Real Estate Blog of Steve Dickie, Broker

The listing price is a key component of the valuation and sale of a property in the marketplace. The closer the list price is to market value, the more likely that a higher sale price will be realized within a reasonable period of time. A list price at or close to market value will attract the most number of serious buyers. A heightened demand will usually translate into a higher selling price.

Simply put, a buyer, upon seeing a well priced property, will become anxious to make a good offer before anyone else realizes the property’s excellent value. As a result, it will be the seller and not the buyer who will be able to negotiate from a position of strength. Therefore, under normal circumstances, it is very likely that the buyer will pay top price to get the property before anyone else does.

While there are no absolutes concerning listing prices, it is generally recommended that the list price be no more than 2-3% above the estimated value or value range. If the estimated value is $205,000, then perhaps a list price of $209,000 should be recommended. Of course you should also look at your competition in determining the proper listing price.

Often, sellers misunderstand the process of determining a listing price. You can often hear them say “Let’s list the property 10% higher just in case we get lucky” or “We need to list the property 10% higher to leave room for negotiations”. In both cases, a listing price 10% higher than the market value could very well be overpricing the seller’s property. If the list price is indeed too high, then the seller’s property will probably be eliminated by the serious buyers who otherwise would have considered buying it. In fact, serious buyers may either not look at the property at all or will use it to justify buying another property that is much better priced in comparison.

Of course a buyer may still make an offer on an overpriced property. However, in these situations, it is the buyer that will be in a position of strength in the negotiations as he/she will be aware that they will not be in competition for the property. Indeed they may be the only offer that comes along. As a result, they will often be able to negotiate a price at the low end of or below market value (depending on how long the property has been on the market and how frustrated and desperate the seller has become).

Some sellers will counter the argument that the listing price is too high by saying “You can always lower the listing price later”. The problem here is that a property will, after a time suffer from the problem of Market Staleness. As the weeks drag on, fewer and fewer buyers will look at the property. Buyers will often ask how long a property has been on the market and be very suspicious of a property that has been listed for a long time. Even when property is finally reduced in price to an accurate market value, buyers will make remarks such as “There must be something wrong with the home, its been on the market so long” or “The property has been on the market so long it must be overpriced” or “The property has been on the market so long, the sellers must be desperate”. The end result is often that an overpriced property is on the market longer than necessary and the price received is generally lower than it would have been if it had been listed realistically in the first place.

Errors in pricing generally fall into two categories. The first is looking at current listings and pricing to match them. In reality, what your neighbour is asking has nothing to do with what it may sell for. To determine a good asking price, you need to look at what other properties have actually sold for. The other error is in determining “how much you need to get out of the deal” to buy your next place, recoop renovations costs or any other metric. The potential buyer of your house doesn’t care about your financial needs. They only care about what your house is worth in today’s market.

You’ve decided you’re going to renovate your bathroom.  At the big box toilet store, they recommend plumber A, so you call up plumber A and have him come over and start the job.  He gets the new toilet all hooked up and everything is going along ticketyboo.  In the mean time, you’ve gone to the big box bathtub store and bought a bathtub and they recommend plumber B.  So you call up plumber B to come over and install the bathtub the next day.  The following morning, plumber A shows up to continue finishing the bathroom job, only to see plumber B’s truck parked in your driveway.

“Oh, he was the one that the big box bathtub store recommended so we gave him a call.” you explain.  ”Great job on the toilet though, thanks very much.  Bye.”

Plumber A leaves – out his time and materials – with no money.

After a couple days, plumber B finished the bathtub and hands you a bill for the entire bathroom renovation, including the toilet, and you happily pay him.

See anything wrong with this picture?  Of course it’s ridiculous in the plumbing analogy.  Plumbers get paid by the hour and plumber A would never have just left without getting some compensation for the time and materials he spent on the toilet.  And plumber B wouldn’t have billed you for the toilet work that he didn’t do.

However, in the real estate world, this happens all the time.  Buyers will engage with a REALTOR® to go and see houses.  The agent books the showings, drives the buyers around, investigates the strengths and weaknesses of each property and provides all the research to the buyers.  Then a week later, the buyers see a for sale sign in front of another house, call the listing agent to see it and buy it.  The first agent is out their time and expenses with nothing to show for it.  Agents work on 100% commission.  If they don’t close the deal, the earn no money.

Enter the Buyer’s Representation Agreement (unfortunate acronym that I won’t dwell upon).  This is essentially a contract between the buyer and the agent that lays out the services that the agent is obligated to provide for the buyer and at the same time, obligates the buyer to use that agent if they purchase a property within a specified time frame and geographical area.  It protects both sides.  Everybody is used to a listing contract when the sell a home.  No agent would agree to sell your house without having a listing contract in place to ensure that the rules are all set out and understood.  The same is becoming true of the buying side.

So next time you decide to look for a new home, consider the benefits (which I’ll go into further in a future post) of signing a Buyer’s Representation Agreement with an agent you trust.  That way, they know you’re committed to them and you know that they are working with your best interests in mind.