Underpricing homes triggers bidding wars

Bidding wars are the real estate trend du jour: With a shortage of houses for sale in many cities, some sellers are deliberately underpricing to attract attention and generate a buying frenzy — and higher prices.

Cue the sound of cash registers ringing in the background. Or so it would seem.

Although some sellers may proclaim that bargain-pricing their homes in hopes of generating a dogfight has been a boon, particularly in California, where it has become a fairly common tactic and has generated lots of headlines, economic researchers at the University of Pennsylvania beg to differ. Their recent study of 14,000 transactions found that the time-tested (and opposite) technique of overpricing a home by 10 to 20 percent and negotiating downward will net a higher average price, albeit by only a few hundred dollars.

If you’re thinking of selling your house when inventory is tight, even within small but desirable neighborhoods, it may be tempting to underprice it and to envision buyers falling over one another. Should you try it?

Yes. Or, well, no. The decision may rest on the uniqueness of your home or how eager you are to sell, according to Chicago-area real estate agents and homeowners.

Or maybe it’s just a matter of geography. Some say the underpricing strategy is strictly a West Coast phenomenon — that conservative Midwesterners would flinch at the idea of starting low and hoping for competitive offers that may never materialize.

“I’ve always wanted a client to try it, and no one has,” said Colette Smithburg, an agent for Coldwell Banker’s Lincoln Park office. “I think you’d end up with a buyer who’d pay the most ‘market would bear’ money, based on driving the competition up in a bidding war.”

It’s another headache-inducing spin on a perennial real estate issue, according to James Kinney, vice president of luxury home sales for Baird & Warner Real Estate in Chicago, who agreed that most Midwesterners aren’t willing to take the underpricing gamble.

“Generally, you can’t sell the seller on the idea,” he said. “Just getting them to price it correctly is a challenge because when you’re going in (to the listing process), the seller already is probably thinking the house is worth more than it is.”

But then, maybe not. Real estate agent Emily Guthrie estimates that since 2007 she has had 20 sellers who have been willing to start out on the low side. She is convinced that in a market with a tight inventory of homes for sale, it can speed the process along mightily.

“The advantage is that you’re not sitting around for months with the house on the market,” said Guthrie, an agent for Weichert Realtors Lakeshore Partners in Evanston. “I’ve had sellers who have gone on the market overpriced, and they’ve had to keep it tidy and make sure everything is in order. That starts to take a toll on people. (With an underpricing approach), in a week or two, you’ve got a solid offer.”

She doesn’t recommend drastic underpricing — a few thousand dollars may be enough to attract attention, she said.

Chris de Brauw, a former client of Guthrie’s, has tried the tactic twice. He agrees that it can work — in terms of saving time.

In 2007, he listed a house in Evanston for $600,000, and within seven days had numerous potential buyers and a firm offer for $625,000 from people who were aware that others had looked seriously at it.

Though the time and expense of getting ready to sell had pained him, he said he was happy.

“Everybody was having a hard time selling at that time,” de Brauw said.

This past spring, he listed an Evanston condominium that he knew he was likely to take a sizable loss on. He had paid about $600,000 but decided to list it for $510,000.

“We immediately had tremendous traffic and an offer above the asking price,” he said.

Alas, that offer fell through. As did three others that materialized about the same time. Within weeks, the condo sold for $490,000.

Still, de Brauw is relatively satisfied because he had feared he would have to sell for $475,000.

“Sharp pricing generated a lot of traffic,” he said. “Did we benefit from a tremendous auction effect? No, I don’t think so.”

De Brauw said underpricing probably would work best for a unique house, “a house that stands alone.”

One of the hang-ups with listing “below market” is that when the market is moving fast, it’s hard to peg what’s “average,” according to John Adamson, who owns the brokerage where Guthrie is an agent.

“The problem in a market that’s stabilizing or still moving is: What’s the exact market value in a close enough range so that you’re able to say, this is below market by X percent,” he said. “If you’re in a stable market, you can probably (underprice) it. I don’t think (the tactic) has caused any properties to go higher than they would have — maybe quicker.”

Certainly, multiple offers were common in Chicago recently, but they probably didn’t stem from too-good-to-be-true prices, Smithburg said. And she said such competition doesn’t always translate into seller happiness.

“When there are bidding wars these days, it’s because the client has priced it right, and invariably (when it sells), the sellers feel they left something on the table,” she said.

Smithburg doesn’t see a change on the local horizon.

“There’d have to be a paradigm shift for folks in Chicago to underprice a property,” she said. “You’d have to see your neighbor succeed at it before you’d take the risk.”

Source: http://www.chicagotribune.com/classified/realestate/buy/ct-mre-1103-pricing-realestate-20131101,0,4910419.story

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