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 ☺

The media campaign is beginning and we should worry about sellers adjusting their strategy too aggressively. Wait until they get a whiff of the upcoming Q3 report showing the vast improvement in sales activity from the 2nd quarter.
When I say 'chasing a moving target', I refer to any property that has reduced their asking price 3,4, or even 5 times over the course of the listing in the desperate hopes to find out where "market value" is. This type of seller is chasing a moving target, a target of buyers that seem to be running away ahead of them; finding themselves behind the curve chasing the market as it falls. As the buyers run away due to declining confidence and deteriorating economic fundamentals, the seller's are chasing them down with the hopes of catching up. The result tends to be counterproductive because it ultimately can lead to fierce sell side competition and even a further depression of buy side confidence.
Those who signed contracts for new development as the market was near its peak, had to sit tight and wait to close on their property before putting it back on for resale; if that was the plan originally or if the plan changed during the 'waiting period'. With the credit crisis beginning in mid 2007, some 'in contract' buyers were helpless to do anything about their pre-crisis purchase other than to make the tough decision to walk away and surrender their 10% deposit.
What sort of discount should a buyer offering all-cash in this environment expect? On the flip side, how much should an all-cash bid be worth to the seller? Here is a recent situation where an all cash bid took complete control over a multiple bidding situation; I'll discuss the basics with changed details to get to the point of the discussion.





































































