was the talk of the town as neighbors are thanking them for creating a huge amount of equity almost overnight in the neighborhood.
This remorse could lead them to take action in whatever way they can against all involved in the chain of events.
How underpricing should be handled
A disclosure form should be used in these kinds of situations that states that the home is underpriced within a certain range of current comparable sales and is subject to a bidding process intent to drive multiple offers yielding the highest and best from all parties, which could result in a buyer paying substantially over the price of the highest sold comparable in the neighborhood, area, etc.
Perhaps a value range marketing approach would be better so buyers understand a range of which offers would be entertained and that multiple offers are possible.
Any agent actively engaged in this kind of market knows this, and it may go without saying, however, buyers should be appropriately counseled before engaging in a property search where aggressively underpricing a home is common practice.
Buyers have a choice as to whether they want to play such a game to get into a home, but if they want to buy in a certain area, it may go with the territory.
The flip side is not every real estate market is in a position to price homes that would spark crazy bidding wars. This is particularly the case in markets with lower wages, properties with less equity (let’s face it many properties across the country have seen their values rise, but not by half a million or more in a few months or a year or two later with the next sale), more resale inventory as well as new construction.
The agent’s credibility is on the line, and the agents and buyers may simply click off that listing and not pursue it further knowing what the outcome is designed to do.
In the eyes of the beholder
Ultimately, the power is in the hands of a buyer when choosing to accept or reject this strategy. They can simply skip these properties and not engage. If consumer interest cools on these listings, sellers and listing agents may need to rethink their approach.
Even in a multiple offer situation when a property is not underpriced, if a seller already has four or five offers in place, a buyer’s efforts may be better focused elsewhere rather than choosing to get dragged into a bidding war with little leverage.
There is no stronger message as to what the market is willing to pay for a seller’s home than when multiple offers are presented for seller review. In many cases, the offers are very much within close range of each other.
Although listing agents may feel they have worked in the best interest of their sellers, if the pricing was misleading, it could result in a buyer getting cold feet, backing out of the deal or having a severe case of remorse. Ultimately, as the Code of Ethics touches on, this kind of approach could discredit or dishonor the profession with a buyer feeling misled.
To underprice or not, that is the question. As in real estate, many situations fall within a gray area, and the dynamics of each real estate market will determine how that plays out on an individual property.
Although market dynamics may rule, both listing and selling agents should handle them in the most responsible manner possible.
Cara Ameer is a broker associate and Realtor with Coldwell Banker Vanguard Realty in Ponte Vedra Beach, Florida. You can follow her on Facebook or Twitter.
