By listing a property below market value, the seller aims to attract a large pool of interested buyers, ideally generating a competitive, high-demand environment. This strategy is known as “strategic underpricing” or “auction pricing.” This can lead to multiple offers, driving up the final sale price as buyers bid against each other, essentially creating a bidding war.
This approach is common in high-demand markets, where buyers are more likely to engage in competitive offers, and it can be particularly effective for properties in prime locations or those with unique appeal.
Strategic underpricing is increasingly common in competitive markets or markets with limited inventory, especially in high-demand urban areas and regions with low property turnover. Sellers and listing agents often use this tactic in “seller’s markets” where buyer demand exceeds supply, as it leverages competition to maximize the final sale price.
Signs a Property is Strategically Underpriced:
For buyers, look at recent sales and nearby comps to assess whether a the price might be part of a competitive pricing strategy. Working closely with the agent can also provide insight into whether an underpriced listing is likely to spark a bidding war.
The margin for strategic underpricing typically ranges between 5% to 10% below market value. Pricing below this range—especially if it dips closer to 15-25% or more below market value—risks being seen as manipulative or even unethical if the intent is purely to create unnecessary competition without intent to negotiate fairly.
- List Price Below Recent Comparables: If a home is listed notably below comparable properties, especially without clear issues like needed repairs, it could signal an attempt to stimulate competitive bidding.
- “Offer Review” Date Specified: Some listings set a specific date to review offers, which often encourages multiple offers and bidding.
- High Initial Interest: When an underpriced listing immediately generates numerous showings and open house traffic, it’s often a signal that the pricing is designed to attract attention and trigger a bidding environment.
- Market Conditions: In a seller’s market, properties are frequently priced slightly below value, making this a common strategy. Knowing market trends in a specific area can help anticipate this approach.
- Listing Agent Remarks: Occasionally, listing agents will hint at or explicitly note the pricing strategy in agent-only comments, or in rare cases, even in the public listing description.
Guidelines and Potential Limits:
- Ethical Standards and Fair Practices: Agents are bound by ethical standards, particularly around fair representation and honesty in dealings. Pricing a property far below market value without a legitimate reason (like a fixer-upper or an urgent need to sell) can lead to accusations of bad faith or bait-and-switch tactics. Misleading buyers this way could harm an agent’s reputation or lead to disciplinary action by real estate boards.
- Professional Repercussions: Agents who price properties excessively below market value and only entertain a pre-selected best offer can face complaints, and their license could be at risk if they’re found to have acted unethically. Some states have specific disclosure requirements around offers and negotiations to protect buyers, especially if an agent is intentionally underpricing.
- Brokerage Policies: Many brokerages have internal policies or guidelines regarding pricing strategies to avoid manipulative practices. Some will restrict agents from setting prices too far below market value unless there’s a clear basis for the low price, like repairs or market downturns.
- Buyer Protection Measures: In some markets, Multiple Listing Services (MLS) or state real estate commissions require agents to disclose all bona fide offers to sellers, meaning that the process of reviewing offers needs to be transparent. If an agent consistently ignores better offers in favor of a pre-arranged buyer, this could lead to legal repercussions or accusations of steering.
Key Takeaways for Buyers and Sellers:
- For Buyers: It’s wise to check comparable listings, assess the potential for multiple offers, and work with a knowledgeable agent to determine if the price is realistic.
- For Sellers: Underpricing can be effective, but going too low may attract unqualified buyers or prompt oversight by regulatory bodies if it appears misleading.
In most cases, pricing within that 5-10% range below market value is sufficient to encourage competition without veering into unethical territory.