FAIR USE NOTICE. This document contains copyrighted material whose use has not been specifically authorized by the copyright owner. The Managerial Economics course is making this material available as part of our mission to promote critical thinking about economic issues. We believe that this constitutes a `fair use' of the copyrighted material as provided for in section 107 of the US Copyright Law. If you wish to use this copyrighted material for purposes of your own that go beyond `fair use', you must obtain permission from the copyright owner.

In an Unruly Real Estate Market, Try This Broker's Guidelines Rules for Market With No Rules

Kathleen Pender
Friday, September 1, 2000
San Francisco Chronicle


How much should a buyer expect to pay for a house in San Francisco when there are multiple offers?

If there are six to eight bids, the winning buyer is likely to pay 20 to 30 percent above the asking price, according to a new study by San
Francisco real estate broker John M. Lee.

Lee says he conducted the survey because the old rules of thumb no longer apply in the Bay Area, where many homes are deliberately
underpriced to create a feeding frenzy among buyers.

Lee, a former chemical engineer with an MBA in real estate and finance, surveyed San Francisco listing agents and asked for the following
information on homes and condos sold this year: address, listing price, sales price and number of offers received.

He got about 100 transactions and plotted the information on a graph. Using ``regression analysis,'' which involves drawing a curve that
best fits the data points, he came up with some interesting observations.

First off, Lee found that it takes only six to eight offers to drive prices 20 to 30 percent above the asking price. ``On a $400,000 listing, we
should get $100,000 over (asking price) with just six to eight offers,'' he says.

As the number of offers increases, so does the price, but only to a point. After 20 to 25 bids, the sales price remains fairly constant. ``It is
difficult to obtain bids over 50 percent above the asking price,'' Lee says.

In the old days, Lee advised sellers to price homes at 5 percent above market value, based on the sale of comparable homes.

Today, a home listed at market value or even 5 percent below is likely to attract only one or two offers.

``Buyers are expecting to offer over the asking price, and thus when they see something priced at market, they automatically think that in
order to get it, they will have to go higher, and thus will be overpaying for it,'' Lee explains. This is a new phenomenon, he says.

To generate five to 10 offers -- which Lee considers optimal -- a house needs to be priced 15 to 22 percent below fair market value, based
on comparables.

Lee's study is not scientific, and the 100 transactions he included represent only a fraction of the 3,000-plus homes and condos sold in San
Francisco this year.

However, it could give buyers and sellers one more tool for pricing a home in San Francisco or any Bay Area location where the market
remains overheated.

Lee says buyers should ask the listing agent, ``How many offers do you expect, and how many do you have in hand?''

Then, according to the chart on Page B4, if five offers are submitted, the house might sell for about 18 percent more than the original asking
price. ``It'll work sometimes. It's not 100 percent accurate,'' he says.

This strategy could become moot if the real estate market, which has already cooled a bit, goes into a deep freeze.

``Pricing is an art, not a science,'' Lee adds. And sometimes, he says, it's not even an art -- ``It's an emotion.''