Can a property be priced too low?
I am constantly reminded of the general inefficiency in the market when it comes to pricing properties. (As you might expect, the pricing part (“the ask”) has a much greater tendency towards inefficiency than the closing price, which has the benefit of incorporating the demand side of the transaction equation.) Nowhere does this stand out more than when looking to the land of FSBOs, and looking at wildly aberrant swings of pricing too high or pricing too low.
About a month ago, I posted the following on TAP (The Apple, Peeled):
The theory goes that FSBOs (for sale by owners) offer better deals to you, buyers, because they save on the typical 6% commission and can pass those savings on to you. We thought we would take a sampling of properties at different price points, and see if this theory holds water. (Of course, all we have to count on is the asking price, so bear with us.)420 E 55th Street
FSBO: asking $575k for apt 1B
Broker: asking $550k for 9B, on the market 13 weeks301 E 79th Street
FSBO: asking $740k for apt 8N
Broker: asking $650k for 17N, on the market for 17 weeks299 W 12th Street
FSBO: asking $1.55mm for 15k
Broker: asking $1.47mm for 6K, on the market 25 weeksIt’s not surprising that pricing comes in above broker-represented properties. Back in 2006 when Urban Digs conducted a similar experiment, he yielded similar results. Just because owners save that 6% doesn’t mean they’ll trickle down those savings.
Now for the other side of the coin: when we dug into the FSBO listings for analysis, what we found is really a bifurcation of property pricing … a bi-polar pricing pattern, if you will: either pricing above market, as the above suggests, OR pricing significantly below building comps or below market. This begs the question of how much money they may, in fact, be leaving on the table for the sake of saving the broker commission.
This last piece is the part that I’d like to point to and question: the concept of under-pricing. Said in a different way: is there such a thing as pricing a property too low? Way back in November, a nice little conversation was started around this very premise. At that time, Noah commented that:
I find that sellers feel that they are GIVING AWAY MONEY if they price their unit at or slightly below where it likely should trade given market conditions and comps. The seller response is something like..."well, I know it should sell for around $1.5M, but how will we know if we cant get $1.6M if we don’t price near $1.8M"? So, they price at 1.8M, listing gets no traffic, no sense of urgency, gets stale over time, and after 2-3 price cuts every buyer out there knows they can probably approach the seller differently. Pricing high to test the market is usually counterproductive unless we are talking about a property with exceptional features.
Whereas other commenters noted:
Sellers can't disassociate psychologically from wanting to discount.Your suggestion of option 3 [under-pricing] as "intellectually" the correct choice assumes multiple bids for a unit. Even if traffic is good and pricing is great, isn't assuming multiple bids coming in at the same time too much of a leap of faith?
As a potential buyer, I would not under any circumstances engage in a bidding war in this climate. I may offer above ask for a property that is clearly priced below, but I would walk away if a broker told me that I would have to engage in a bidding war to get the deal done.
I've sold twice without a broker before and both times did #3. Both times I sold in a bidding war. Both times I got more than the most recent building/area comps.
As a buyer, I can point to dozens of apartments that I really liked, but didn't even bother to look at, since the asking price made the seller look irrational. for some of those, its possible that I would have ultimately put in a bid, but they took themselves out of the running by indicating an unrealistic price expectation. More importantly, I've also seen a few (not as many as I would like) apartments clearly priced below market. For each one of these, I quickly contacted the broker to see the place in order to place a bid. In all of those circumstances, I found that there were already multiple bids at or above ask.
When the market was really hot, we sold two properties for well above asking by pricing enough below then-market value to generate a bidding war. But in this market I would assume that a place priced low might very well not sell above that price -- but it would sell, and pretty quickly.
Although, I'd hopefully drop out when it turned into a "bidding war", I don't see any issue competing with other buyers if I think they are also bidding rationally and the asking price started out below where I see fair value.
Since November, we have the benefit of hindsight knowledge: bidding wars have indeed materialized since then and sellers have been much more savvy in terms of pricing their properties to leverage those first few critical weeks on the market. The NY Real Estate Market (not the world economy, mind you), does appear to have at the very least stabilized, with the lower end comparing favorably to last year from a pricing standpoint. Sellers appear infinitely more realistic and the buyer pool has shifted away from deep value or distressed hunters to needs- and feature-based buyers.
My questions therefore are:
• Now that we are in a different market, is the concept of “under-pricing” that much less controversial, less of a leap of faith?
• Have the market dynamics normalized enough to conclude that the this strategy will, in fact, help a property reach “market pricing” in the quickest time possible? [To even entertain this notion, you must first believe that markets determine prices, not sellers or brokers.]
Inquiring minds wanna know ☺
Comments (9)
I had tried to sell into the illiquid market of 2008 as strictly FSBO, as an open listing (working with buyer's brokers), and giving an exclusive to a broker. Throughout that process it was very difficult to know where the market was because of the illiquidity, but at the very least I always had the most aggressive price in the building compared to other comps whether they were exclusive listings or not. Shortly before taking it of the market, I put to the test what a lot of readers here had been saying at the time: I went back to FSBO and set my ask a little above liquidation price (based on an identical unit that was a bank listed foreclosure that had sold a month prior). I most likely wouldn't have sold for that price, but wanted to see if it would really result in multiple offers. Moving the slider down to generate interest resulted in the same amount of traffic I'd had all along (about 2 viewings a week for 6 weeks), with no offers whereas I'd had two over the course of the previous 8 months that both fell through due to buyer financing issues. While price obviously is a large control that affects time on market, I'm convinced through my experiences that it's not the liquidity booster some people here make it out to be.
Also, the examples given in this article are way, way too anecdotal to support the notion that most FSBOs usually price too high.
Posted by nycjoe | June 7, 2010 10:59 AM
I'm a firm believer in pricing no higher than the market, even below, Ana Maria. As for your comment, nycjoe, you seem to ignore the price that sellers pay for having a listing too long on the market. It's stale, and the potential buyers have moved on.
Posted by Malcolm Carter | June 7, 2010 11:51 AM
nycjoe - indeed, the original post went on to say that we observed "a bi-polar pricing pattern, if you will: either pricing above market, as the above suggests, OR pricing significantly below building comps or below market. This begs the question of how much money they may, in fact, be leaving on the table for the sake of saving the broker commission."
So, I agree that it may not be necessarily an issue of overpricing.
Posted by Ana Maria | June 7, 2010 12:10 PM
MC and AM, I totally agree that time on market is a seller's worst enemy, and in the majority of cases results in a lower return- in my post did I say otherwise? The main point I'm making is that many of the regulars who commented here over the past two years repeatedly argued that if a seller prices their property low enough at the start it will move quickly. In my own observations since the Lehman collapse for units in my building that sold above and below market, very early on or on the market for a long time- that pattern isn't reliable. While pricing was a factor in some of the quicker sales, other factors like marketing approach whether broker listed or FSBO, competence of the broker (this factor cannot be underestimated), and seasonal cycles seemed to affect results more significantly.
In 2006 I think Noah's FSBO article was much more apt because liquidity seemed to be at an all time high, but nowadays more and more FSBOs are becoming aware of the folly of the strategy of pricing high to get more "wiggle room" at negotiation time.
Posted by nycjoe | June 7, 2010 4:02 PM
I sold 2x as a fsbo (no brokers) and sold quickly in bidding wars. I got price brokers would ask -- I told them I'd be trying FSBO, they gave me their advice anyway -- and then took off 10%.
But these days I think the bidding wars you hear about are really few and far between. I know of several recent sales in the dumbo/brooklyn heights/cobble hill area. They all sold for about 10% under asking after a couple of months on the market. Lots of open house volume. A price cut here and there. Then, finally, a sale. Even the place that I really think was underpriced went for 10% under asking. I would price at the higher end of market, expect it take a bit, and sell at hopefully a reasonable number. On the upside, I dont' see prices drastically lower than peak.
Posted by alice | June 8, 2010 7:26 AM
Honestly, I cannot remember the last time I saw an ocean-view property in Costa Rica for under $100,000. Remember, increased tourism causes an increase in prices. That's probably why I can't think of any off the top of my head. That's not to say you won't find any, though.
I would suggest that you look into Nicaragua, too. Costa Rica's neighbor to the North also has various projects and gated communities among other projects that are competitively and lowly priced in comparison to Costa Rica. The country's one of the safest in Latin America and the cost of living is astronomically low. You can really stretch your dollar there.
Real Estate Sale
williamsjohn333
Posted by Real Estate Sale | July 1, 2010 3:39 PM
I had tried to sell into the illiquid market of 2008 as strictly FSBO, as an open listing (working with buyer's brokers), and giving an exclusive to a broker. Throughout that process it was very difficult to know where the market was because of the illiquidity, but at the very least I always had the most aggressive price in the building compared to other comps whether they were exclusive listings or not. Shortly before taking it of the market, I put to the test what a lot of readers here had been saying at the time: I went back to FSBO and set my ask a little above liquidation price (based on an identical unit that was a bank listed foreclosure that had sold a month prior). I most likely wouldn't have sold for that price, but wanted to see if it would really result in multiple offers. Moving the slider down to generate interest resulted in the same amount of traffic I'd had all along (about 2 viewings a week for 6 weeks), with no offers whereas I'd had two over the course of the previous 8 months that both fell through due to buyer financing issues. While price obviously is a large control that affects time on market, I'm convinced through my experiences that it's not the liquidity booster some people here make it out to be.
Also, the examples given in this article are way, way too anecdotal to support the notion that most FSBOs usually price too high.
Real Estate Sale
williamsjohn333
Posted by Real Estate Sale | July 1, 2010 3:41 PM
You really made some good points in your post
Posted by links of london | July 7, 2010 2:39 AM
I would have ultimately put in a bid, but they took themselves out of the running by indicating an unrealistic price expectation. More importantly, I've also seen a few (not as many as I would like) apartments clearly priced below market. For each one of these, I quickly contacted the broker to see the place in order to place a bid. In all of those circumstances, I found that there were already multiple bids at or above ask.
Posted by coach handbags | August 13, 2010 4:48 AM