Should I underprice my home to start a bidding war?

By Romana King on April 4, 2016
Estimated reading time: 4 minutes

Overpriced homes actually sell for more, according to a U.S. research study

Q: The real estate market in Barrie is really hot right now, which won’t come as a surprise to anyone. But as a home seller, we still want to make sure we get the highest possible sale price. I’ve read about all these bidding wars and wonder if we should underprice our home to try and start a bidding war?

— Want more for my home, Barrie, Ont.

Answer from Romana King, senior editor and real estate specialist at MoneySense: Listen, if you’re selling in today’s real estate market, your biggest concern is whether or not you can get top dollar for your home. In recent years, one tactic that has dominated the bigger markets—and stolen headline space—has been the use of bidding wars.

The idea behind a bidding war is to attract competing potential buyers with enough interest that they’ll increase their maximum purchase price and, ultimately, raise the final sale price for that home. The most obvious way to create a bidding war is to underprice a home. Would-be buyers will flock to—what should be—a great-looking home that appears to be competitively priced. In a rush to be the new owner, these buyers will submit bids above the listed price. Very often, the buyers, through their real estate representative, will have additional opportunities to increase their bid, until, eventually, there’s only one buyer left presenting the highest possible market-price for that home (on that particular day, in that particular neighbourhood).

Good strategy, right? Turns out that some studious professors were actually studying the impact of under- and over-pricing on final sales prices.

According to a study published in the Journal of Economic Behavior & Organization overpricing and underpricing a home for sale actually has counter-intuitive results.

According to researchers:

–> sellers who listed their homes 10% to 20% higher than other homes in the neighbourhood saw a slight increase of 0.05% to 0.07%, on average, in the final sale price (which translates to an extra $117 to $163 in the final sale price);

–> however, sellers who listed their homes 10% to 20% lower than other homes in the neighbourhood saw a slight decrease of 0.05% to 0.08% in the final sale price (which translates to a loss between $117 and $187 from the final sale price).

According to the co-authors, Grace Bucchianeri, former assistant professor at the Wharton School of the University of Pennsylvania and Julia Minson, a lecturer at the University of Pennsylvania, the research findings were evidence of a behavioural trait known as “anchoring.” This trait assumes that, as rational decision-makers, we’ll rely on the first piece of information offered (known as the anchor) when making decisions. Once buyers have an anchor, they’ll examine and interpret all other information in relation to the anchor.

The takeaway: as a seller you want to establish the anchor that will be used as the framework for evaluating your home and the price a buyer is willing to pay for that home.

Still, there are always exceptions to the rule. According to one New York-based real estate broker, overpricing a property works best when inventory is low. Still, other real estate agents take the opposite approach: stating that an underpriced property in a low-inventory market sparks activity in buyers.

So, what should you do? The best advice is to collect as much information as you can. For instance, is it a buyer’s market? Or a seller’s market? (To learn about the difference and how to determine what type of market it is read my previous column on this topic.) Also, what were the final sale prices of other, similar properties that recently sold in your neighbourhood? Finally, do you have any features that other properties don’t have (a larger backyard, a newly renovated kitchen)—properties that could be considered extra value to potential buyers? The more information you can get about the overall market and, specifically, about your neighbourhood, the better armed you’ll be when settling on your list price.

Romana King is the senior editor and real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook.
If you have real estate concerns or questions, please email Romana directly at [email protected] or call her on her direct line at 416-764-1382.