It’s not where you start. It’s where you finish.
This axiom applies to just about every human endeavor. Whether an endurance contest or a high stakes business transaction, the same holds true: all that matters is the end result. In the former example, some athletes prefer to race to the front of the pack from the starter’s gun. Rabbits, if you will. Others prefer to lay back and conserve energy for a steady pace and stronger finishing kick. Tortoises. Neither strategy is inherently right nor wrong, just a matter of strategic preference based on skillsets and personality types.
The same is true in business negotiation. Some are highly aggressive from the start, while others hold back a bit in anticipation of a long, drawn out process. Some cut to the chase. Some prefer a more gradual progression towards the most advantageous terms.
When pricing a home for sale, a standard tactic is to list it at or slightly above market value in anticipation of some negotiation. Knowing that buyers don’t like paying sticker price and expect to negotiate some of the “fluff” out of a list price, sellers and listing agents are conditioned to add some into their pricing.
You want $500,000? You price it at $529,000.
You want $1,000,000? You price it at $1,049,000.
With a little luck, maybe you even get a little more than your target sale price.
This is the time honored and traditional method of pricing a home for sale. Largely because it is effective. Grossly overpriced homes don’t sell. They just sit on the market, stagnant. Homes priced appropriately for the current market will usually sell in line with standard averages in terms of both price and speed.
But what if you want to sell faster than the average? Maybe you don’t have 30-90 days to waste? Perhaps, outside factors make speed a higher than normal factor. Major life changes, concerns about the direction of the financial and real estate markets, and even just an impatient personality might encourage a seller to adopt a different strategy.
Namely, strategic underpricing.
Not to be confused with undervaluing or fire-selling a home, strategic underpricing can prove useful in obtaining the highest price the market will bear for a property in the shortest amount of time possible.
When you intentionally price a home below its estimated current market value, you instantly create more demand for the property. It’s the most basic law of supply and demand. Everyone likes a low price, after all. If a desirable home in a desirable community hits the market for $50,000 – $100,000 below recent sales of comparable properties, for example, you can bet that people will line up to buy it. The same isn’t typically true for homes priced $50,000 – $100,000 above recent sales outside of wildly overheated markets.
A fast sale is only half of the equation, however. The other half is leveraging all that demand to obtain full market value. Giving the house away is not a winning strategy.
The low list price gets the market’s attention. Next, the home needs to be marketed effectively to build some anticipation prior to accepting offers. This can be accomplished with “coming soon” advertising. Let the market know about it prior to going active in the MLS. You will likely have buyers lined up for showings by the time you go live.
Make it an event. Hold a grand opening style open house to kickstart showings. Let prospective buyers see firsthand just how desirable the home is to competing parties by the traffic alone.
Don’t accept the first offer that comes in, no matter how good it is. Clearly spell out to all interested parties that you will be fielding offers through X date and time (typically 5-7 days). Fully anticipating multiple offers, requesting “highest and best” offers by that date sends the clear signal that you expect the price to go up rather than be negotiated down.
You are looking to spark a bidding war, which when handled properly, can not only lead to the price getting pushed up well beyond your initial asking price, but with superior terms as well. In competitive situations, buyers may add an “escalation clause” to their offers, which matches or beats any higher competing offer by a specified amount. Buyers may agree to accept the home “as is” with no repairs. Perhaps, a buyer will be willing to waive the financing and appraisal contingencies, making their earnest money non-refundable if they fail to get their loan or the house doesn’t appraise for the purchase price. The possibilities are limited only by creativity and the desire to win.
This isn’t a strategy for everyone. Some don’t like the gamesmanship of playing one party against another. Some don’t like the added stress and logistics of weighing multiple offers against each other, preferring to deal with one party at a time. Some don’t like the idea of the predicted bidding war not materializing, leaving them with a lower than hoped for sales price.
If that frantic burst of activity upon entry to the market isn’t for you, or you have a trickier property that requires a very specific buyer (and is, therefore, less likely to spark a competitive bidding war), stick to a more traditional strategy.
If you are a rabbit who wants it done NOW with a bold approach, however, strategic underpricing might be optimal.
After all, while it’s very easy to overprice a home, it’s very difficult to underprice a home. The market will push a home up to its current market value just as reliably as it will push it down.
You just have to know how to play the game.
Is strategic underpricing the right strategy for you and your home?
Give us a call and we’d be happy to advise.
