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A house recently sold during winter real estate market in Toronto February 06, 2013.Fernando Morales/The Globe and Mail

The question:

We've outgrown our two-bedroom semi and need something bigger, so we've decided to sell. We're in a good neighbourhood – Riverdale - so our agent says the home should go fast. But he's telling us to list at a price we know is much too low in order to start a bidding war. I'm a bit torn – he's probably right, but somehow it doesn't seem fair to me. What should I do?

The answer:

Underpricing in hopes of sparking a bidding war can be a risky proposition. However, certain neighbourhoods in Toronto (like Riverdale) are in high demand and have historically been able to support bidding wars if they're done right.

As a starting point, I would pull up a list of recently sold comparables in your area and examine how they were positioned and subsequent outcomes.

Three things to look for in these comparables will help determine whether you're ready for a bidding war: Days on market, list price to sold price ratio, and description.

Days on Market tells you how quickly homes are moving – 5 to 7 days on market is usually the norm for bidding-war scenarios. List price to sold price ratio tells you if homes are selling for more than asking, and for how much more. A great barometer of demand in the neighbourhood. Finally, the Multiple listing Service (MLS) description may say something such as "No offers until X date"-- indicating it was purposely set up for multiple offers.

In the second quarter of 2012, North Riverdale had average sales prices that were 105% of asking, with an average of 13 days on market. Similarly, South Riverdale's had a sold to listing price ratio of 105%, with an average of 17 days on market (Source: TREB).

Let's talk about some risks of pricing for a bidding war. The biggest is that you will not garner enough interest to create a multiple-offer situation, in effect setting the value of your home too low in the marketplace. Momentum and market exposure matter, and your first few days on market are critical exposure. Realtors and home buyers look at MLS listings on a daily basis, and you have a small window in which to set an impression around your property's value.

You may be stuck with a list price lower than your real market value when those bids come in. And if offers don't meet your expectations, you may want to start all over again. In this situation, sellers will quickly raise the listing price to align with true market value.

But to all those observant realtors and potential buyers, that says "I played some games with the price, and now I'm back to get what I really wanted all along. Or am I trying to create another bidding war in a different price slot?" Either way, not a strong position in a competitive real estate market unless you have a true gem of property. And if so, why did you underprice in the first place?

At the end of the day, your specific situation will guide your outcome. Get the comparables on your neighbourhood. Discuss all the factors with your realtor, and know the real price you are willing to accept for your home. If there is real demand for your neighbourhood or your particular property type, the market may be ready to respond with a bidding frenzy. But understand your risks before you go to war.

Ricky Chadha is broker with Royal LePage Estate Realty, and specializes in applying social media and other digital tools to the business of real estate. You can find Ricky on Twitter @your416 or at his website

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