In the bustling real estate market of the Greater Toronto Area (GTA), a fascinating strategy often puzzles many: properties selling for significantly above the asking price within days. This phenomenon, known as underpricing, is a deliberate tactic to spark interest and competition among potential buyers. But why would anyone list their property below its fair market value? Let’s understand this strategy and its nuances for both sellers and buyers.

Understanding Fair Market Value

At the heart of real estate transactions lies the concept of Fair Market Value (FMV). FMV is the price a willing buyer pays and a willing seller accepts, free from undue pressure. Determining FMV involves a meticulous comparison of recently sold properties of similar type, style, age, specifications and location. The accuracy of FMV hinges on the number of comparables and their recency, providing a solid foundation for selling or buying decisions. This is a scientific process in which the broker objectively reviews each one of the Sold comparable with the subject property and comes up with the adjustments to arrive at the fair market value of the subject.

The Rationale Behind Underpricing

Underpricing is employed to generate buzz and increase property viewings. By listing below FMV and setting an Offer Presentation Date, sellers aim to attract multiple offers, creating a competitive bidding environment. This strategy not only ensures the property reaches FMV but can sometimes surpass it due to the urgency and competition it fosters among buyers.

Buyer Strategy in an Underpriced Property

Your strategy as a buyer should be to determine the Fair Market Value with your agent; and the more robust and analytical it is, the better it is for us. Once you have the fair value range, you should make sure that you are within that range only when you offer. One should not get emotional and overpay in any situation when buying Real Estate. Your offer amount should be very reasonable and within the dictates of fair market value based on the previous sales in the area, and nothing more. Even if this means you might not get the property. More will be coming your way in the next week and you will be fine. When as a Buyer you offer for a property, we should not care whether there is 1 offer or 10 offers on the property, the price we want to pay should be as per our fair market value analysis, and that's it. Just the fact that more buyers are queuing up to purchase, should not impact my offer price.

Seller Strategy in Underpricing

As a Seller, your agent has a big task at hand to ensure all buyer brokers who have come up with an offer are informed throughout the presentation on the happenings of the day. For sure only one of the offers will be successful, however, once the selection process is done by the Seller; all stakeholders should be informed so that they can update their buyers. Another important work would be to strategically set the pricing, it should be less but not too far from the fair market value. If the gap is too high, there could be a situation that offers land up way lower than the fair value and it would work as a detriment for the Seller. So, the skill would be to select just the right price, to make it low enough to generate more traffic.

In conclusion, I can say that this strategy of 'Underpricing' might work all right for a Seller, however, it needs a lot of careful planning to pitch it at the right price and not impact the ultimate selling price. Also, for the Buyers it would warrant having a good agent by the side, to ensure they navigate it well and do not overpay for the property. 

I hope this helps to clarify the subject of 'Underpricing'. You can reach out to us for any Real Estate goes you have in the Greater Toronto Area and we will be happy to help. We help our clients deal with residential, commercial as well as pre-construction opportunities. Take good care and talk to you soon!

Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate, and we will do our best to help.

Mudit Mehta 

Broker of Record

ELIXIR REAL ESTATE INC.

Off: 416-816-6001 | [email protected]