How Houses Get Priced

Here’s a curious (terrible, horrible, no good, very bad?) fact: 

Right now, it seems the best way for realtors in Ontario to obtain the possible highest sale price for a property is to underprice it, often dramatically. When you see houses sell for silly amounts over the asking price, this is a good part of the reason why.

Here’s how it works. 

If a house that has a market value of $475,000, say, is priced at $399,000, then everyone with a 400,000 budget is going to rush out to see it, and there’s good chance that they’ll write an offer, thinking, “This is the one!” Or “What a deal!” Offers galore will be presented and, quite predictably, the sale price will be driven skywards. Houses priced below $400,000 routinely sell for more than $500,000.

Now if that same house had been priced appropriately, at $474,900, or even $465,000, just to be on the safe side of the data, the number of viewers would have been reduced (because fewer people could afford it), and consequently there would be fewer offers and perhaps also a lower (and more reasonable?) sale price.

It’s also likely that at $474,900 the house would have seemed overpriced, simply because of all the underpriced houses around it. Which is pretty awful. And it means there is incredible pressure for everyone to use the same strategy. What it comes down to is this: if you price reasonably these days, you risk languishing on the market.

How can that be right? Well in my opinion it’s not. It’s all sorts of messed up.

First of all, you create false hope. You draw lots of buyers out to view property they don’t stand a chance of winning. They become pawns in the selling process. They are being used to create the illusion of serious competition, much like film extras in a crowd scene, only they don’t even get to enjoy the catered lunch and the faint brush with stardom. It wastes both their time and their emotional energies. It’s no wonder so many of them retreat to their social media pages to vent their frustration. Cynicism and distrust have set in hard, and we should worry about that.

Plenty of realtors, though, love the strategy. A house will sell in under a week. There are no carrying costs for the agent. And they get to claim “Sold for 120% of the asking price in 6 days. Call me to find out how the same can happen for you!” Breathless utterances that further fuel the fire.

Importantly, an equal number of us (at least) detest this state of affairs. We feel that the asking price for a house should be defensible, realistic, and based on the available sales data (data that organized real estate, by the way, guards zealously).

So what should we do? After all, a seller employs a realtor to achieve the highest possible sale price. Isn’t there is a professional obligation, then, to employ the most successful strategy, moral qualms be damned? 

It feels to me this a question the regulatory bodies need to look at. When we plant a sign on the front lawn, the price should be reliable, shouldn’t it? It should reflect our expertise, and be a guide for buyers, not a trap. I’ve always believed that truth in advertising is what we’re after. The code of ethics we’re bound by doesn’t mean much if we’re allowed to put a price tag of six bucks on a million dollar house and then rent out parking spots to everyone who wants to come see it.

Honest mistakes can be made in pricing property, I get that. So how do you legislate positive change? I don’t exactly know, is the short answer. But we desperately need to think about the part we play in fanning the flames. We’re supposed to demonstrate expertise and leadership in the marketplace. It’s required of us, and rightly so. Perhaps, for instance, when we put a house on the market we also need also to post the best three comps (most comparable properties) right there on the realtor.ca page next to the virtual tour, so that buyers can see exactly how realistic the asking price is, and whether we’re any good at math.

I’m sure there are much better ideas. But what’s important is that we resolve to listen to those affected by this fierce, unwholesome market, because what’s true right now is that our skills are being used too often to darken the real estate scene rather than to illuminate it.