One thing I find annoying in the extreme is click-bait headlines along the lines of: “123 Main Street Sold for 10%….15%…20% OVER list!” That is one of the least valuable stats any potential buyer or seller could read and does the watcher of real estate an incredible disservice. But before we dive into how you should treat a headline like that, there are few facts worth acknowledging.
One, I am not taking anything away from the hard work of a listing agent’s marketing and preparation. Both of which can prove invaluable in creating a great outcome for their client. When someone puts in the work and finds themselves having sold 10+% over the closest comparable sale, then they really do have something to brag about. But that’s rarely the whole story.
Two, the right property, priced at the right price, that is move-in ready, in the right location is going to generate competition, at least in the single family home market (condos are a different story).
Third, even great agents who along with their clients price one of their listings fairly—AKA do not employ an unrealistically low list price as a strategy—may discover once they go to market there is more demand than they banked on and end up with multiple offers. Not all over-asking offers are intentionally created.
The Psychology of Listing a Property Under Market
There’s an old off-color joke I’ve never forgotten. Why are divorces so expensive? Because they’re worth it. The same logic applies to why an agent would recommend their seller intentionally set a lower than value list price. Because it works.
Why would a buyer pay more than the list price for a property that has been intentionally priced below market value? It’s influenced by human emotion and it works by creating a sense of urgency, altering the perception of value in the buyer’s mind, and creating an emotional attachment to the property.
Buyers may experience a sense of urgency and good old-fashioned FOMO (fear of missing out) on a good deal when they see a property listed below market value. This can create a competitive atmosphere where buyers feel compelled to offer more than the asking price to secure the property. Many of us are naturally competitive people and don’t like to lose, so this scenario pushes one emotional button.
Another button being manipulated is the perception of value. When a property is listed below market value, buyers may perceive it as being of higher value than the asking price because it is, which can create a desire to pay more for it—but you don’t really know how much more. This perception is also influenced by the scarcity of the property and the competition among buyers. Tie that into not wanting to “lose” and you often get a sales price over where it might otherwise be valued.
Lastly, buyers may feel a sense of emotional attachment to a property, especially if it meets their specific needs or preferences. This emotional attachment can lead them to overlook the asking price and focus on the opportunity to own a property that they really like and may have originally felt like a good deal. If they are the ones making the decision to offer more, it doesn’t feel as bad.
How Should You View Asking Prices?
All of this begs the question: if over-asking sales prices are meaningless, what should buyers focus on instead? It’s never a mistake to go in with a strong, competitive offer that is realistic and reflective of the current market conditions. This means doing your research, working with a trusted real estate agent (surprise surprise), and being prepared to move quickly when you find a property that you’re interested in. That strong offer means factoring for the following:
- The true value of the property based on comparable sales in the area.
- The condition of the property and any necessary repairs or renovations.
- The value of current loan conditions and interest rates aka your monthly payments.
- Having a reputable lender who has pre-approved you (see our post on the different versions of being approved for a loan).
- Staying flexible and willing to negotiate with the seller.
The Bottom Line
Warren Buffet as usual said it best: “We firmly believe that near-term economic and market forecasts are worse than useless. Quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.” And when it comes to the over-asking sales stats in particular, the same conclusion is true. Without the context of comparable properties that have also sold, breathless reports about something selling for $150,000 over listing price is clickbait–nothing more, nothing less.
Need help navigating this market or deciding on a fair price offer? You know where to find me!