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As a real estate broker, I've seen all kinds of ways to price homes for sale. From experience, most sellers base their asking price on a few dollars more than the anticipated selling price. Then, there are others...

 

There are lots of things NOT to base your asking price on:

  • What you paid for the home
  • How much it cost to build home
  • How much is still owed on the mortgage
  • The cost of the improvements put into the home
  • What a past neighbour SAID they got for their home
  • What your current neighbours, or loved ones, suggest
  • What your individual tax assessment says it was worth
  • How much you need to net out of the sale for retirement
  • How much you paid for your next home
  • How much your dream home is going to cost
  • Whatever the "Magic 8-ball" indicates

 

What you should price your home is based upon specific market dynamics and what people can - and will - likely pay for your home. It really shouldn't be an exercise in wishful thinking.

 

What you probably shouldn't base your homes price (or value) on is the Greater Fool Theory.

 

Investopedia defines Greater Fool Theory as, "A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price." The online Business Dictionary defines Greater Fool Theory as, "Observation that any price (no matter how unrealistic) can be justified if a buyer believes that there is another buyer who will pay an even-higher price for the same item. This line of thinking causes and fuels stockmarket and commodity market booms and manias which, in due course, lead to busts and paranoias." Another reference for it is in the Law Dictionary: Greater Fool Theory. It was most likely coined in reference to the speculative bubble of the 1920's which resulted in the Great Crash of 1929 and the Great Depression.


While this theory has been around for quite some time and applied mainly to stocks and other securities, the first reference of it applied to real estate that I can find was was a short article that appeared in a Chicago newspaper in 1986. Perhaps, prior to this time homes were considered as primarily places for shelter and rarely considered "speculative investment vehicles" that can be flipped. In the last decade there's been at least one book and many articles written on the topic and probably lots of sold out seminars preaching an impending real estate bubble rupture. Like many people, I'd like to think that is just fodder for great headlines.

 

GREATER FOOL Theory  -- is it raising its ugly head in the Calgary real estate market? While I'm not an advocate of using this theory, it is critically worthwhile being aware of. A few sellers are pricing their homes well above what they are worth - most are just sitting amongst the otherwise tight inventory. Worse yet, there appear to be buyers that may be following the GREATER FOOL Theory and paying more for homes than they are worth in today's market. Are these buyers following their real estate brokers' advise? Are they even using a real estate broker or are they calling the listing broker?

 

If you're planning on selling your home in the Calgary area, ask a trusted real estate broker to advise you on a realistic selling price in today's market. If you don't have one, then give me a call and I'll help guide you. Likewise, if you were buying a piece of property, you'd want to seek their advise too (obviously never trusting the selling broker for advise since their loyalties lie with the seller -- by law). I personally believe there may be many honest real estate brokers willing to give you an unbiased and informed answer. (I speculate there may be more than a few real estate brokers that also subscribe to the GREATER FOOL theory! so, choose your advisor wisely)

 

As a Calgarian, do you see the GREATER FOOL Theory in practice in the residential real estate market?

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