Right now there are at least 3 ways homes are being marketed. Let’s break it down by the 3 types, and just for fun, I will tell you which type of properties are most likely to fall under these three categories. Now I am going to say that this is based on what is happening in the GTA; broadly, this is from Mississauga to Clarington and north to Newmarket. (I bet it’s happening wider than that, but this is just my area of most familiarity)
Drum roll please….the three categories are….
- The price is really the price
- Fishing with a net
- Clickbait
Want to skip the details? Watch my video (click on the picture)
The Price is Really the Price
In this situation, the house is priced the seller feels comfortable with accepting.
If you're like most people, you'll ask....is there be room for negotiation?
Maybe, maybe not - it’s probably best to ask three questions first to understand the market...
- Does the price look like good value for the money?
- Have other homes sold with similar features for around that price?
- Is there a recent listing activity history for that home?
Question 1: Is the price good value for the money, and you recognize this, there are likely several other people with the same thoughts. Sometimes a home priced like this will naturally attract several home buyers. Other things that make a property attractive is if it’s been recently updated, is close to transit, or has beautiful landscaping. There is likely to be less room for negotiation in this situation. Homes like this usually sell quickly at close to, or even (in competition) over asking.
Question 2: Have other similar homes sold for around that price? How long did they take to sell? A good comparable property - and here’s the thing - it must be sold during the same market conditions - will give you a good indication of price flexibility. Is everything selling with a 98% of list price? This kind of research, along with a good discussion with the sellers realtor should answer some of the questions.
Question 3: If the home has some recent listening history, let's say it's been listed at a much higher price (maybe the seller was testing the market), then dropped to a low price (see "Fishing with a Net", below) there may be an inflated expectation by the seller. Or maybe now they’re getting desperate? Or maybe now the market dynamics have caught up to their pricing strategy… again a good conversation with the listing agent may help peel back the layers and give you some information to help craft an offer that will get accepted.
What do homes in this category look like?
These homes tend to be on the upper end of the market, including luxury homes. In this market, there are fewer buyers because of the price point. This is not to say homes do not sell for over asking if they are appealing enough to several buyers.
The other category I see these properties fall into would be lower end condos, say in buildings or areas that are not desirable, or have an upcoming special assessment. For more on Special Assessments, see my video here: Red Flags in Status Certificates
Fishing with a Net
This is not a new strategy. I have seen this for 20 or more years in popular neighborhoods like the Beach. I’m going to say that the majority of homes are sold with this strategy in a hot market. Why?
Because when there are many more home buyers, than homes for sale, house pricing becomes heavily driven by supply and demand.
How does "Fishing with a Net" work?
Let’s say that a listing comes on to MLS on Tuesday. The list price is $799,000 and there’s an offer date & time set for reviewing any offers the following Monday.
This is clearly not a $799,000 house. By a quick search of recent sales, It’s worth $1M or more. Anybody with a basic knowledge of real estate understands, whether by looking at the list price, the presence of an offer date, or both, that this property is under-listed.
The listing agent knows by putting out a “loss leader” price in the week before offers are reviewed they will be able to show the home to as many possible home buyers as they can. They are banking on homebuyers that have a budget of only $850,000 coming to see it, as well as potential buyers who have a budget of $1.2M.
They are essentially "Fishing with a Net" to catch the buyer who will pay the most money with the fewest conditions
After all, there will be a lot of homebuyers with that $850,000 budget, who will ‘just try’, hoping they will be the only buyer to snag a deal. But what really happens is that those dummy offers will bid up the price of the higher offers - and the more bids on the table generally, the more the price escalates.
And they are counting on the buyers that are serious to have done their homework (be pre-approved for the bid price, have a deposit on hand and be confident to offer without conditions or contingencies.
Is there a limit to how high the price can be pushed? There sure. is. Researching recent sales to observe the gap between the list price and sale will show that clearly. For example, it’s unlikely a house listed at $799,000 would sell for $2 million. Just the same way it’s very unlikely that the buyer with a $2 million budget would be checking out homes listed at $799,000.
The rule of thumb is pricing strategies will follow similar homes sold in the neighborhood, to replicate those results.
What do those homes look like? They are generally in popular neighborhoods, with updated finishes. If the marketing of the home is spectacular, it will draw in more buyers.
This is also a popular strategy to market fixer uppers/estate properties. You may notice that these are priced especially low. One clue to picking out these homes is the lack of interior photos. Not everyone will qualify for a mortgage on this type of property, so it is especially important that these homes are exposed to as many people as possible.
And finally, we have Clickbait
There’s also a third way a property is marketed. I personally find this method, the most annoying and confusing, but it happens so we need to deal with it.
Knowledge is power after all. Here's how clickbait pricing strategy works:
A property is on the market for $899,000. The listing reads, “Motivated Seller! Bring All Offers!”
The price looks too good to be true, but there is no date to review offers in the listing, so it doesn’t seem to be deliberately under-priced for competition. History in the neighbourhood shows that things sell for higher.
What’s more is that the property has been on the market for 42 days.
So I call the listing agent and ask “So your seller would entertain offers at that price?” The reply: “No, of course not.”
I asked if they had received any offers on the property and was told: “Several, and most were over asking,”
So why do sellers continue this strategy? Because, they know if they increase the price, buyers have been conditioned to look for “deals” and the showings will trickle down to nothing.
Is it unfair? Unprofessional? I tend to think this strategy falls into the second category, but it is allowed, and it happens! Knowledge is power.
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