Is Under-Pricing Real Estate “Unfair?” | Toronto Realty Blog!
A good friend of mine and an avid TRB reader told me the other day, “You don’t respond to your commenters often enough.”
Huh. Okay.
I sort of thought I did, but perhaps she was right?
“You only seem to respond when they comment about haircuts, hockey cards, or Yellowstone.”
And that’s about the point where I realized that perhaps she’s right.
I vehemently defended myself and said that the average blog post takes two hours to write, plus we’re in the thick of an insane spring market, I’ve had four listings generate a combined 41 offers in the past two days, and I’m working with buyers, and planning ahead for further listings. So while I try my best to check up on the comments now and again, I can’t live on the forum.
I realized, however, that I really only read the comments when I have down-time, ie. five minutes waiting for a client outside a property. Combine that with the fact that I don’t like typing anything longer than a few words on my iPhone, and I often pick the “low-hanging fruit” of the comments, ie. those about haircuts, hockey cards, or Yellowstone…
I don’t want the readers to think that I’m dodging questions, although to be fair, how could anybody think that, given the behind-the-scenes stories I tell and topics I’ve addressed which no other agent would.
There’s been talk of a “better system” in real estate for a long, long time. And while I’ve addressed this before, I did write Monday’s blog knowing that I’ve essentially written that same piece about seven or eight times over the years, so there’s no reason that we can’t discuss one of the largest points of criticism in our “system” yet again.
Is under-pricing in Toronto’s real estate market unfair?
Some say that it is.
So, since the group seems to be quite talkative, based on Monday’s blog, why not have this discussion today?
A reader commented last week that I haven’t addressed that “the system is broken.”
I think the system is flawed, but it’s not broken, and that’s because it’s impossible to define what “broken” is.
In our current real estate “system,” there is one simple facet of the process that ensures it’s not broken: the highest offer prevails.
I’ve mused in the past few weeks that an overwhelming number of people in society today are confusing political systems with economic systems.
We live in a time and are governed by a political system that’s obsessed with equality, which is a good thing, and a long time coming! But equality of opportunity and equality of outcome are two different things. For everybody to truly have equal is simply not possible in today’s economic system, and economic systems are shaped by political ones.
Many people who cannot afford what they want to own or purchase believe that the economic system is unfair. They use words like “should” quite often. People “should” be able to afford to live in this city! Real estate “should” not cost as much as it does. But in order for that to be true, we would have to allow the government to significantly overhaul and regulate, almost to the point of controlling and owning, all real property. So while people might aspire to live in a democratic, free society, from a political perspective, they’re unconsciously and unknowingly asking for an economic system that is more akin to communism.
What is “fair” is up for debate, but people continue to talk about real estate as though “fairness” ought to be the deciding factor in who lives where.
Unless we are truly electing to move toward a fully planned economy, and understand the repercussions of this choice, we must accept that capitalism is still rooted in competition, which is bound to bear winners and losers, despite any government intervention.
So crack your knuckles, and tear apart what I just said. But for now, I’m moving on…
I’ve read a lot lately about how “unfair” the tactic of under-pricing is, but as I have written over and over through the years, it’s only unfair because many buyers who participate in the process are uneducated, and/or work with unqualified buyer agents.
Case in point: I listed a property this week for $499,900, with an offer date, and yes, this property was under-priced.
What signal does the buyer pool need here to understand the true or potential value of this property?
For starters, they need merely look around at what’s happening in the market. Properties are listed with offer dates and sell in multiple offers, over asking. Ergo, this one will too, and thus the $499,900 list price does, in fact, represent an under-priced property.
But secondly, buyers can simply look at what has sold.
Let’s say the identical model to this unit had sold a few months ago for $596,000. Does the buyer, or the buyer agent, need to know anything more than that, in order to understand that the $499,900 list price is simply a list price, and nothing more?
When sixteen offers are registered on the property, why does not one, but two buyers submit offers of $499,900?
Tell me. I’m dying to know.
Tell me how this “system” is unfair.
To suggest that it was unfair to list this condo at $499,900, with an offer date, and tell buyers to submit their offer on Monday, March 29th, is seeking to level the playing field so flat that it defies physics and reaches into an alternate dimension. It also absolves the buyer pool and their agents of any and all personal responsibility, financial literacy, or intelligence even approaching average.
So is there a number, or a percentage, which an agent can list a property for, below market value, which is fair?
That condo sold for $628,000, by the way. Is it “fair” to list it at $599,900, but not $499,900?
Alright, but what about the argument that I wouldn’t have attained $628,000 if I had listed at $599,900. Now what?
Now is it time to claim that “Real estate agents are driving up the price of real estate with their unfair under-pricing?”
Sure. Okay. I’ll buy that for a dollar.
But isn’t it more fair (no pun intended), or apt, to suggest that buyers are driving up the price of real estate?
And of those buyers, who is more responsible: the dummy buyers who made offers at or near the list price, or the buyer who paid the highest price in the end?
For the record, there were four bids over $600,000. So this person didn’t “overpay,” if a property is worth what somebody’s willing to pay for it, and, what four other people are just-about going to pay for it.
Last week, this article ran in the Globe & Mail:
“Eager Sellers, Zealous Buyers Driving Up Home Prices In Toronto”
This article was emailed to me by four different blog readers, all of whom wanted to know what I thought.
So I told them.
And then, I realized that I should share it with all of you…
Here’s the meat of the article which requires our discussion today:
Some real estate agents do set unrealistically low asking prices in order to draw attention and whip up a frenzy of bidding. Mr. Christensen is one of many veteran agents who lament the practice.
Recent examples abound of properties listed in the $899,000 or $999,000 range that receive premiums of $400,000 or more. In the segment between $1.5-million and $2-million, sellers are often rewarded with an added $600,000 or so.
Mr. Christensen stresses that agents are obliged to work in the best interests of their clients and, for many, it’s difficult to coach buyers who are thinking of entering such unbalanced competitions.
“My problem is I have lots of people who want to buy. Any marketplace has to be fair or people lose confidence in it.”
Mr. Christensen believes that setting an asking price of 10 per cent or so below market value seems like a sensible strategy to him if a seller hopes to draw multiple offers.
Full disclosure: I don’t know the agent quoted, nor have I worked with him. So let’s assume for the sake of this discussion that these comments were made by Joe Average.
This comment is problematic:
“Any marketplace has to be fair or people lose confidence in it.”
We certainly can’t define “fair” in a general sense.
We can’t really explain “fair” to our children in terms of what an appropriate bed-time is, without admitting, to some extent, that there’s a discretionary and arbitrary element to it.
So what about “fair” as it pertains to the pricing and selling of real estate?
This comment makes the assumption that we can define “fair” in a real estate sense, and I honestly don’t think we can.
Then this:
“Mr. Christensen believes that setting an asking price of 10 per cent or so below market value seems like a sensible strategy to him if a seller hopes to draw multiple offers.”
Okay, isn’t this simply Mr. Christensen’s opinion?
It says he “believes,” and not that he “defines.”
And what Mr. Christensen believes is a “sensible” strategy is not sensible across the board, for every seller, for every property.
To suggest as much is ordaining Mr. Christensen as all-knowing God, and I don’t think that’s sensible. Do you?
So here is any similar listing agent’s Jerry Maguire moment: start pricing your properties 10% below what your clients will accept. Take that house and list it for $900,000, and when the pre-emptive offer comes in for $1,000,001, your sellers are obligated to take it.
Is that sensible?
More to the point, would that agent really obtain the highest price for the seller? And if not, then where is this agent’s value, other than, perhaps, being loved by the buyer community?
Remember, you can’t have it both ways. You can’t be a buyer and want a system that ensures you pay less, but be a seller, and want a system that ensures you receive more. The problem is: most people are naive and ignorant to their own hypocrisy.
Now, let’s say that by listing that $1,000,000 house at $900,000, with a sensible and “fair” under-pricing of 10%, you end up selling for $1,000,000.
But let’s also say that another agent, in a parallell universe, lists that house for $749,900 and ends up selling for $1,070,000.
What’s fair?
What’s unfair?
To many buyers in today’s real estate market, “fair” simply means “more affordable” or “cheaper.”
But if that’s how we’re going to label “fair,” then I fail to understand how we’re not heading to an economic system that is rooted in a level of equality that only a planned economy can produce.
Who’s job is it to define “fair” in terms of the actions of a seller?
Who’s job is it to define “fair” in terms of the morals and ethics of a seller?
If that seller wants to price at $749,900, to try to muster up more competition, is this not fair in our current economic system, which is, in fact, capitalism?
Competition is one of the hallmarks of capitalism.
What’s wrong with competition?
Can you imagine what the 100-metre dash would be like if only Usain Bolt ran the race? We know he’s going to win, so why bother putting nine guys on a track with him, let alone go through four heats, after Olympic qualifiers?
So what’s wrong with listing a house at $749,900 and seeing how people compete for it?
The entire buyer pool has access to the same information, and that is, by definition, “fair.” That makes all buyers equal in a sense.
Now, what about listing that house at $699,900 and seeing how people compete for it?
What about $599,900?
What about $499,900?
Well, I think it’s stupid to list a $1,000,000 house for $499,900, but that’s merely my opinion. My opinion is not binding, nor do I think that it should be, or that my opinion should be legislated into practice in our industry.
I also think that listing this house at $499,900 might backfire, and the seller might not get buyers who want to play this stupid game.
Ah, there it is!
Capitalism, free-market, and choice!
If I price this house at $1, and I don’t get the interest I need to get over $1,000,000, then my strategy failed.
That’s the competition that exists in our system, for better or for worse.
So if an agent lists this house for $900,000 and is able to sell it for $1,000,000, but another agent lists the house for $749,900 and gets $1,070,000 for it, but another agent lists the house for $499,900 and gets zero bids, then isn’t this the market at work?
There’s one constant in all three scenarios which I think, undeniably, makes this system “fair.”
Do you know what it is?
Buyers decide on what to bid.
That’s right. In all three cases, with three different listing prices, it’s the buyers that decide what they want to bid, or not.
And that is why the action, strategy, or tactic of under-pricing is not unfair.
If a buyer pays more for the house because there’s more competition, then that’s his problem.
And if there’s more competition because buyers are stupid and make offers that have no merit, then that’s their problem.
So what do we do?
Legislate against stupidity?
Because that’s where all of this is headed if people continue to suggest that under-pricing is “unfair.”
If a guy were to stick a paperclip into an electrical outlet, you might suggest his action is stupid. But would you legislate against it?
Then what?
Legislate against all stupid, naive, uninformed actions?
Why did somebody submit an offer of $499,900, on a property listed for $499,900, which attracted sixteen offers, for which there is a recent comparable sale approaching $600,000?
If you want blame the listing agent and the seller for under-pricing, and not the buyer for making the offer, then we’d better remove all electrical outlets in the city to avoid people sticking paperclips in them.
As always, the comments section belongs to the TRB readers. Discuss what you want.
Today, I wrote about the “unfairness” of under-pricing, so I challenge the naysayers to stick to the topic at hand, and avoid the strawman argument of bringing other aspects of the sale process under the microscope.
May the best argument about the fairness or unfairness of under-pricing, win. I just hope everybody gets a fair shot…
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