Pricing your home below market value will attract buyers (their eyeballs, at least). But should you price your home below fair market value? Let’s dig into a more nuanced answer. Pricing strategy for any property depends on many factors, including but not limited to the property’s condition, comparable sales, market conditions, even the real estate “culture” in your area.
First, it’s important to acknowledge that the list price is not necessarily the seller’s expected sale price. In most real estate transactions, the list price is simply a starting point for negotiations. For sellers, the list price is an essential marketing tool. For prospective buyers, the list price either encourages or discourages their pursuit of the property. Both sellers and buyers may counteroffer on price and other terms during negotiations.
The ubiquity of pricing below market value
In my experience representing sellers and buyers throughout the Bay Area, I’ve observed an increasing trend in which properties are listed well below fair market value to incite bidding wars. The practice is so prevalent that it’s become industry standard, just a part of the real estate culture. With prices set artificially low, buyers have become conditioned to include a buffer in their search criteria. For example, if you expect to pay $2M for a home, then you learn to only look at homes priced at $1.7 or less.
Egregious underpricing—I’m looking at you, SF and East Bay—can be effective, but it can backfire, too. Depending on market conditions, you might not drum up enough offers to counter and get the price you actually want. In today’s market wrought with interest rate hikes and inflation, consider the consequences if you price your home below market value. Aggressive underpricing could result in lowball offers and increased DOM. While you contemplate upping the list price, your property’s perceived value diminishes.
That said, sellers should understand what the list price conveys to prospective buyers in the current environment. A safe strategy is to set realistic expectations based on how the market is trending. Price your property in the range of comparable sales. List too high and your property will get overlooked—it will sit on the market and invite buyers to wonder what’s wrong with it. List too low and it will also seem suspicious.
The benefits of pricing close to market value
Here’s a fresh idea—you could set a transparent price. The transparent price is the price you’re actually expecting or you’d be satisfied with accepting. Then work with what you get, which could mean you take the first offer that comes in at asking, no fuss. Or, in a seller’s market, be pleasantly surprised when you receive multiple offers anyway.
A reasonable strategy for low- to mid-range properties is to list just under market value or a little less than all the neighboring, comparable homes for sale. It’s kind of like the $1 strategy on The Price is Right (if you think everyone else is overpriced). By pricing *just* shy of what’s expected, your property will stand out in search results and bring more buyers through the door. In a market with few homes for sale, this strategy can yield multiple offers if there are plenty of competing buyers. (It’s what we hope for, but no guarantees.) In a slower market, you’ll want to make sure the list price is also a satisfactory sale price in your eyes. If not, you might be disappointed when you get what you ask for (or less).
Luxury or highly custom homes with few comparables may fare better when priced right at market value (or even slightly over). At much higher price points, real estate is less commoditized and the buyer pool becomes smaller, too.
The best pricing strategy course corrects as needed
Keep in mind that there’s no blanket strategy. Every property, just like every individual, is unique. Throw in constantly changing market conditions and pricing becomes a very nuanced science. Well-priced listings may sit for weeks in today’s market when they would’ve gotten into contract within days just a few months ago. Many factors affect buyer behavior, and the market can turn quickly, sometimes week to week, even overnight. So what’s the best pricing strategy? The one that listens and adapts to a changing market.