Acceptance!

I’m always advertising that I’m an honest, no-nonsense Realtor who shoots from the hip, and tells it like it is.

So for that reason, I feel I owe it to prospective buyers to tell them EXACTLY what to expect when looking to buy a single-family home in Toronto, whether they want to hear it or not.

Maybe it’s harsh, and maybe it’s dream-crushing, but I figure I’d better tell them sooner rather than later, otherwise, I’d just be coddling them and stringing them along like any other salesperson.

If you are looking to buy a single-family home in Toronto today, you have to accept current market conditions for what they are…

Acceptance concept.

A colleague heard me on the phone the other day, talking to a prospective client, and he asked me, “David, were you trying to scare that person away?”

No.

I’m just telling them the truth.

About once or twice per week, I get a phone call that starts with, “Hi David, my name is blank, and I’ve been reading your blog for the last six months or so, and well, my boyfriend and I are looking to buy a house in Toronto.”

I’m always excited at the prospect of a new client, but today’s clients can be basically grouped into three categories:

1) Condo Buyers
2) House Buyers over $1,000,000
3) House Buyers under $1,000,000

Those are three very different buyers, working in three very different markets.

And it’s that #3 market that is so incredibly tough in 2014’s Toronto, and it is to those potential buyers that I give the brutally honest truth.

I’ve surmised in past blogs that part of the reason the $600-$800K price point in Toronto is so hot is because of Jim Flaherty’s decision two years ago to implement a mandatory 20% down payment on houses over $1,000,000.  This was intended to cool down the market, by causing borrowers to take on less debt, and take some of the borrowers out of the market, but instead, it caused the sub-$1M price point to catch fire.

You might say that overnight, $650,000 homes went up to $750,000.

And every house that’s listed for $599,000 today seems to be selling for upwards of $800,000.

So when I get a new buyer on the phone, and they tell me, “We want to buy our first home in Toronto,” I don’t waste any time telling them what the market is like.

I’m paraphrasing myself, but these are the bullet points I’ll make during our initial conversation, and yes, I’m aware that these are, in essence, generalizations:

1) “This is the hottest market I’ve ever seen in Toronto.”

I can’t sum it up any more succinctly than that.

I want to get it out there right at the start – this IS the hottest market I’ve ever seen for single-family homes, and so if you’re a buyer looking to get started now, you have to put things into perspective.

People come into the process with all kinds of ideas and notions, many of them so far-fetched that it can take a long time to undo their misconceptions.

When somebody says something like, “I want to get a super deal,” I have the unthankful task of telling them that we’re working in April of 2014, in Toronto, and not some other market, in some other city, where “super deals” are routinely possible.

2) “Starter homes are essentially $700,000”

I’m sure you can get a house somewhere for less, but for the most part, you’re looking around $700,00 for a starter home.

Yes, you can get a fixer-upper for less.

Yes, you can get a 2-bedroom house for less.

Yes, you can get a house with a few red flags and drawbacks, ie. no parking, only a crawl space instead of a basement, a short 60-foot lot, etc.

But with the average price of a home in Toronto (including the whole of Toronto, both houses and condos), hovering close to $550,000, it shouldn’t be hard to see that your average 3-bedroom home in the Central, West, or East TREB districts is going to be around $700,000, and some agents would suggest that starter homes start even higher.

3) “You WILL be in competition at some point.”

I refuse to accept otherwise, so long as you’re working in the $600-$800K range.

If I had a prospect tell me, “I’m not going to do one of those stupid ‘bidding war’ things,” then I’d question the reality that they live in.

Just as with point #2, there are circumstances where this will prove wrong.  But for the most part, you WILL be in competition at some point.  It’s unavoidable.

You can’t come into the process looking only at houses where there won’t be “offer dates,” because any $599,000 or $749,000 house in Toronto IS going to have an offer date!

The only houses without offer dates are over-priced houses that have seen their offer date come and go, and maybe where the seller has actually RAISED the price of the house.

I can’t change the market in which we work.

I wish to God that it wasn’t this way; that we didn’t have to “bid” on houses, on “offer night,” but that’s the way it is.  And it’s not going to change.

You aren’t going to see a $699,000 house in Danforth Village hit the market with no set offer date, and thus you are always going to be in competition on these homes.

Maybe not next month or next year, but right now – this is the way it is.

4) “The search process might not be fun.  It might actually be very frustrating.”

I think a lot of buyers get so excited about the idea of buying a home, that they don’t do any research on market conditions, the offer process, and how the market for single-family homes actually works.

I’m working with three couples right now who have lost in competition four times or more, and all three couples are a bit tired.  They’re still excited to buy a house, and all three couples remain positive and optimistic, but they’d be the first people to admit that the search process could have been easier, could have been quicker, and could certainly have been less stressful.

I’m not trying to be a downer when I tell somebody who I just met on the phone, “The process can be very frustrating.”  But I am trying to accurately convey how things could play out.

Isn’t that better than surprising them?

5) “Searching for a house is a full-time job.”

You have to look at houses online every day, and you have to be out looking at houses at least twice per week.  Likely one weeknight, and then either Saturday or Sunday.

You’re going to me making several offers before you finally tie up a home.  If you get the first house on which you offer – then you’ve done very well!

You’re going to be signing a lot of paperwork.

You’re going to get to know your bank teller as you get certified deposit cheques, and then put the money back in your account if/when your offer is unsuccessful.

You’re going to be talking to your mortgage broker and real estate agent more than your best friend.

Searching for a house is a full-time job in this market, and if you miss a day, you could miss an opportunity.  Those agents who work part-time are doing their clients a major disservice, and likewise, the buyers who have one foot in the pool are never going to jump in.

6) “Houses are going to sell for upwards of $200,000 over asking.

It’s just a number.  Like your age.

I know that turning 30, or 50, has a different “feel” than turning 29 or 49, but you have to remember that it’s just a number.

If an $800,000 house is listed at $599,000, then I agree – it’s stupid.  But that’s the way it’s done in today’s market, so accept it at the onset.

When you see that $800,000 house, listed at $599,000, don’t be the person that says, “Why can’t I offer $650,000?  That’s FIFTY-THOUSAND dollars over the asking price.  That has to be enough!”

You can’t get wrapped up in the sale-to-list ratio, or the amount over asking.

Look at the sale prices in the neighbourhood, regardless of the list prices.  Feel out the property and what you think it’s going to sell for.

I lost out on a property that sold for $805,000, with a buyer who had offered $800,000.  The property was listed at $629,900.  It’s no coincidence that both myself and my clients, and the winning buyers and their agent, came up with essentially the same price.

Houses do have a market value, and sometimes, it can be $200,000 over the asking price.  Accept that it’s utterly ridiculous, and move on.

7) “You can’t listen to people who aren’t in the market.”

I’m sorry, but if your uncle knew so much about real estate, he would be selling real estate for a living instead of working at the steel mill in Hamilton.  True story…

If you tell people that you’re looking at houses, you’re going to get a million-and-one unsolicited opinions, many of which have no merit.

Your dad tells you, “When mom and I bought our house in 1981, we offered the sellers 80% of the asking price, and then when they turned down our offer, we came back lower the next day.”

Well dad, that was then, and this is now.  And when there are eleven offers on a property, you don’t have that luxury.

When your boss says, “Trust me – that house isn’t worth what they’re asking,” you are under no obligation to listen to him, just because he’s your boss.  And FYI – that house is probably worth $150K over asking, so he should go back to his desk and make a giant paper-clip chain.

Nosey-Nancy, from Accounts Receivable, who is always asking everybody about their plans for the upcoming weekend……..on Wednesday – she doesn’t know anything about real estate.  So why are you listening to her when she says you should put three conditions in your offer so you “have the option of getting out of the deal if you want to”?

And even your mortgage broker, who works out of Ajax, doesn’t know enough about the Toronto real estate market to be telling you how much you should offer.  You probably know more than him, just based on your weekend escapades to open houses.

Toronto’s housing market is far too dynamic for outsiders to understand on a daily basis, and market conditions change every day.  If you aren’t in the market, you simply can’t be expected to know it.

I would rather risk scaring off a prospective buyer, than misguide them at the onset.

I’d rather tell them the absolute truth about current market conditions, then waste their time, and fill their heads with mistruths, as they dream about buying sought-after houses for less than the asking price, and conditional on the sale of their home in Ajax.

If somebody has let HGTV real estate shows shape their perception of the market, and tells me, “I want to focus on bank foreclosures,” I’ll tell them that we aren’t in Florida, and that we are, in fact, in Toronto.

If you were a buyer for a single-family home under $1,000,000 in 2014, would you want me to tell you the truth?

Trust me: acceptance is the first step in the house-buying process…

20 Comments

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  1. Peter says:

    David – can you discuss what happens when the mortgage period expires on a house that had 10% down, CMHC, bought for $900k, and then the market moves 20% higher – IE comps are way up. Is this mortgage now non CMHC insurable, or does it get grandfathered because no transaction occurred?

    1. Geoff says:

      ? CHMC is paid at the time the mortgage is issued, not renewed. So the mortgage was chmc insured at the time of purchase; what happens afterwards doesn’t really matter. Technically if the value of the house fell below the value of the mortgage the bank may call the loan but that’s the bank, not chmc. (And I don’t think that scenario has ever happened by the way).

  2. A Grant says:

    “About once or twice per week, I get a phone call that starts with, “Hi David, my name is [blank], and I’ve been reading your blog for the last six months or so, and well, my boyfriend and I are looking to buy a house in Toronto.””

    I would hope that anyone who has read your blog for at last 6 months knows most of these points (especially #s 2 and 3). If not, I would question their reading comprehension.

    That said, if buyers understand that it’s the comps that matter, not the asking price, that’s half the battle right there…

  3. Torontonian says:

    How is your advice different for buyers looking > 1M?

    1. BillyO says:

      Yes I would like to know this too, especially since $1M is becoming the standard for a detached home in most desirable areas of TO

    2. @ Torontonian

      Depending on the area, it can be more of the same.

      My colleague submitted a bully offer of $1.6M on a $1,469,000 listing on the weekend, and it was shooed away.

      In some areas of C04 right now, in the $1.8M range, you have an insane amount of choice.

      Builder homes in Leaside are in increasing supply, and even higher-end homes in the Beaches seem to be sitting longer.

      Then there’s the luxury market, over $3M, where ther are some real “deals” to be found! 🙂

  4. 30-something in TO says:

    This article definitely bang on. My only issue is that I think it may scare 1st time home buyers when there still are deals to be had. I’ve bought 3 houses in the past 6 years- two at Woodbine and Danforth and 1 on St.Clair W- all under $530,000. The first was for asking and the other two below asking. Our current house is a 3 brdm, 2 bath with parking, detached within a 10 min walk to Woodbine stn. All with inspection conditions. Before scoring these properties though, I lost many bidding wars on houses I loved and saw some really crappy houses. In all three purchases though I don’t feel I compromised. There was some luck involved but really I think advantage was that the listing agents were not doing their jobs well. In one case the property was listed on a Sunday, in all cases the photos on MLS were horrible and the houses were not staged. Timing was a factor too as I bought one on New Year’s Eve. I just wanted to point out that although it’s crazy out there, it’s possible to get a good deal with patience, persistence and a little out of the box thinking!

    1. 30-something in TO says:

      I should also mention that for 2 of the houses I bought, the listing agents didn’t hold open houses so I had to work with a buying agent to see them. Highly recommend that approach instead of touring open houses on your own without working with an agent.

    2. jeff316 says:

      Though I’d have to say buying in the last six years may not represent an accurate experience of the current craziness, I’d agree that inopportune listing times, stat holidays, listings with terrible/difficult/no photos, listings with incomplete/wrong info, listing without open houses and listings with outoftown agents or difficult agents are all your friend as a buyer – but to find those and deal with those effectively, you have to put in a lot of work.

      1. 30-something in TO says:

        Last purchase in Danforth Village was recent, still not unpacked 🙂 We did lose about 5 bidding wars before it though.

  5. joel says:

    Another point to add would be that if you want to “win” in a bidding war you have to be willing to go above what the comps are. There are buyers willing to add 25K-50K on top of what the comparables are and in order to get a house you can’t bid what it would have sold for 6 months ago.

  6. Joe Q. says:

    David writes: “… decision two years ago to implement a mandatory 20% down payment on houses over $1,000,000. This was intended to cool down the market, by causing borrowers to take on less debt, and take some of the borrowers out of the market, but instead, it caused the sub-$1M price point to catch fire.”

    I would re-frame this comment in the opposite direction: the idea that the CMHC would insure a mortgage of any size was a nine-year experiment (2003-2012) that ultimately proved too risky for the government. So far as I can tell (and in contrast to the changes in amortization length and debt-service ratios) re-instituting the mortgage insurance size cap was never pitched as a way to cool down the market or take borrowers out of the market, but rather as a way to reduce the CMHC’s risk exposure.

    Evidently someone in the government ran some numbers on high-LTV $1M+ mortgages and didn’t like what they saw.

    1. Appraiser says:

      @ Joe Q. Definition of ‘evidently’: in an evident manner. Synonyms include: clearly, obviously.

      As opposed to what you have actually displayed, which is ‘conjecture’: an opinion or idea formed without proof or sufficient evidence.

      1. Joe Q. says:

        Thanks for the English lesson, Appraiser!

        1. Appraiser says:

          Oh @ Joe Q., I’m afraid it was much more than an English lesson my friend.

          If you are going to pull conjecture out your arse, at least try to back it up.

          For example: “Of our total insurance-in-force distribution, five per cent of our mortgage portfolio had a loan amount exceeding $550,000 at origination. This includes high-ratio, low-ratio and multi-unit.” ~CMHC. http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/06/20-observations-on-the-new-mortgage-rules.html

          Rob McLister , the author of the article, then goes on to state: “As a pure guess, high-ratio million-dollar mortgages are probably near or less than one per cent of CMHC’s overall portfolio.”

          You see @ Joe Q., that’s how it’s done.

          Now here is some conjecture on mu part. The CMHC $1M cap rule was and is nothing more than political posturing, meant to look as though one is doing something, while not really doing very much at all.

          1. jeff316 says:

            “You see @ Joe Q., that’s how it’s done.”

            What, how to be a dick? Being a jerk always always hurts your argument.

          2. ScottyP says:

            Even Joe Q. is allowed to be wrong once in a while. No one is perfect.

          3. Peter says:

            You need to get laid, brotha.

          4. Joe Q. says:

            Actually, Appraiser and I agree that the borrowing cap was not re-instituted as a way to cool down the market or take borrowers out of the market.

            Where we differ is that I think the cap was re-instituted because someone in the CMHC or the Finance Department had concerns about risk in high-LTV mortgages on $1M+ properties. (The size of a portfolio is not the sole determinant of risk, so Rob McLister’s estimate is only partially relevant here.)

            I base this speculation on comments Flaherty made at the time, to the effect of just letting borrowers in this price range to work out their arrangements with the banks.

            On the flip-side, Appraiser thinks that the decision to re-institute the cap was pulled out of a hat, not based in any way on research or analysis.

            Neither of us work for the CMHC or the Finance Department, and Flaherty is no longer around to comment further, so we will never know for sure.

  7. FroJo says:

    Thanks, David. I can’t think of anything more valuable than a professional assessment of the market, communicated candidly to a client. I value your integrity, even as a lay reader who is not (yet) a client.

    From my limited, nervous-nelly perspective, this seems a crazy half-decade from the Toronto housing market. Or at least I hope it’s crazy. If it’s the new normal, then …

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