In a hot market, the tactic of ‘egregious underpricing’ serves home sellers well because it attracts a number of buyers and creates a competitive situation.

When prospective homebuyers Allyson and William Murphy found a Richmond home in their price range, they jumped on it, offering $95,000 above the asking price.

To the Murphys’ dismay, the sellers countered, asking for $800,000, a whopping $120,000 over the $680,000 listing price.

“I don’t know why they are listing them the way they are listing them,” Allyson said, referring to the huge gap between the asking and desired price.

The reason: listing a property for less than the seller really wants likely will create competition and drive up the price. It’s an established marketing strategy that has reached exaggerated levels in parts of the East Bay, to the point where there’s a term for it: egregious underpricing.

“A lot of listing agents will list the house at a certain number to generate the traffic to get people in the house,” said Sarah Torney, a real-estate agent with Better Homes and Gardens Reliance Partners in Berkeley.

“Once they get in the house, they like it, so you get more offers,” Torney said.

The tactic confuses the buyers she represents, Torney said, adding, “It’s sad and ridiculous that agents will list a home for such a low price. You have to set up your buyer (to understand) what it’s going to sell for.”

Nancy Duff, a former Berkeley zoning commissioner who has been an East Bay broker for 40 years, said, “Obviously, people are trying to list them (properties) low and get them bid up.”

The tactic “serves sellers well because it attracts a number of buyers, creates a competitive situation and ultimately an offer price that far exceeds the list price,” said Jane Anderson, a real-estate agent with the Grubb Company, which has an office in Oakland and one in Berkeley.

Subscribe to the Daily Briefing Don’t miss a story. Get Berkeleyside headlines delivered to your inbox. Don’t miss a story. Get Berkeleyside headlines delivered to your inbox.

A Realtor.com article elaborates on the approach: “Not only does it get more people in, but once the buyers see the place, they’re likely to offer over the purchase price, which often leads to bidding wars,” Collin Bond, a New York real-estate agent for the Boris Sharapan Team of Douglas Elliman, says in the piece.

Egregious underpricing is not the only factor that leads to the bidding wars that drive up prices. One important element is the dearth of homes on the market in the East Bay and the entire area.

But agents and homebuyers agree that the tactic contributes to the dizzying degree to which sale prices exceed asking prices.

An example: 1800 Sonoma Ave. in Berkeley was offered at $1,095,000 in September and sold in October for $1,640,000, according to the multiple listing service. That’s $545,000 over the asking price.

Another example: 1601 Mountain Blvd. in Oakland was offered at $995,000 in October and sold in the same month for $1,650,000 — $655,000 over the asking price.

Berkeley homes selling for 17% above asking price on average

Looking at the market overall, the average sale price to list price ratio in Berkeley in March was about 117%, according to data from the Multiple Listing Service. This means that on average, homes sold for 17% more than the asking price.

In Oakland, the sale price to list price ratio was about 111%, so on average, Oakland homes sold for 11% more than the list price.

In this regard, Oakland and Berkeley outdid even San Francisco, which had an average sale price to list price ratio of about 108% in March.

To give an idea of how unusual this is, nationally, the sale to list ratio was about 94% in March on average, according to Redfin. This means that across the country, homes sold for less than the asking price.

“There are other areas in the country that are very different,” said Michael Price-Brown, branch sales manager with Century 21 M&M and Associates. “We are our own little planet.”

The strategy is only effective under certain circumstances, agents said.

“I had a listing on Portland Avenue in Berkeley that listed at $895,000 and sold for $1,310,000,” said Anderson.

“It happened in March in the Thousand Oaks neighborhood. It was a winning scenario of a charming house in great condition beautifully updated, and you could walk to Solano (Avenue). It was in a very desirable neighborhood. It had everything going for it,” Anderson said.

“When you have a property that misses one of those criteria, either a neighborhood or a condition or location, you have to be a little bit careful about pricing too low, because what happens if you only get one bid, one offer?” Anderson said.

She said the tactic is effective in a hot market, and applies to what she called “the bulge,” mid- and lower-priced properties.

“If I were to define the culture of our market, it is to price soft and get multiple offers,” said David Gunderman, an agent with Alain Pinel Realtors in Montclair.

“As you get higher in price, people may not show up for the party,” he added.

Agents and homebuyers agreed that egregious underpricing doesn’t happen everywhere in the East Bay.

“The velocity of markets in Berkeley, Albany, El Cerrito, the nicer parts of Oakland, Piedmont and Montclair – those markets have a higher rate of turnover,” said Keith Maddock, an agent with Marvin Gardens Real Estate.

But, as Allyson Murphy’s experience attests, the bidding wars are even spilling into certain neighborhoods in Richmond. She and her husband gave up on Richmond, El Cerrito and Berkeley, and found a house in El Sobrante. They moved into what Allyson describes as “a beautiful home on half an acre” in July.

After looking for three years, Zoe FitzGerald Carter had a similar experience.

“The houses (in Berkeley) that had walkability and were reasonably nice, not even huge or fancy, listed for a million and went for $400,000 to $600,000 over asking,” said FitzGerald Carter.

FitzGerald Carter reached the end of her rope when she looked at a house in Rockridge. “There were so many people inside looking at it, I couldn’t even get in the door,” she said.

“I went to Kensington and found this house with an amazing view,” said FitzGerald Carter, who is a client of Nancy Duff. “There were only three people looking at it, not 50. I bid on it and got the house and did not massively overpay.”

Initially, it can be difficult to get sellers to agree to underpricing, especially if they know a comparable house in their neighborhood sold for more, an agent said.

“You have to have frank conversations,” said Price-Brown.

“Communicate. Tell them this is a tactic, it’s not going to sell at this low price,” Price-Brown said. “If you explain it to them, they get the game.”

“But if (the sellers) are adamant at selling it for this (higher price), I’m honest and say it may sit on the market for longer than a lower-priced house. It will take a little longer to sell, but it will sell,” he said.

Along those lines, “Do you want to be aggressive and price it below market value? OK, it works, I’ve done it many times,” said Liat Bostick, an agent with Coldwell Banker Residential Brokerage in Montclair.

“But if you want to ask for fair market price that is fine too. You won’t get as much attention, but you won’t have to review 20 or 30 offers, some of which would probably be too low,” Bostick said.

Obviously, the current market favors sellers, as does egregious underpricing.

Stephanie Ferrara, who is looking to buy in the East Bay, said in an email, “If the list price was a price (or near a price) that the sellers would actually accept (as list prices are in the rest of the country), I wouldn’t be as frustrated with the process. As a buyer, you’d have realistic expectations about what you can and can’t afford.”

Agents said they protect their buyers by explaining the system to them.

“Buyers have to be taught to look at homes listed for well below their price level because they have to have negotiating room,” Anderson said.

Price-Brown said, “I’m not going to show them something that is listed for what they can afford. I always try to go in 10 to 15% below what their top level is. If they are approved for $750,000, I go to listings for $650,000.”

It’s unlikely that egregious underpricing will last forever, Anderson said.

“This developed in a hot market,” the Grubb agent said. “If we see things correct or level off, we may see more transparent pricing. Houses will be listed closer to what they will eventually sell for.”