Why do Realtors Grossly Under Price Homes?

Dear Phyllis,
I recently read an article in another paper about a home in South Pasadena listed for $1,349,000 and selling for $2,105,000. My daughter has been looking at homes for six months and made three offers, each time getting outbid. It’s a very hurtful and emotional process for her. My question: Why do Realtors grossly under price homes? It seems cruel to waste everyone’s time.
Donna

Dear Donna,
A popular real estate pricing strategy is to under price a home to obtain multiple offers and a bidding war. Pricing a home 3% – 5% below market value typically results in the home selling at a higher price than if originally priced at fair market value. According to Wikipedia: Herd mentality, or mob mentality, describes how people are influenced by their peers to adopt certain behaviors, follow trends and/or purchase items. In today’s market, buyers are more confident about their home purchase when someone else desires the same home. Pricing a home on the lower end of the value range stimulates interest among buyers. As a result, herd mentality takes over.

It’s a better tactic for a home seller to negotiate the selling price up rather than down. However, I agree with you that it is cruel to waste everyone’s time by grossly under pricing. Once a seller has at least two offers s/he are already in a position for multiple offers and a bidding war. When I list a home, I try to list about 5% less than where I think it should sell.

I have learned that, when pricing a listing, if I price somewhat aggressively my client will walk away with more money. However, the home you mentioned sold more than 50% above the asking price. I don’t know how many offers the Realtor had. Personally, I find it extremely difficult dealing with more than 10 offers. There are numerous calls, emails and texts to answer.

To answer your question: Why do Realtors grossly under price homes? My partner, Kris Jardino, and I often ask this question to ourselves. The only answers we have been able to come up with is that they are inexperienced. Or perhaps it makes them feel like the most popular girl at the dance. I wish I had a better answer for you.