Underpriced or Overbid? The Anatomy of DC’s Bidding War Climate

by Shilpi Paul

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This row house sold for $176,000 above its asking price.

There may be no better indicator of the uber-competitive nature of DC’s housing market than the number of homes that sell for well above their asking price these days. The trend has become so widespread that UrbanTurf developed a series of articles to cover it.

A home in Truxton Circle recently sold for $176,300 over its list price, and Mount Pleasant rowhouses are becoming notorious for bidding wars that drive prices from the $800,000s into the $1 million range.

So, what’s going on? Are listing agents underpricing homes or is the market moving so quickly that the home value in such a competitive market is hard to determine? Or are buyers falling victim to “auction fever,” paying more than what is rational because of the competition and being fed up with losing out on a number of other homes?

It turns out the answer may be all of the above.

“There have been a few open houses where the listing agent told us that the home was priced to incite a bidding war,” said Rick Heath, who has been actively searching for a home for almost a year and has made several offers. Heath and his wife recently came in second on a house in Mount Pleasant, where they were beat by an all-cash, higher offer.

Besides underpricing, Heath believes low inventory is creating a desperateness on the part of many buyers, who are anxious to find a home after months and months of losing out on other properties. At a recent open house, he ran into another couple he had last seen at an open house…five months ago.

“There are some people who are now willing to make a dumb offer,” said Heath. “If money was no object, I’d probably be doing the same thing.”

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Courtesy of Trulia Trends.

Heath’s experience matches what a recent Trulia survey found, specifically that frustrated house hunters are resorting to very aggressive measures to get the home they want:

Among survey respondents who plan to buy a home someday, 2 out of 3 would use aggressive tactics such as bidding above asking, writing personal letters to the seller, or removing contingencies, to name a few. One in four (25%) would be willing to pay the seller’s closing costs, and 25% would also be willing to bid 1-5% over asking.

Pam Ryan-Brye of Long & Foster recently worked with a couple to make the winning offer on a rowhouse at 2011 Klingle Road NW in Mount Pleasant priced at $879,000. The couple had a broader budget and were eager to stay in DC, so they asked Ryan-Brye to help them make a competitive offer. They ultimately got the house for $996,000, beating out seven other offers.

On its face, it could look like the buyers overpaid, but when Ryan-Brye sat down to do the market analysis, she found that the $879,000 price was a little disingenuous.

“In the past couple months, there have been a number of similar houses that sold in the $1 million range in the neighborhood,” said Ryan-Brye. The homes had made it past the appraisal process and were comparable to their selected listing.

“Our consensus was that the house was underpriced to get multiples,” believes Ryan-Brye.

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2011 Klingle Road NW, which recently sold for more than $100,000 above asking.

If the underpricing tactic continues, said Ryan-Brye, she could see how it would be misleading. If someone has a budget in the $800,000 range then many homes showing up in their search would not actually be in their price range. Finding a home appropriate for their budget would require more research to find the normal “starting price” of homes that are ultimately bid up to $800,000. It’s hard to blame a listing agent for underpricing a home, though; their duty is to get the highest price for their client and this is an increasingly effective way to achieve that goal.

Bidding wars, like auctions, also have particular psychological effects; according to research cited in this BBC article, being in direct competition with other people makes it more difficult to make a rational decision. People also tend to overvalue items that feel scarce, either because they are unique, or because they are only available for a limited time; our low inventory, high demand market provides both of these constraints. Finally, auctions operate on a principle of social proof: if other people believe that something has value, we do, too.

Whatever the reason, if inventory doesn’t start increasing soon, bidding wars, and higher prices may be the new normal for DC house hunters.

See other articles related to: underpricing, editors choice, dclofts, dc bidding wars, bidding wars

This article originally published at http://dc.urbanturf.com/articles/blog/under_priced_or_over_bid_the_thinking_behind_a_bidding_war/7373

7 Comments

  1. C said at 10:17 am on Friday July 26, 2013:

    I think it’s obviously a little bit of both - underpricing on the agent/seller side and people willing to do about anything so as not to lose out on, yet another (perhaps), house.

  1. Shawn J said at 10:25 am on Friday July 26, 2013:

    your obsession with this truxton house is getting laughable at this point. damn thing sold for like mid $300s/sq ft. how is that worth 4 articles on your site?

  1. Doug said at 4:17 pm on Saturday July 27, 2013:

    I agree with C that it is a little of both, but lean more towards people aggressively bidding up not lose out on a house.

    I have been in the market (700K to 900K) and have lost out on five houses in the last three months, very similar to Heath’s situation. There is only so high I can go, but I am about to reach my point where I will be making a dumb offer to get the house I want.

  1. K said at 10:05 am on Sunday July 28, 2013:

    This is why data is not the plural of anecdote, I would have said some of both, but leaned toward under pricing. And I have a contract pending on condo that I am paying $5,100 over list on it. It seemed to me and my realtor that it was a little underpriced to make it stick out and generate multiple offers.

    That’s not to discount anyone else’s experience. I also wonder if there are effectively different submarkets at different prices. I’m in a WAY lower price point than Doug.

  1. Dana Hollish Hill said at 2:35 pm on Monday July 29, 2013:

    Two points I’d like to make:

    1) By listing a property below the comps for the neighborhood, it may lead to multiple bidders, but many of the buyers are not really able to afford the final sales price. When a Mount Pleasant property recently had over 20 bidders, it basically just made 20+ buyers LOSE another property and increased the likelihood that these buyers will be bidding more aggressively next time.

    2) If you decide to list your home below the neighborhood comps and a rush of buyers DO NOT submit offers on your property, what are you going to do next? If a nicer property in your neighborhood gets all of the attention and yours doesn’t, you may be left with a home that is priced lower than you would like.

  1. C said at 3:21 pm on Monday July 29, 2013:

    Dana Hollish Hill, I’m not sure what your point is on #1.  I’m sure it’s a good point, but it’s not clear to me.  Are you saying that properties listed below price (neighborhood comps, which are comps for similar style, number of bed/bath, updates, parking/no parking, etc.) are you saying that all the bidders are not able to afford the final sales price because the bidding is so high or because the final sales price will be more the “real” value of the property, which people looking at homes in the original price range will think this property is in their range but really it’s not because it’s being priced low and the “real” or “true” sales price (final) is the next level but people are bidding and thus they keep losing out on properties because the list price is too low and they are looking at homes above their price range? 

    Your point #2 raises a good point.  There is a risk, somewhat, to underpricing.

  1. Dana Hollish Hill said at 1:39 pm on Friday March 14, 2014:

    C - I’m sorry that I am just reading your comment now. I’ll try and clarify my first point for you.

    Listing agents may like to see the feeding frenzy that arises from listing a home so far below the comps. It doesn’t take much time for the listing agent and the seller to weed out the lowest 17 of 20 offers so they can focus on the top 3. It sends a message to all buyers that they have to up their offers next time. Many are desperate to win after a loss.

    I’m an exclusive buyers agent. When I advise buyer clients to search for homes within a price range they can afford, I hope that the homes they see are within that range with a small margin of error. When they see a home that is listed $200,000 below its final sales price, they want to believe that they will find another home of that quality/location within their price range. They can spend a long time comparing all homes to that home that got away. When in reality, that home was never within their price range.

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