Bidding wars are normally the ultimate sign of a hot real estate market, that demand for real estate is so stratospheric that prospective homebuyers are nearly falling over themselves with offers for the homes.

Bidding wars had been in short supply in the post-boom housing market, but the summer of 2012 was a different story, with record low interest rates and the tightest housing inventory since 2005 sparking bidding wars in some of the nation’s most competitive housing markets – Chicago included. At the height of 2012’s homebuying season, agents in Edgebrook, Chicago’s North Shore and western communities such as Oak Park, Hanover Park and Glendale Heights all reported competitive bidding and multiple offer situations.

Last year’s bidding wars, though, hatched an intriguing pricing idea. Though we still have some ways to go before bidding wars are commonplace in the real estate markets, some real estate professionals suggested agents could have their cake and eat it too via a most unorthodox of pricing methods – by deliberately sparking a
bidding war.

Bidding Wars – The Empire Strikes Back
It almost seems like a big budget movie, doesn’t it, that after a long absence from the battlefield, bidding wars have come back in a major way?

Here’s the notion behind the whole “sparking a bidding war” idea, which first sprang up in South Florida: agents should price the property low – as low as they possibly can. Even if the home has drawbacks, say, shoddy construction or bad plumbing, agent should not worry, because the low price will attract potential buyers; if the price is indeed low enough, it will attract enough potential buyers that offers will start pouring in, and once the buyers become aware of each other’s presence, a bidding war will ensue.

And the South Florida example is telling. Though the West Palm Beach property had a leaky roof, the agent priced the home at the ridiculously low price of $37,600, prompting 70 potential buyers to tour the home and many to make offers on the property, pushing the final sale price to $51,000, 36 percent higher than the original asking price.

Price it Right – Strategically
So the whole bidding war idea, essentially, is an inversion of one of the cardinal rules of real estate – price it right. Agents are typically told that as long as a home is priced correctly, it will sell; all agents have to do is assess the property’s features, consult previous sales of neighboring residences and base their listing price on
that information.

The bidding war concept, though, turns all that on its head, suggesting instead that agents deliberately price their properties unnaturally low (in other words, incorrectly), and count on the resulting buyer interest to push the price up to the desired sweet spot – or, if the competition is intense enough, even beyond that point.