Underpricing for Overbidding

If you want $1.4 million, ask for $799K?

Underpricing is a detested hallmark of the retail industry, where products can often be had for “as low as” some shockingly reasonable price. But that car-salesman marketing strategy is now becoming standard practice in the real estate market, where 37% of houses now sell over asking, up from 13% in 2018.

Underpricing is particularly prevalent in the Bay Area, where sellers have discovered that the tactic can not only spark bidding wars, but may be the only way to ensure that a home sells successfully.

That’s what The NYT found again and again in Berkeley, where the highest percentage of listings in the country (80%) are underpriced, and are overbid by the biggest margin (19%). Partly, Berkeley-style underpricing is a game of eyeballs, in which an underpriced home gets on more people’s radars by pretending to be in a more affordable price range. Underpricing also forces buyers to bid in the dark, which in a competitive scenario means that sellers can count on someone offering far more that most buyers are willing to pay — and potentially more than the house is worth. But in a market where home prices are climbing as quickly as they are, buyers may feel like the value of the home will go up, no matter how much they pay for it, and hence feel good about going over the top in what is essentially a seller-controlled blind auction.

Interestingly, the practice has become so common that when homes in the Bay Area are transparently priced — which is to say, listed at a price that reflects the true value of the home, based on sales of similar nearby homes — buyers sometimes get confused, the listings don’t get interest and the sale sputters.

With so many factors encouraging the practice, chief among them the market itself, savvier buyers are starting to ignore the asking price and go straight to comps. But enough still want to believe that there are affordable houses out there, and sellers are happy to help maintain that illusion.

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