Raise your hand if after reading the subject line, your mind immediately went to Billy Idol, and “Dancing With Myself.” That’s where my mind went…
Today, I want to try something interesting: I want to provide two stories, both which result in implied arguments, and note that both stories contradict each other.
Both stories involve pricing houses, trying to determine fair market value, and cast a light on a buyer-agent’s responsibility to his or her buyer-client.
Afterwards, you’ll either agree with one of the arguments, or agree that both are valid, and every situation in real estate is different…
“On the floor of Tokyo
Or down in London town to go, go
With the record selection
And the mirror’s reflection
I’m dancing with myself”
It’s sheer genius, I tell ya.
And despite having the single greatest song ever recorded by mankind, Billy Idol was also able to produce “Mony Mony,” “White Wedding,” and of course, “Rebel Yell.”
But enough about God.
Today, let’s talk about pricing.
If you want to end the argument before we even start it, and simply say, “Who really knows what anything is worth in Toronto these days; the market is nuts,” then I suppose we’d be hard pressed to argue with that.
But in lieu of a fatalist attitude, let’s try to come up with an answer to the question: “Is a property really worth what somebody is willing to pay for it?”
Let me tell you two stories…
Last week, I showed a very small “junior one-bedroom” condo to a client, who was an investor looking to rent the unit out, and hold it long-term.
The unit was in an A+ location, in an A- building, but the unit was somewhat unspectacular itself. I mean, how can a 450 square foot unit really impress you?
Perhaps that’s not fair; for what the unit was, it was pretty good. The finishes were upgraded, it was well laid-out, and there would be absolutely nothing for the owner/investor/landlord to do.
The unit was listed at $279,900, but we knew that was high. Really high, in fact.
There was an identical unit that was sold conditionally on MLS, so we didn’t know the price, but the unit was listed at $269,000.
When I say “identical,” I mean that unit 105 is the same as unit 205, which is the same as unit 305, and so on.
A few days after we looked at the $279K unit, the same unit came onto MLS for $269,000, and sold that very same day. Literally six hours on the market, and gone!
The next day, the conditional sale firmed up and the price was released: $263,500.
It didn’t take a genius to see what this unit was “worth,” or rather the ballpark in which you could play with the price.
We drafted an offer of $268,000 for the unit priced at $279,900, and sent it in.
Wouldn’t you believe that a competing offer came in the very same day?
The listing agent called me and said, “I told my client to take your offer – $268,000, that’s what it’s worth. We knew this based on the other two sales. But before I could even send him the offer, this other agent registers his!”
I told the listing agent, “No worries, but we’re out. Take the other offer.”
He said, “Nah, come on, there’s no guarantees here man, yours could still be good. Or if you want to come up a bit, who knows.”
I told him, “I know. I just know that the other offer is going to be from some genius fresh out of the institute of higher learning known as ‘OREA College’ and they’ll figure, ‘Well, we’re in competition, so we’d better go above asking.’ I just know it.”
The listing agent laughed and said, “Well I certainly hope so for my client’s sake, but I won’t hold my breath!”
A few hours later, he called me and said, “Wow. I mean, wow. The other offer is way, way higher.”
Some genius bid over asking to “win” the property, when the list price was so goddam high to begin with.
The same units – SAME identical units, had just sold for $263,500 and $269,000 within the previous ten days, and somebody goes and pays $285,000.
Congratulations? With a question mark(?)
Bosley Real Estate is one of the industry leaders when it comes to training new agents, and “Bosley University” is the 10-week training program that new agents are put through like boot-camp.
From time-to-time, I’m asked by the Bosley brass to come and help out with the rookies, and in recent years, they enjoy having me come into their role-playing sessions when dealing with multiple offers, and act out the role of the listing agent.
We were role-playing a $2,300,000 listing, with 14 offers.
The rookies all presented their fake offers – according to notes the managers had given them, and then I took over in terms of “what happens next.”
I wanted to test out this one guy, so I signed back his offer of $2,450,000 at $2,600,000, even though I had 13 other fake offers. I had a feeling I knew what he’d do, and he walked right into it.
He came back and sat down, and I said, “Do we have a deal?” He then said, “Well folks, I’m here to negotiate tonight, and so, no, we didn’t take your sign-back of $2,600,000. We signed it back to you at $2,500,000.”
I then held up two other fake offers of $2,700,000 and $2,750,000, and said, “Buddy, you screwed up tonight.”
It was a lesson learned by all. All, except for that one guy.
He immediately started to say, “Well, that’s too much. It’s too much for the property.”
Now keep in mind that this was all fake; they had done an appraisal one somebody’s property, but the whole multiple offer situation was fake, and anything could have happened.
But the theory behind what he was saying, and the conversation that ensued, was real.
He announced, “How can I have my clients pay $2,750,000 for that house? It’s not worth it. We signed back at $2,500,000 because that’s what we felt it’s worth.”
I told him, “But then what do you say to the person who offered $2,750,000? Or the person who offered $2,700,000? Are they wrong, and you’re right?”
He said, “Well, I wouldn’t put it exactly like that, but yeah.”
I told him that there were another four offers that were higher than his, and asked him to clarify his statement about the price being “too much.”
He went on about how it’s his job to get his clients “deals,” and how they need to “feel like they won something.” They needed to “know that they didn’t over-pay.”
I asked him what market he was working in, because it sure wasn’t Toronto!
Look, I’d love to get all my clients “deals,” but in one of the hottest markets on planet earth! We’re in a free market – a market where supply does not come even close to meeting demand, and where people pay what they need to in order to buy a house.
I told the rookie that if he was going to suggest that when SIX offers are higher than his, that somehow he’s right about the price that the house “should” sell for, then he’s doing his clients a disservice. They’ll never be successful in this market, and the market will continue to appreciate around them as they continue to look for that “deal.”
How does a person “Know that they didn’t over-pay?”
His argument was circular, and contradictory.
He wants to ensure that his clients don’t over-pay when in multiple offers. But when you buy a house in a multiple offer situation with fourteen offers, you beat out thirteen other buyers who had access to the same information that you did. So didn’t you “over-pay,” theoretically?”
In the role-playing example, if the sign-back he provided to us at $2,500,000 was the highest, and the other six offers hadn’t beaten his, would he still feel like he “got a deal?” Would he still suggest that his clients could “know that they didn’t over-pay?”
Pick A Side?
Is one of these arguments right?
Or are they both right?
Perhaps the second story was a bit more argumentative than the first, but that’s because I was the one playing Devil’s Advocate in the story!
I think I already know some of the critiques of these two stories, and if you’re going to suggest that these two cases are different, I’m sure you’ll note:
1) One property was a condo, the other was a house.
2) One property was the bottom-end of the market at $270K, the other was the higher-end at $2.6M.
3) One property was for an investor, the other was for an end-user.
These points are all true, but when it comes to value, does it matter what the property is being used for?
If you purchased an income fund or a REIT, would it have a different intrinsic value if it were in your RRSP, TFSA, or Investment Account?
Well, perhaps the tax on the dividends is the variable there, since the three accounts provide for deferred tax, no tax, and full tax respectively.
But does the value of the property differ if you’re an investor versus a user?
Is there such a thing as an “emotional premium” on a property, or an “intangible” that adds to the price, AND is justified in doing so?
How do you differentiate between these two situations?
In the first, I’m arguing that you CAN over-pay for a property, and that it’s often easy to see when somebody is doing so.
In the second, I’m arguing that the person who submitted an offer in the middle of the pack is naive for doing so, and foolish to think that the high-bidder over-paid.
Is there a middle of the road here?
A point I’m missing?
Or am I just arguing with myself?