The concept of an asking price is becoming virtually meaningless in today’s real estate market.
Is that because the market is moving so fast and realtors are so out-of-touch that they can’t price homes properly? Let’s hope not. In a world where the real estate industry is justifying commissions which are close to 5% of the sale price of a home, that wouldn’t look too good on the profession.
I think we can assume most real estate agents are more astute than that – they don’t list a home for $500,000 and have it sell for $600,000 by accident. Are we to believe they are so clueless that homes can routinely fetch 20% more than the realtor thought it was worth?
Listing a home for below market has become a selling and marketing strategy. On its extreme end, one real estate agent actually listed a home for $1 last year.
The game is to attract more buyers to the product by marking it down to a price that the homeowner would never accept. There’s something disingenuous about the practice but apparently perfectly legal.
“It’s not considered an offer, it’s an expression of interest,” says Lawrence Dale, a lawyer and one of the founders of discount firm Realtysellers, which has been battling industry standards for years.
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“There is nothing formal to say you will sell it for that price.”
Can you imagine if Best Buy put out an “expressions of interest” for the latest 42-inch television, you showed up at the store and they told you they weren’t willing to sell it to you at that price and you should bid again?
Mr. Dale says the trend emerged during this real estate cycle as part of a package of schemes that includes putting the house up for sale and refusing to take any offers for days.
“It’s all trying to drum up interest,” says Mr. Dale, who believes in some commoditization of real estate. “Ultimately, the value of a property determines the price.”
A seller can list a property for $799,000 and have it sell for $1.1million but it would sell for the same price if it had been listed for $999,000, he says. “People are not fooled.”
He does concede that people can end up spending more on a home than originally intended because they get caught up in the frenzy of a bidding war.
But the process also allows agents to claim to potential sellers that they can get more money for a home, Mr. Dale says . “It’s another misleading way to justify their fees,” he says, adding listing low can create an auction-like process.
The problem is it’s not an open auction where you can see what the guy beside you is bidding. You’re blind. If you’re a buyer, the message from your agent will invariably be put your best offer forward because somebody else might have a better one.
The first home I ever put a bid on had two offers. My wife and I bid $30,000 less than list and the other bidder went $20,000 above. Whenever I drive by the house, I almost feel guilty that the eventual buyer bid $50,000 more than they had to.
Craig Alexander, chief economist at Toronto-Dominion, says the type of “auction” organized by the real estate industry is likely to produce a higher price.
“You generally get a higher price from a closed bidding process. The reason is in an open bidding concept, let’s say I am bidding against you and I’m prepared to go to $500,000. We start the process at, say, $380,000 and the most you will go to is $450,000, then I can get it for $451,000,” says Mr. Alexander, who says you cannot discount people getting emotional in any bidding process.
In the type of seller’s market we have today, the process is downright inflationary. The artificially low selling price just kicks the process off.
Moshe Milevsky, an associate professor in Finance at the Schulich School of Business at York University in Toronto, says the closest analogy he can think of is the market for initial public offerings.
“The investment bank tries to issue to the market at a low price,” Prof. Milevsky says. “They know the company is worth more but they go to market with a low price because they want that pop on the first day of trading. They want the publicity, the excitement.
“In cases of real estate, it’s not different,” he says. “What you offer it as not as important as what the market price is. You offer at a low number to create a bidding war.”
The one problem in real estate that makes pricing difficult is the lack of liquidity and the fact that comparing two houses can sometimes be like comparing apples to oranges.
“You never know quite what to compare to,” Prof. Milevsky says. “The phenomenon of the houses selling for more than asking price in and of itself doesn’t mean much because the asking price is an artificial construct.”
That’s not to say home prices are not rising fast. They are. And you can’t discount the possibility of that one buyer who bids well above market price. But asking price itself should not be your gauge for what a home is worth. Not anymore. Real estate agents have taken care of that.