TorontoRealtyBlog

Do you recall the blog post that I wrote a couple of weeks ago?

The one about the psychology of pricing?

I had fun with that one!  Except when it came to choosing the “feature photo,” since there aren’t as many interesting, high-quality photos of minds or people thinking.  I must have gone through one-hundred photos of brains before I found one that wasn’t ridiculous.

Then again, you might think today’s photo is an odd choice.

But is it?

If you want to get metaphorical, don’t listing agents “mask” the real price of a House or condo for sale when they under-price the property and set an offer date?  And don’t they take the mask off once the property is sold and the price is published?

When I wrote the post two weeks ago, blog reader, Pete, said:

Would love more posts that examine the psychology of real estate 

But, Pete – we talk about this all the time!

Don’t we?

All aspects of real estate contain at least some psychology, and there’s at least a small part of every post here on TRB that could lead us down a path of analyzing a person’s mind.

But today, I want to look at a real estate phenomenon that really shouldn’t be one; a phenomenon, that is.

Today, I want to look at how the practice of “under-pricing” continues to work, when it really, truly, shouldn’t.

If you’re new to TRB and this is the first blog post you’ve ever read, perhaps a refresher is in order.  Apologies to the regular readers.

In Toronto, in anything from a balanced market to a seller’s market, a quality property (especially freehold) will usually be listed for less than fair market value.

Often, “less” means significantly less.

The reason?

To drive traffic to the property.

Or at least, that’s how the practice started.

But over the last decade, the practice has provided another benefit to the seller and listing agent, one that, if used correctly, helps the push the price beyond fair market value:

Under-listing results in “dummy offers.”

A dummy offer, in my opinion, is an offer that is submitted on a property when it has absolutely, positively, zero chance of being successful.

But why would a person submit a dummy offer?

We have covered this topic on TRB before, and unfortunately, we don’t know enough about human nature to answer this question.  Maybe our children’s children will, one day, figure this out.

So let me present an example of a property that we sold in January which will examine not one, but two areas of real estate psychology:

1) Why does a Buyer submit a dummy offer?

2) Why does a buyer pay more for a property because there are multiple offers?

We were called last October to look at a property which the home-owner’s children intended to sell.

The home-owner had been there since the early-1970’s, but it was time to move into assisted living, and the children were going to facilitate the process, culminating with the sale of the “family home.”

The property wasn’t in good shape aesthetically, but the house itself was solid!  From the vein of, “They sure don’t make ’em like they used to,” we felt that if we just painted some walls, sanded some floors, swapped out some appliances, and maybe made a few upgrades in the home, then it would show a lot better and ultimately sell for a much better price.

But the market was quite poor in October so we gave the sellers an opportunity to make a small “bet” on the market: put some work into the home, which will take time and mean you miss the opportunity to list in the fall market, but push the listing into the new year.

New year, new market?

Yes.  The bet paid off…

We planned to list the home for sale on a particular date, but as (bad) luck would have it, the neighbour listed their home for sale two days before we were scheduled to list.

What are the odds?

That’s not rhetorical.  I’m asking, in case any of you statisticians feel like chiming in…

We decided to push our listing back, since competition two doors down wouldn’t be good for our end result.

The property down the street was listed for $979,900 and sold for $980,000.

Not a terrible result, but certainly not a great one.  That was what I would call a “Fall, 2023” price, but we were now in February of 2024.

We had much higher expectations for our listing but we also had a different pricing strategy:

Our listing would come onto the market at $899,900 with an offer date.

Now here is where it’s going to sound like I’m speaking out of both sides of my mouth, since I’m going to essentially ask, “Why are people so naive and uninformed?” while simultaneously counting on people to be naive and uninformed!

I knew that pricing our listing at $899,900 would bring in all kinds of buyers who could afford $899,900 but not $980,000, like the house that sold two doors down, one week earlier.

I knew this.

But what I didn’t know, what I still don’t know, and what I’ll never know is why people make these “dummy offers.”

Our property is listed for $899,900, with an offer date.

And nobody knows what it’s going to sell for!  Shhh!  It’s a big secret!

Except, they do know.  Or at least, they should.  Because the same house, two doors down, just sold for $980,000.

So this is helpful for two different types of buyers:

1) The buyers who have the budget to buy the home, but who need guidance on price, and how much over our $899,900 list price the eventual sale price will go.

2) The buyers who don’t have the budget to buy the home, who now won’t have to waste their time, effort, energy, and mental health bidding on a house they can’t afford.

But here’s the problem with point #2: many people make those bids anyway.

Why?

It’s a combination of things, and I don’t say this to be rude but rather to explain why and how we got to this point.

Think of the words: hope, faith, dream, and luck.

Now, think of the words: ignorance, inexperience, bad advice, lack of financial literacy, and poor judgment.

I’m not blaming the buyers here, but rather most of the blame in this case falls upon the agents.  I had every agent in the city calling me on this property and most of them were inexperienced, part-time, and/or new in the business.

It would go like this: a buyer walks into the open house, sees the house is listed for $899,900, and gets all excited.  The buyer calls or emails their agent, who is a part-time agent, friend, or family member, often working out-of-area, and tells the agent that they’re interested in the house.  Then that agent gets even more excited and calls me, often at 10:30pm on a Saturday night.

Think of the person who calls you at 10:30, 10:30, and 10:32.  That’s not normal behaviour, and yet that experience was very, very common throughout the course of this listing.

Offer day comes along and we’re very optimistic!

We’ve had over eighty showings on the property and a lot of agents are telling me they’re going to bring offers.

Now, remember, in case anybody is skimming: we’re listed at $899,900 and the property two doors down just sold for $980,000.

So what did our bids look like?

Do you think I’m going to share them all?

Yeah, sure!

$895,000
$899,900
$899,900
$905,000
$900,000
$920,000
$930,000
$935,000
$949,000
$950,000
$960,000
$970,000
$970,000
$979,000
$999,999
$1,010,000
$1,027,000
$1,031,000
$1,056,800
$1,090,000

Fourteen of the twenty offers were below the price that the house two doors down sold for.

That says a lot about “the psychology of real estate.”

Let’s pick a random bid from the list above – say, the $920,000 offer.  Now, let’s psycho-analyze the buyer who submitted that offer.

The house two doors down sold for $980,000 two weeks earlier.

Why would that buyer submit an offer of $920,000?

What did that buyer expect to achieve?

How did that buyer expect to have success?

And here’s the crazy part: many buyers don’t expect to have success!  Some of these agents say things like, “We realize we have no shot at this, but we’re submitting the offer anyways.”

Huh?

Why?

Why would anybody spend the time, effort, and energy to submit an offer that they know has a 0.00% chance of being accepted?

What’s the psychology behind that?

I’ve never understood this.

But another thing I’ve never understood is the logic behind that $895,000 offer.

The buyer would have to think:

“There are twenty offers.  I expect that the other nineteen offers are also below the $899,900 list price, which happens to be $80,000 below the sale price for the property two doors down, that just sold one week ago.”

What’s the psychology behind that?

Of course, the elephant in the room that many of you want addressed is:

If the property two doors down just sold for $980,000, then why are people submitting offers of upwards of $1,100,000?

Maybe that aspect of real estate psychology is more interesting to many of you?

But just as I suggested two weeks ago that many of you want to think that you don’t subconsciously put a lower value on a product with a $2.99 price tag as opposed $3.00, I would also suggest that many of you want to think that you wouldn’t put a higher value on a home that has received twenty offers.

It’s very well possible that a buyer, knowing he or she was bidding against 19 other buyers, would say, “I’ll go to $1,056,800 for this house,” even though the house two doors down just sold for $980,000.

Now, let me tell you another story, and this one just happened two days ago.

Tara is working with a client who is buying a home in Milton and the market out there is completely unpredictable.

Also, the houses out there are often completely identical!  You know what I mean, right?  The houses were all built at the same time, in the same subdivision, and are absolute mirror images of one-another.

So, there’s a house listed for sale for $999,000 and it’s sitting on the market.  It’s been listed for 75 days.

One block over, the identical model is listed for sale for $899,900, but with an offer date.

The same house.

Exactly the same.

So, let’s say that before this other house came out at $899,900, a buyer could probably have offered the owner of $999,900 house, say, $950,000, maybe negotiated a little bit, and perhaps paid $985,000?  Sure.  Maybe $975,000?  Likely.  Maybe even $960,000?  Not impossible.

But Tara told me, “The identical house sold three weeks ago for $870,000.  This house isn’t even worth the list price of $899,900.  It’s just not.”

Maybe the market has moved in three weeks, or maybe we can’t pin-point value within $30,000 here, which is 3% of that $899,900 list price.

But where the psychology of real estate pricing took this story is downright crazy.

The “comparable” sold for $870,000.

The “over-priced” version of the home is listed for $999,900.

And now we have a third version listed for $899,900.

What happened, you ask?

There were eleven bids on this house and it sold for $965,000.

Now, ask yourself why.

I believe that there are two ways that a buyer could look at the $965,000 bid price:

1) It’s $95,000 more than the most recent sale.
2) It’s $35,000 less than the guy up the street is asking.

And while you want to believe that you’d only look at option #1, I know, unequivocally, that the buyers who had the highest bids all convinced themselves that option #2 was the only way to look at this situation.

What do you see here?

This looks like a product that’s on “sale” for $13.00, down from $16.99, down from $30.00.

That’s how our minds likely see it.

But “compare at” doesn’t mean that it was actually priced there, and this is what chains like Winners have been doing for years.

In fact, this was explored by the CBC in 2016:

“Bargains At Winners Not Always What They Appear”

Regardless, the psychology behind those price tags are intended to “anchor” a buyer to thinking that they’re getting a deal because the product was $30.00, at some point, somewhere else, and/or was $16.99 at T.J. Maxx, and now it’s $13.00.

The red tags help too.

So in the case of this Milton house described above, I think many buyers “anchored” to that $999,900 house that’s for sale up the street, and convinced themselves that $940,000, $950,000, or $965,000 is a good price, since it’s below a “comparable” property.

Comparable.  “Compare at.”  Sounds similar, doesn’t it?

If you’re a seller in today’s Toronto real estate market, you need to think about the psychology of real estate pricing to maximize the sale price of your home.

If you’re a buyer in this market, well, same thing, but different!  You need to think about the psychology of real estate pricing to understand how the market works, what competing bids likely look like, and how to avoid getting carried away.

And if you’re simply a market onlooker with no horse in this race, then just sit back and get your popcorn ready…

The post The Psychology Of Real Estate Pricing: A Real World Example appeared first on Toronto Realty Blog.