Low-Ball Pricing

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Low-Ball Pricing
by Robert Irwin

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With the housing market still in transition in most areas of the country, some sellers are adopting a controversial technique for getting the highest possible price. It goes by various names, but I call it "low-ball pricing." Let's consider how it works, first when there's an agent involved.

If the property has a market value of, say $500,000, as determined by a CMA (Comparitive Market Analysis), the agent might suggest that the seller consider putting it on the market for far less. The low-ball price might be 10 percent less, or $450,000.

The idea here is that  buyers are keenly aware of pricing. And with the agent spreading the word to other agents that he's got an under-priced house, buyers will be more likely to make offers. While the initial bids may come in for full price or even less, subsequent buyers may bid higher. Since the agents let the buyers know the true market value is $500,000, many won't hesitate to bid more - hence a bidding war.  This strategy works particularly well in a seller's market, but for the right property it can work at anytime.

However, a bidding war often leads to irrational behavior from buyers simply wanting to win. In that situation some buyers may bid even higher than market - to say $510,000 or $525,000 or even more. Thus, by initially low-balling the price, the seller hopes get buyers involved with a house they may have overlooked and  create a bidding war that will end up getting him more than market for the property.

Does it work? Sometimes it does. And sometimes it doesn't. A lot depends on:

  • How competitive the market is
  • How well publicized the low-ball price is
  • How clever the seller is in holding onto offers waiting for better ones to come in.

Of course, the great danger when using an agent is that there might end up being just one offer for the full low-ball price. No, the seller isn't required to sell. But, he may be required to pay a full real estate commission to an agent who brings in a buyer ready, willing, and able to purchase. (Some sellers now try inserting a clause in a listing that says they don't owe a commission until the escrow closes.)

For the "by owner" seller, not having a listed property avoids the potential complication noted above - there's no commission to pay regardless of price. On the other hand, a "by owner" seller risks not getting a bidding war started because of an inability to well publicize the low-ball price.

Remember, most agents have easy access to the Multiple Listing service as well as direct communication with other agents. They can almost instantly spread the word that there's a "steal" out there. And other agents will quickly bring their buyers by.

Selling "by owner," however, you don't normally have access to this organization. Yes, advertising will help, but that process may be slow. Listing it on an Internet site such as owners.com should bring in quicker results, as buyers often troll such sites looking for good deals. But, in both cases unless the buyers themselves know your house and area, they won't immediately realize it's under-priced. You'll have to convince a sometimes skeptical buyer that your house is actually low-balled.

TIP

A "by owner" seller has to be careful to widely publicize the under-pricing. You have to work quickly, because bidding frenzies usually happen all at once in a matter of days or a week at most. Buyers aren't normally going to let you sit on their offer for a month while you wait for a better offer to come in.



Robert Irwin is the most prolific real estate writer in America having produced over 100 published books in the field. His TIPS & TRAPS McGraw-Hill series has sold well over a million copies and his FOR SALE BY OWNER KIT and FIND IT, BUY IT, FIX IT and other books have been strong sellers for Dearborn.

In addition Irwin writes a regular real estate column for The Wall Street Journal online and is introducing a new weekly column for Owners.com.

Irwin has sold his own property "by owner" and during over 30 years in the business has been a broker and consultant to lenders, agents, buyers and sellers.

He can be reached through his website RobertIrwin.com.



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