Confusion, Fear, & Gambling!

All three words were central to today’s blog post, and I couldn’t pick just one; hence today’s title.

I’ve noticed a new trend in Toronto real estate, and while it’s not new in a sense that it’s never happened before, the frequency with which it’s happening is certainly something we’re not accustomed to.

Real estate is an asset with no fixed value, and the red-hot Toronto market can produce different returns for the same property based on circumstance.

So let’s look at how some sellers are confused by the process, often act out of fear, and sometimes gamble with the results…

Gambling

If that blog title didn’t get you stirring your coffee a little faster on a Monday morning, then I don’t know what will.

There’s nothing quite like poker chips, dice, and playing cards to get your heart racing.

Have you guys been following “Fan Duel” and “Draft Kings” in the news?  These are daily fantasy sport sites, that don’t fall under the definition of “gambling” and thus aren’t regulated in the same fashion as lotteries or casinos.

It’s an amazing story, and if you haven’t heard about this yet, believe me – you will soon!

These two sites, and others like them, operate under an “exemption” to the Unlawful Internet Gambling Enforcement Act (2006), although we might call that “exemption” a “loophole.”  That Act was passed by Congress with an exemption for “games” like fantasy sports, which they deemed “a game of skill, and not chance.”

But me and my buddies, playing in the 14th year of our fantasy football pool, are a bit of a different animal from the $6 Billion business that has become “Daily Fantasy Sports” a la Draft Kings and Fan Duel.

Lawmakers across the U.S. are scrambling to figure out how to address this, and with the billions of dollars at stake, and the major players that have bought part of these daily fantasy companies (many owners of professional sports teams), not to mention the teams that have “partnered” with the daily fantasy sites (the Toronto Maple Leafs partnered with Fan Duel), I think defining “gambling” is going to take a decade in the U.S. courts.

So, with that little lead-in, let’s now talk about how Toronto real estate is sold.

Consider “luck” and “skill,” as they pertain to gambling, and now think about, oh, I dunno, say, listing your house for sale at $599,000, and hoping to sell it for $700,000.

Is it luck?

Is it skill?

Or is it a little bit of both?

The eternal real estate bears, and Realtor-haters will suggest that it’s “luck,” but they’re the same ones that say, “You just need to put a sign on the lawn, and the house will sell itself.”

The house will sell itself?

Is that like Justin Trudeau saying, “The budget will balance itself?”

Yikes.  Maybe I picked the wrong day to bring that one out…

In any event, my goal here today isn’t to convince you that a good Realtor has the “skill” necessary to get more for a property, and that “luck” doesn’t play a prominent role.

I want to instead shift the conversation back to the subject of today’s post, and talk about the “confusion” and “fear” that has began to creep into real estate.  Only then can we return to the conversation about “gambling.”

Consider how red-hot Toronto’s market is right now, and how real estate is sold.

It’s effectively “auctioned” off, but in a blind process, unlike what you might see at Christie’s or on “Storage Wars.”

Suffice it to say, there’s a lot at stake for a seller, right?

The average price of a Toronto home is now $627,395, so yes, there is a lot at stake for a seller when selling his or her home, and it’s certainly not a process to be taken lightly.

Most of the single-family, residential houses in Toronto are sold by “holding back” offers to a certain day, often by under-pricing them with the initial list price to make them look more attractive.

Then comes the actual “offer night” itself, and for a seller who has never done this before, or hasn’t sold real estate in a long time, perhaps the process can be confusing.

A seller might want a simple answer to a simple question: “What is my house worth?”

But in this market, “a house is worth what somebody is willing to pay for it.”  So how can you really know what a house is worth BEFORE it’s sold?

It’s nuts.  The logic in that, or the lack thereof, is just plain nuts.

But you see – that’s where the fear plays into things!

The confusion about market value creates a fear for sellers and listing agents alike, since to be perfectly honest, many of them have no clue what they’re doing.

Then eventually, comes the gambling, since in cases like this, there is no “skill” involved, but rather, it’s left to “luck.”

So now allow me to tell you the following story, where I’ll change the names, dates, and prices, but for which this account is wholly accurate.

A short while ago, a property came onto the market for $695,000, and I didn’t notice it because I wasn’t really in the market for that particular property.  The house sat on the market for 18 days.

Toward the end of those 18 days, a met a new client who was looking for a property exactly like this one, and low and behold, by the time I started to look on his behalf, this particular property was up for sale for $588,800, on the market for three days.

The property, of course, had a “hold back” on offers for nine days, but it was clear what had happened here – they listed for $695,000, the house didn’t sell, so they enacted good ole’ “plan-b,” and re-listed for $588,800, with a hold-back on offers.

Of course, I facetiously refer to “plan-b,” since I don’t believe you get a second chance to make a first impression in real estate, but that’s a topic for another day.

My client liked the house, and said he wanted to make an offer.  But alas – that damned “offer night” thing!

I called the listing agent, hoping to use some logic and common sense, and be very straightforward.  But unfortunately for some agents fear is a driving force in their business, and this guy talked himself out of a deal.

I asked him, “So the house was up for $695,000 and didn’t sell, and now you’re doing the whole ‘under pricing’ thing with the offer date, so let me ask you this: what does your seller want for the property?”

It’s a pretty simple, fair question, right?  But do you think, in a million years, he’d reason with me?

“Well, he wants to see what the market will give him,” the agent told me.

“The market gave him 18 days, unsold, at $695,000,” I told him, trying not be rude, but rather straightforward.  “I have a buyer who will make an offer on this house tonight if you give me a number that is to his liking.”

Simple, right?

Give me a number.  What could be more simple than that?

But many agents out there are filled with fear.

Fear of playing their hand.

Fear of being played.

Fear of losing.

Fear of making a mistake.

Where there’s a lack of skill, things are often left to chance.  Or “luck” as you might have it.

“I would assume the ‘magic number’ is somewhere between $588,800 and $695,000, correct?” I asked the agent.  He agreed.  “So what is that number?” I asked him again.

There was a long pause, and he said, “There’s no number,” he said.  “My client is going to see what comes to him on offer night.”

Goddamit.  Remember when we used to price things at market value, and a “list price” meant something?  Remember when two agents would work together to get a deal done?  Now one agent just gets in the way of both agents, and the deal itself.

I told him, “It could be $620,000, $650,000, $670,000 – it could be anything.  But what I’m saying to you is that I will put an offer in tonight with my client, unconditional, if you give me a number, and my client likes it.”

As you might guess, the agent was too afraid to play along.

I finally asked him a question to which the only answer is “yes,” just to see how he’d respond, and said, “What if I brought you an offer for $695,000 tonight?  Would your client accept it?”

Simple enough?

Nah.  Not for this guy.

He stuttered and said, “Well he might get that on offer night, so we wouldn’t be looking at that offer tonight.”

Unbelievable.

And that’s where the gambling comes into play.

Think about it – this house was on the market for $695,000 for 18 days, and the house was unsold.  On day #17 of that listing, they probably would have jumped at an offer of $680,000.  So here I am, asking him a simple question about whether he’d take $695,000, now that it’s listed at $588,800, and he can’t get past his own confusion and fear to say “yes.”

So what happened next?  Well, naturally we gave him an offer!  That night, we emailed over an unconditional offer for $680,000, with a 3-hour irrevocable, and guess what?”

They turned it down.

They said they wanted to wait until “offer night.”

Even though they would have jumped at an offer of $680,000 when they were sitting on the market at $695,000 for 18 days, for some unknown reason, they turned this down, now that the house was priced at $588,800.

My honest feeling here is that the agent and the seller were scared.  They didn’t know what to do, so they did nothing.  They didn’t want to make a mistake, so they didn’t act.

My client went out that weekend and bought a house two streets over (it too had an offer date, but we submitted a bully offer and it was accepted), and so we didn’t really pay attention to the “offer night” for our confused, scared, gambling friends, listed at $588,800.

But three days later, the $588,800 listing was terminated, and the house came back on the market at $690,000.

That’s right – $10,000 more than we had offered, $5,000 less than their original list price, and $101,200 more than they had just been listed at.

What an absolutely ridiculous game.

And what an epic waste of time!

On “offer night,” there were five offers on that house, and while I don’t know what the highest offer was, I can guarantee it wasn’t $680,000!

Five buyers and Five agents wasted their time, and a whole lot more will waste time dealing with this ridiculous agent, and his ridiculous seller.

It’s unfortunate that these pricing games are allowed, but I don’t see any alternative.  We can debate “rules” of pricing and selling real estate another time, but the take-away from today’s blog post is that a lot of people are “afraid” of today’s market.

I’ve seen this a lot lately.  The listing and re-listing of properties, at various prices, with various “strategies,” is borne out of fear of not knowing the market, and not really knowing the best way to proceed.

It’s like those two roads that diverged in the woods.  Except you don’t take the one road, but rather you go a wee-bit up the first road, then turn around and go back to take the second road a wee-bit, and then turn around yet again.

With all that is at stake when selling real estate in today’s market, I suppose I understand the confusion, and I know that can lead to fear.

But when fear leads to gambling, and giving way to random luck, then maybe it’s time to consider why you didn’t take the “skill” path from the get-go…

9 Comments

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  1. Gloria says:

    Thanks for sharing such an interesting story but I cannot help but ask was the agent Asian – whether it be Chinese or Indian? I’m sorry, but I am Asian myself and have dealt with 2 Asian realtors in the past for buying and selling, and I must say, they do not know how to sell real estate or represent their buyer professionally. There are so many (excuse my language) crappy – unprofessional realtors in the business that it really disgusts me. Ultimately it’s the client who suffers for their lack of professionalism and it’s a shame. David I appreciate your insight on real life situations in the real estate market. Hope to work with you sometime soon!

  2. condodweller says:

    David, you left out one important piece of information here: what is the fair market value of the house based on your research and looking at comps, excluding gamesmanship? We know the price is whatever the buyer will pay for it, and in some cases they go way over the “fair” market value and some way under. The starting point should be the average of what a handful of agents would value the house at with the final price determined by what the highest offer is, assuming the seller wants a quick sale and isn’t willing to wait for a higher offer to come along.

    Let’s say the “fair” market value determined by the seller’s agent was $750,000 and he already underpriced it at $695k. Perhaps he received several offers over $695k and under $750k which is why it wasn’t sold. At this point, the agent sold the buyer on the idea of under pricing to see what would happen. When they again failed to get an offer close to $750k they took it off the market. What puzzles me is why would they relist at $690k when at $695k they didn’t get an acceptable offer. I mean it is possible that someone will enter the market and love the house and make an offer higher than the highest offer at $695k.

    My biggest issue in all this is that when the asking price was $588k and they received 5 offers, most of which I assume was over the asking price, they didn`t accept an offer. If I made an offer over asking and it was not accepted and the house did not sell, I would be very annoyed as I would take it as a huge waste of my time.

    In the past you asked what would make the system better. I say the best way to improve the system is to force the seller to accept an offer over the asking price. That way it will be guaranteed that the list price will be close to fair market value and the offers will be close to the asking price not wanting to overbid, which they may still do in a hot market if they wished.

    You calling other agents names because you see no logic in their action is like Don Quixote`s attack on windmills. I get that you are frustrated with the system, but it is what it is.

  3. Libertarian says:

    Isn’t a big factor in the above example the motivation of the seller? Considering the seller let the property be listed for 18 days, then re-listed for another 9 days, and then re-listed again for however many days, it would appear that the seller is not in a rush. I’m always fascinated that agents want every transaction done in a week. If the seller wants $700,000, then shouldn’t the seller wait for that one person to come along willing to pay that amount? Isn’t it the agent’s job to go out and find that one person? There are new buyers coming into the market every day, so I don’t blame the seller for waiting.

    1. Noel says:

      You are on to something. The telling research on this is the book Freakonomics where the authors investigated thousands of real estate deals in Chicago and found that if it was an agent selling their own home the house stayed on the market an average of 1 month longer. Why? Because the agent then got 100% of the increase in selling price over taking any offer that came in early, whereas if they were the agent on a house not owned by them (the typical situation) they only got 2.5% of the upside. The prime motivation of agents is to get the deal done and move on to the next, not to get you the highest price. Also, there is the risk that the listing period could expire and the house would be listed with a different agent rendering your work useless.

      So, churn those deals is the primary motivation of agents. It’s not rocket science to figure this out. Follow the money and what incentivizes the agent and the answer is VERY clear. It’s their interest they have as the primary motivator, not yours. Any agent that tells you otherwise, including the author of this blog is blowing smoke up your you know what!

      1. condodweller says:

        On brig city broker Brad Lamb and his agents showed really well it was all about pressuring the seller to agree to sell at a lower price rather than them spending more time or more marketing to get the asking price.

  4. Kyle says:

    I suspect these “strategies” are all just symptoms. The real problem, is the seller has unrealistic expectations, which are usually formed by some Agent saying, “Your house is worth X” – which it isn’t.

  5. Joel says:

    How much of this is the agent and the seller wanting different strategies. To me this sounds like the seller wanted to list their property at the value they wanted and when that didn’t work the agent talked them into selling in the bidding war strategy that is more common in Toronto.

  6. Noel says:

    Btw, I monitor house prices in Toronto very closely, especially Rosedale where many of the so-called ‘high end’ agents from boutique and ‘high end’ brokerages list homes. They often languish on the market for well over 30 days with many over 60 and 90 days. If the agents are so smart in marketing these homes so well then they wouldn’t languish so long. Yes you can say that it’s the fact their are fewer buyers with the kind of coin to buy such high-priced homes, but then what does that have to do with ‘marketing’ the home rather than waiting for the right buyer to come along? Not much. Often the houses are eventually reduced in price and often re-listed (not reduced) at a lower price so they look like a new listing. As such, beyond the items I enumerated in my previous post, there is really not much an agent can do to help get a house sold except lower the price. This whole business of ‘marketing’ is anything an agent with half a brain can do.

  7. Noel says:

    You are right that there is no alternative to an open and free market for people to negotiate how they want to. We live in a capitalistic democratic country not a dictatorship.

    As for “You just need to put a sign on the lawn, and the house will sell itself.”, after the staging is done, flowery MLS listing is posted, pictures, brochure, perhaps custom website and video are done, agents open houses are held and the listing is splashed across social media, ALL of which is not rocket science for any agent with half a brain, it’s going to be price that sells the house. Many man agents have told me and it only makes sense that if you do all of that and the house does not sell after a reasonable time on the market then price is the reason. Yes, the agent you described above was a bit of a dweeb in terms of negotiation as he simply refused to negotiate at all, but I think he was right in basically saying bring me an offer and we’ll talk and you were the dweeb in not simply making an offer instead of engaging in the meaningless back and forth with him. Rule 1 of negotiation when you are selling something is to ask the other party to make a bid not telling them what you will accept. That eliminates the risk of you providing a number that was lower than what the other person would have offered. If they can’t bother to make a bid then they aren’t serious.

    Also, as an agent you should and I trust do know that you cannot name a price the client will take without specific authority from the client or you are in violation of RECO’s rules. So, you attempting to bully him into giving you a specific price was not successful specifically for that reason at the particular time you were doing it because he likely did not have the authority from his client to give you that number, right?

    Anyway, the behaviour of the agent after you made that bid indeed does not make much sense. However, again, you do not know how his behaviour was guided by a client that refused to listen to the common sense of their agent. I am sure you have encountered that with clients of yours so there is no way you can no who the ‘guilty’ party was. However, I do agree that there are some agents who really don’t know what they are doing and act irrationally. This guy might be one or he might not.

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