The Fallacy of List Price

Originally written by John Riche on May 25, 2010

Us in the Real Estate business are always faced with the issue of price... or more accurately the "list price" of the homes we act as purchasers agent or the homes we list ourselves for sale. You may not realize it, but we are always asking other agents their thoughts on price as well. I always ask other agents "What do you think of the price?". When they say it is priced correctly I always take credit, when they say it's overpriced, I always say it was the vendor's choice... just kidding (I can hear the other agents snickering).

There is a popular misconception about who creates the list price in the marketplace as a whole as well; that is that Real Estate agents set the price. It is quite popular (and humorous too) to read the comments on CBC.ca every time there is an article about increasing real estate values where misinformed people complain that the Realtors are driving the prices up. It's not true... actually its quite the opposite, Realtors are part of a larger market machinery... sure we are in the trenches, but it is the market that sets the price. Every Realtor will tell you of one of their listings which they recently had was over-priced because it was what the vendor wished.

Ethically however, all Realtors who list homes are hired to acquire the maximum value from a home sale. Conversely, when acting for the purchaser they will attempt to acquire a property for their clients for the least reasonable amount.

The truth is that list price is a number that is driven by either (a) the vendors desired price or (b) the price generated from a cogent comparative analysis of previously sold properties in the neighbourhood or (c) a combination of both.

Is this price always accurate? no, there are always going to be over-priced listings. But a simple analysis on the computer can always tell you whether the house you are looking at is at least in the right ball park. Your Realtor can help you fine tune this search. Does this mean that homes that sell on the first day with multiple offers are under-priced? Once again, no. The market is a fickle beast and such basic assumptions do not take in the variety of reasons why a property gets multiple offers.

The price is important for the vendor, because from this price he or she draws the cash equity from the sale (hopefully positive). From that they have to pay the lawyers fees, the brokerage fees, the de-registration of mortgage documents and deeds, etc, etc, etc... They also may need this equity to put on a down payment on another home in which they are the purchaser.

The price is important for the purchaser too, but it is on a more philosophical level than it is for the vendor. Sure they don't want to over pay for a listing but if a purchaser is planning on purchasing a home for 3 years or longer then they should view the price as part of the process not the single "be-all and end-all" of the transaction. Many purchasers get very emotionally attached to price, like it is a reflection of their personal financial know-how. Men are worse than woman too, because they have a tendency to dig their heels in and be stubborn about the necessary give and take in a real estate transaction. What these people fail to see is that negotiating is not standing pat, it is creating a "win-win" solution, or failing that, a "partial win-partial win" situation between two parties. Funny enough, those who dig their heels in are actually the ones who are illustrating their lack of personal financial know-how.

If you told someone that they could buy a house (listed at $309,900 for arguments sake) now today for $300,000 or they could wait for six weeks and purchase the same exact house for $275,000 (assuming no one else is interested) they would probably say I will wait the six weeks to save the $25,000.

Smart?... maybe not.

If you are following what the Bank of Canada has been bellyaching about over the past year you would know that they are thinking of significantly raising interest rates. To make a long story short, The $300,000 home you buy with the 5% down payment at 4.29% today will cost you $1538.04 a month (25 year am. excl tax, insurance, yadda, yadda, yadda) but the $275,000 house (with the same $15K down payment... lets keep it fair) at 5.29% will cost you $55 more a month. In terms of real dollars you have actually increased your monthly budget.

Be smart about price, don't react emotionally and remember there are two parties to every transaction. The goal is a wonderful home not to tell your buddies what kind of deal you got.