The Psychology of Paying "Over Asking".

April 5, 2017

"Obviously, this post is not about baby showers and bidding on sippy cups"

 

Last weekend I was at a baby shower for a good friend of mine and we played "The Price is Right". (I promise this has something to do with real estate, so bear with me). Apparently, this is a wildly popular game to play at baby showers but for those of you that don't know how it works (the baby shower version, obviously, because if you don't know how The Price is Right works in general, you should probably go watch some TV asap!), here's how it goes:

 

1 - There's a basket of baby stuff for you to examine. From baby formula, to diapers, to stuff I didn't even know babies used or needed. I clearly don't have kids.
2 - You guess what each item is worth, tally up your total, and the person closest to the actual retail price of all the items combined, without going over, wins. If your total goes over the actual total, you're out.

 

Seems simple enough. I gave my best educated guess on the price of the 8 items, locked in my numbers, and then proceeded to stuff myself with cake. The winner? This would be a lame story if it wasn't me, so obviously, I won. And the prize was two free movie tickets, so I'm glad I didn't phone this one in. The actual total was something like $62.50 and I bid $57.89. And in case you don't believe me, here's proof:

 

The funny thing is that my wife came in second, just $0.89 behind me! I guess all my blabbering at home about bidding wars and how to price condo units rubbed off on her ;)

Obviously, this post is not about baby showers and bidding on sippy cups. But the concept in real estate remains the same:

 

"How much do I bid for a condo so that I win without going over what the unit is actually worth?"

 

Investor clients of mine were in a bidding war a few weeks back in River City, right where King St E meet Queen St E. Unit was a pretty well laid out, condo fees were low, and the rental rates were decent. List was $359k so we prepped for offer night. We came in at $400k and we lost to a bid of $425k. My clients' reaction was "so like $65k over asking. Good to know". And we moved on.

 

The next night we saw a unit at King and Sherbourne, which is quickly becoming the nexus of the "east of Yonge" universe. Another small 1-bedroom but with a very awkward layout. In fact, the tenant's sofa was literally in front of the fridge, which I guess isn't the worst thing in the world if you were watching a movie and wanted to grab a snack without getting up. But the unit was tenanted so that means someone was willing to live there. List price was $379k (holding back offers, of course) and here's the comment from my clients that caught my attention: "Hmmm. I don't think this is worth $445k, so let's pass".

 

I took a second and asked, "why would you assume we'd have to offer $445k?" Their response made sense: "well, the previous unit sold for $65k over asking, so if this unit is asking $379k, wouldn't they be expecting $445k?"

 

As an agent, I usually ignore the list price of most units, do my own analysis on what I think a unit should/could/would sell for, and work with my buyers to see if my analysis is on par with what they would be willing to pay. But with all the media attention around houses selling for "$100k over asking!", there seems to be comfort buyers take in being able to anchor their bids to the list price in some way. Professionals will agree that all units in this market might as well be listed for $1, but it's very difficult for everyday buyers to determine true value without some sort of base to build off. And I totally appreciate that. It's also quite useful for agents to realize this when listing properties because even though you may have listed your unit below "market value", buyers will still use their anchoring technique and assume the seller wants $X above asking based on what other units listed for the same price have sold for, and then determine if they are willing to pay that new price ->

list plus $X. And if they are not, they may not make a bid, even though they probably should.

 

In this case, we skipped the unit because the layout was just too awkward and it ended up selling for $385k. But I have no doubt the list price, although lower than what the unit was ultimately worth, somehow deterred at least a few buyers from making an offer. It certainly deterred mine.


If you have a comment, feel free to leave it below. And remember, if you haven't already, please "like" my Facebook page and check back regularly!

 

Your Toronto condo lover,

Adil Dharssi

 

#AdilKnowsCondos #TorontoKnowsCondos

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