4 Ways Properties Are Priced

In an ever-changing real estate environment, we’re forced to constantly adapt as realtors.  It’s our job to stay current, whether it be with respect to recent sales, new developments, precedent setting legal cases, city legislation, or even simply how the sales process is conducted.  I enjoy being on top of my game, as I believe it’s what sets apart the good realtors from the GREAT ones!

That being said, understanding the market ourselves is one thing, but for our clients, or even the general public for that matter, it’s not your full-time job to stay on top of these topics.  This can cause a huge learning curve, not to mention a great deal of confusion for the average homebuyer.  Even repeat homebuyers are often overwhelmed with how fast-paced and downright different the current market is vs the last time they purchased

Below, I’m going to lay out the 4 pricing strategies that we see (some more than others) these days.  Before we begin though, I want to lay out some common terminology that you’re going to hear throughout this blog and whenever the time comes to start your search:

  • List price - an arbitrary figure that the listing agent and homeowner agree to list the property at; has no bearing on what the home is actually worth
  • Market value - an actual figure, or range of value, that is substantiated by factual data; this is based upon recent comparable sales, replacement costs, and/or rental income
  • Sale price - what a property ultimately sells for; may not align with list price or market value
  • Holding offers - when a listing does not allow any offers until a specified future date, at which time all interested parties offer on the same day & time
  • Offer date - the date which offers are being held until (ie. property listed June 1st may hold offers for a week, thus, the offer date would be June 8th)
  • Firm offer - an offer with no conditions (ie. financing, inspection, insurance, sale of property, etc.); considered a done deal if the sellers accept it since there is no due diligence to perform
  • Irrevocable - the amount of time you are legally bound to your offer for as a buyer, or alternatively, the amount of time the sellers have to accept, reject, or counter your offer (ie. 6 hours, 24 hours, 48 hours, etc.)
  • Pre-emptive or Bully Offer - synonymous terms for an offer that is submitted before the offer date on a listing that is holding offers; an aggressive purchasing approach that generally involves submitting a firm offer well above the list price

Now that we have a better understanding of the terminology, let’s get into the 4 ways properties are priced.  We will spend the majority of the discussion on approaches (3) and (4) since they are the newest approaches that are causing the most confusion.

(1) List High and Negotiate

Back in the good old days - aka before 2017 - this was pretty well the only approach to pricing a property.  Although it’s never been a good idea to price a property significantly above it’s market value, historically speaking, it never really hurt to be a tad high.  If market value was 460k, you would list at $469,900.  The right buyer would usually come around after a few  weeks or months on market and offer 450k with a few conditions.  The sellers would counter at 460k, the buyer would accept, and then undertake their due diligence & firm up - done deal!  The buyers have the perception like they got a bit of a deal without taking massive risks, while the sellers are satisfied receiving fair market value for their home.  Easy-peasy! 

(2) List at Fair Market Value

This is personally my favourite approach to listing a property.  No special stipulations, no fine print, simply put, no games!  Hire an awesome realtor who is familiar with the local market, have them present the supporting sales data, and list your home at a price that you both agree is exactly what you feel it’s really worth. 

Just like with pricing strategy (1), when listing at fair market value, offers will not be held, so there will be no offer date.  What does this mean?  Does anyone even remember how real estate functioned without offer dates?  Oh right, you could just book a showing and if you liked it, you could submit an offer any time!  And the best part..?  Sellers were actually extremely thankful for your solitary offer :)

It doesn’t necessarily mean that you won’t still attract multiple offers when pricing at what you believe fair market value to be.  If you do receive multiple offers in this scenario, it’s usually due to an all around top-notch effort by the sellers and their realtor to prepare and market the property exceptionally well.  In such cases, the $$$ above market value was properly earned.

This approach resonates with my personal business model because I pride myself on honest and educated service.  Put in the work, arrive at an educated and substantiated determination of value, then list it at exactly that price.  It’s just good, honest business.  Why do it any other way?

(3) List Low and Hold Offers

Well here’s why we are now doing business a different way.  Somewhere along the lines as demand increased, a seller and their realtor decided to try a new approach.  The premise goes like this: 

You purposely price a property way below market value, generate a mass amount of interest which translates into multiple offers, and ultimately choose the best one of the bunch (hopefully at a price higher and with less conditions than you ever anticipated).  

Now we’re not talking about listing 10 or 20k below market value, we’re talking about listing properties at 50, 100, 250k below market value, sometimes more!  Whatever you feel is ample enough to generate a ton of interest without looking completely silly, although we have seen some properties literally priced at $1 before.  That is the epitome of laziness as a realtor in my opinion.  

Regardless, rather than only getting an offer or two if you listed at market value, you end up with 10, 20, 50+ offers on the offer date.  Many of those offers will be from dreamers and misinformed buyers who believe that they can purchase it for not too far above list price.  Ultimately, the most interested buyers feel pressured to bid more than they would have if there was less competition and the property often ends up selling above what most would consider fair market value.  It is the opportunity to potentially sell for above market value, as well as receive a firm offer, that has contributed to almost every seller wanting their home sold this way in recent times.  As much as us realtors take the blame for the market being this way, it’s worth remembering that as much as we are there to advise, we are ultimately there to help facilitate the seller’s wishes too.  Therefore, even though listing at market value is my favourite approach, I will still agree to hold offers if it’s my client’s wishes and I believe it won’t be detrimental to their outcome.  Often times, it’s very possible that it will be beneficial to their sale, so it’s hard to argue against it to be honest.  It just means that buying in this “holding offers environment” will be a relative nightmare for them, which is where my opposition to this pricing strategy mainly originates.

Now I’ve had some friendly discussions with other listing agents who like to drill home the point that “market value” is whatever someone is willing to pay.  And to an extent, that is true, something is worth whatever someone is willing to pay for it.  I’ve never been one to blindly accept common generalizations like this though.  In my opinion, especially when it comes to real estate, fair market value is arguably more in line with what the majority of people are willing to pay for something, rather than what one individual pressured into making a quick, blind, and competitive bid decides to put on paper.

Let me use an example to further illustrate this.  If a freehold townhouse has a pretty clear market value of 675k based on very similar recent comparable sales.  Say it’s listed at $599,900, holding offers, and receives 10 offers on the offer date.  If one offer is at 625k, eight offers are between 650k - 685k, and the single winning bid is at 775k, did the sellers receive market value or above market value?  When both the initial research and the majority of professionally advised offers align with the original determination of “fair market value,” I don’t buy that fair market value of the same property becomes 100k greater seemingly overnight due to one buyer’s misinformed bid.  Sure, maybe they just really liked it and valued it more than everyone else.  Great!  Then bid 700k, that’s a solid 25k above market value, but still within a reasonable range.  It doesn’t matter what the object at stake is, once you cross a certain threshold, it can be universally agreed that you overpaid.  In this case, 775k is not all of a sudden the home’s new market value.  In my opinion, it’s merely the outcome of someone who overpaid in a difficult and stressful situation.

Whether we agree or not about what dictates fair market value, there are some other confusing points about the holding offer process that are worth nailing down.  In theory, I believe that the holding offer process could be greatly improved through increased transparency and more strict rules & associated penalties for realtors that don’t follow them.

A common phenomenon that we’re seeing increasingly often in the private realtor remarks on an MLS listing is that offers are being held until a specific date, but that the seller may entertain pre-emptive offers as well.  Personally, either you hold offers or you allow offers any time, but adding pre-emptive offers into the mix only complicates things.  In these scenarios, if a buyer decides that they don’t want to wait until the offer date to submit their offer and they want to put their best foot forward to the seller “pre-emptively” as a kind of take-it-or-leave-it proposition, then the listing agent must rush to inform everyone who has shown or has a future showing booked that they will now be looking at offers very soon if you want to submit one, instead of on the posted offer date.

So for those of us who like to play by the rules, sometimes our clients see the property the day it hits the market, decide to respect the seller’s wishes and wait to offer at the end of the week on the offer day, and then safely leave to their cottage for a few days that they had booked off that week before the offer date.  Even though the listing states “no bully offers,” a bully offer comes in that’s too good to ignore, the sellers disregard what’s outlined in the listing, and the offer date gets pushed forward.  Now the people who played by the rules get screwed because the sellers decided to change the rules halfway through to best suit themselves.  I’ve even had instances where the listing agent totally neglected to inform me of a bully offer.  We saw it, were undertaking all of our pre-offer due diligence in the interim, and then out of nowhere I see it posted as sold before the offer date without any opportunity to compete.  With the holding offer process so unregulated, it really allows all of the less-than-savoury realtors out there to take advantage of the high demand and operate without a sense of morals, ethics, or even appreciation for other realtors and their efforts.  It also forces buyers to play a guessing game in terms of how far above list price to offer, while feeling forced to forego proper due diligence since offers conditional on financing or inspection are almost never accepted anymore.

(4) List Slightly Low and Require a Long Irrevocable

Finally, a similar approach to holding offers, but without actually holding offers is becoming more prevalent as of late too.  This involves requiring a long irrevocable on all offers.  We often see this with sellers that are too scared to list way below market value and hold offers, yet are worried that if they simply list at market value, they’ll lose the opportunity to attract a bidding war and maybe leave some money on the table.  So what do they do?  They don’t hold offers until a specific date, but they require that all offers have a minimum 48 hour irrevocable on them.  This means that you, as a buyer, are forced to submit an offer where you are bound by the terms of your offer for 48 hours after submission, but more importantly, that the sellers have up to 48 hours to respond to your offer.  This gives them a 2-day window after any offer is submitted to try and get more interested parties through the door and hopefully submit additional offers before they have to give you an answer.  

What I dislike about this approach is that it’s a little shifty.  It gives buyers a false sense of security that they can hopefully offer without being in competition for a change.  When in reality, instead of being excited about your offer, the sellers are secretly trying their best to ensure that your offer doesn’t end up being the only one, using your offer as leverage to generate more offers quickly.  It also leaves buyers in an anxious limbo for up to two days, which to me, is really unfair to force buyers to go through this often - it’s emotionally draining!  Furthermore, the honest purpose of a long irrevocable used to be to accommodate sellers who are truly unable to respond in a timely fashion.  Often we would see sellers requesting a maximum 24-hour irrevocable on offers because they are shift workers or live in a different time zone and are selling their property remotely.  Completely fair!  But now what we’re seeing is sellers bumping it up from 24 to 48 or even 72 hours, and more importantly, for no genuine reason other than to try and ensure that the first offer helps generate more offers over the next 2-3 days before they have to respond to the original offer.

This to me exemplifies exactly what’s wrong with the holding offers process and the current real estate market in general.  It puts all of the power into the seller’s hands and gives them a false sense of entitlement.  Aside from a crappy lowball offer with 5 conditions, sellers should be grateful for ANY reasonable offer!  That’s just not the case anymore though.  Sellers, of no fault of their own, have come to expect that they get to dictate how you can offer, when you can offer, what closing date THEY need, what conditions THEY refuse to allow, whether THEY can change the rules halfway through and abort holding offers to accept a pre-emptive offer.  It’s insane, honestly, it’s absolutely insane.

I’m not going to lie, that sounded like a bit of rant, and to be honest, it totally was - but that’s okay!  It needed to be said.  It needed to be explained.  If anything, it should help all of you soon-to-be buyers out there understand how the market is currently operating.  That’s precisely why I wrote this blog, not for me to vent, but to help you all become more informed about how the market is currently operating.

It’s tough out there and far from ideal, but the silver lining is that when you work with a great agent like myself or any of the other amazing local realtors out there, you’ll be equipped with the knowledge, tools, and professional guidance to approach this ever-evolving market with success.  You can say, “what’s the point of using a buyer’s agent if I have to pay way above list price anyways?”  Well trust me, do you think you can navigate this all on your own successfully?  Do you think having the listing agent who wants to get the seller the most money for their property would also have your best interests in mind when helping you as a buyer decide how much over the list price you should offer their seller?  Get yourself a dedicated buyers rep already - we’re a completely free service after all!

You’re not likely to win your first or even second offer, however, with the right balance of commitment and compromise, your next home is right around the corner, and I’d love to take that journey with you :)
Until next time..

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Jonathan Melichercik
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