Selling a Home? Here's Why You May Want to Underprice It

Underpricing your home could benefit you in today's market.

Given that mortgage rates are extremely competitive these days, you'd think it would be a good time to buy a home. Not so: Limited housing inventory has caused a spike in buyer demand, and home prices have soared as a result. That's bad news for buyers, but for sellers, it's fantastic -- most people who list their homes are walking away with top dollar.

If you're about to put your home up for sale, you may be tempted to aim for as high a price as you think you can pull off. But here's another tactic that may be worth employing -- underpricing your home.

How asking for less can work to your advantage

You might think that underpricing your home when buyers are paying more than ever is ridiculous. But actually, it could help you walk away with a higher sale price.

These days, a large number of homes wind up subject to bidding wars. If you're not familiar with the term, a bidding war occurs when buyers try to outbid each other for a property, driving its price up.

Say a home is listed for $500,000 and there are two offers for it. One potential buyer might come in with a higher bid of $515,000 to get their offer accepted, at which point another buyer might come back with $525,000. That first buyer might counter with $535,000, and the second buyer with $550,000. The result? A much higher sale price than the listing price.

These days, bidding wars pop up all over the place because there's such limited housing inventory. But generally speaking, homes priced competitively to start out with are more likely to wind up subject to bidding wars than those priced high.

The reason? When a home seems reasonably priced, it puts buyers in the mindset that there's room to bid above asking price. And when buyers get their hearts set on a home, they're likelier to keep raising the stakes, especially if they feel the home was competitively priced in the first place.

Let's go back to our example of a home listed for $500,000. Let's assume that house could easily fetch $510,000 in today's market. Listing at $500,000 could prompt a buyer to come in well above asking price -- say, $515,000 -- because that buyer knows the price is so reasonable to begin with, and that there's wiggle room to go up. That's how bidding wars often begin.

Of course, you don't want to go to extremes when underpricing your home. If your property could normally command $510,000, listing it for $500,000 makes sense, whereas listing it for $450,000 does not. But underpricing your home modestly is a strategy worth pursuing, especially in a market where bidding wars are effectively becoming the norm.