I’ll ask the question, but it’s almost rhetorical, since you know I’m going to give you my answer and explain why.
Some buyers in this market are targeting types of houses, and making offers at their comfort level, hoping to “win” one eventually.
Other buyers are targeting properties at which they feel they have a chance to “win,” given their affordability.
Let me explain which of these is the proper method, and why the other makes absolutely no sense…
When you approach your real estate search, would you say you’re more like Ben Stiller, or Owen Wilson?
Laugh if you know where this is going…
Remember the 2004 remake of “Starsky & Hutch?”
Remember how painfully awkward some scenes in that movie were?
The first time I saw the movie, it had some great moments, but on the whole, it wasn’t very good.
I remember saying, “It’ll probably end up being like Zoolander or Anchorman, in that you won’t like it the first time you see it, or the second time, but by the third time, it’s etched in your brain forever, and it’ll go on to be a cult classic.”
I think we can all say that’s true of Zoolander and Anchorman.
But in the end, and after having seen it three times, I can tell you that nothing changed for me. That movie just sucked.
There is one line from the movie, however, that I’ll always remember.
It’s hilarious in its intended form, but it’s also metaphoric, and I’ve found myself using this in many other arenas of life.
Take a look:
That never gets old.
And they picked the right character for each line too.
So let me segue back into today’s blog post, and hopefully that movie clip will make sense.
If you’re a buyer in this insane market, and you’re looking for the holy grail of real estate – the freehold single-family home, would you, as Owen Wilson put it, “Just take anything?”
It depends on your situation, of course.
I have clients buying with a 7.5% down payment, who want the best house they can find for $999,999 or less. And I have clients who are buying in cash, and will take a house at $1M, $2M, or $3M, depending on what they get for their dollar.
But if you find yourself in the first camp, and you have serious restrictions on what you can spend, do you:
a) Bid on houses you like, regardless of your chance of getting them, until you “win” one?
b) Specifically target houses that you think will fall in your price range?
You know where I’m going with this one.
I’m always shocked, when I’m on the listing side, at the person who bids the list price when there are nine competing offers.
It makes no sense, but it happens, and it will continue to.
The market is not perfectly efficient, and thus there can be what we think the property should sell for, and what it could sell for.
Last fall, I had a conversation with a “big-time” listing agent, where we could not have possibly disagreed on strategy with regards to working with buyers in this market.
My clients were the tough-luck 7.5% down payment buyers, meaning they were looking at every house with a maximum of $999,999.
Every week, we would see 2-3 houses that had potential, and it was a matter of waiting until offer night to see what the action was like.
A house listed at $799,900, with three offers, could work in our favour.
But a house listed at $799,900, with fifteen offers, would undoubtedly go over our $1M ceiling.
As I said: the market is not perfectly efficient. There are often large fluctuations in price potential and actual.
Offers could be reviewed on the night of a massive snowstorm. I sold a house to a buddy on Cranbrooke back in early 2016 for $1.8M that “should” have sold for $2.1M, but there was a massive snowstorm that night, the city was chaos, and in the end, I had the only offer.
Offers could be reviewed on the same night as another similar property, or two, or even three when the market is busy. I’ve seen this happen before, when the buyer pool is split among a number of houses in the same price point, in the same geographic area, and usually one of them craps out, or sometimes all of them sell for moderately less than expectations.
And on the flip side, offers could be reviewed in a week where absolutely nothing else hit the market, and every buyer is lining up for that one house.
So last fall, I had lost on bids with my buyers on two houses – both in Leslieville, that sold for over our $999,999 ceiling.
We knew that eventually we would find a place, but we just didn’t know which one.
Most buyers have a “soft cap” on their bids. They “want” to spend a certain amount, say, $1,100,000, but they end up bidding $1,125,000 on offer night, and when there are twelve offers and it’s down to only two – them and one other, they make that push to $1,155,000 to tie it up.
But my buyers had the hardest of hard caps. They simply couldn’t go any higher.
On one particular night, there were three houses taking offers, all of which could work for us (times have changed, eh? three options in a single week?), and I was trying to figure out which would have the most interest, and which wouldn’t fall to us under one million dollars.
There was one house, that I honestly thought could get $1.1M or $1.15M, that had only one registered offer at 5:00pm, so I called the listing agent to dig a bit further.
I asked her for a copy of the home inspection, and that’s when things got………weird.
To this day, I still can’t figure it out, and I’ve thought about this several times since then.
She said, “You’re calling me at 5:00pm on offer night, asking for a copy of the inspection?”
I told her that my clients were through at the open house, and they looked through the inspection at the property but wanted to look at it one more time.
She said, “Will you be coming in with an offer?”
And I told her, “I’m not sure yet. It depends on what the action is like.”
She reiterated that she didn’t understand why I was asking for a copy of the inspection two hours before offers, and complained that she had to go home, change, drive to the office, and prepare for offers, and that she didn’t have time to send it to me.
I said to her, “I don’t need a paper copy,” not trying to be facetious, but to point out the obvious. “You can just forward a PDF from your phone.”
“Why don’t you call your clients, and see if they want to offer, and if they do, then I’ll send a copy.”
It made no sense to me, and I told her that.
“Don’t you see how we would like to see the inspection before we decide to offer?” I asked her.
Then I simplified it a little bit.
“This is me, we’re talking about here. You know me. We’ve done deals together before. I’m not a fly-by-nighter, you and I are both top agents, what am I missing here?”
She then said, “There’s a lot of agents out there collecting home inspections, and I don’t like it.”
Again, to this day, I have no idea what that meant, and perhaps this isn’t really central to the theme here, but I wanted to lay out the entire conversation for context, as we get to the crux of today’s discussion.
I then said, “All I’m asking for is for you to click ‘forward’ on your phone, let my client look through the inspection, see what the action is like at 7pm, and then decide if we’re coming in.”
That was her “a-ha” moment, and she pounced on it.
“What do you mean ‘see if you’re coming in?'” she asked.
“Are you, or aren’t you?”
I had nothing to lose; no hand to show. So I told her, “We can only go up to $999,999.”
I thought that was a conversation-ender, not a conversation-starter.
“So what?” she asked. “What does your affordability have to do with the offer?”
That made absolutely no sense to me, and now she and I were getting into it.
“It matters,” I told her. “It’s the entire matter. Why would we bid on a house that’s going to sell for far more than we can afford?” I asked her.
“Because that’s what you do. You pick a house, you like it, you bid what you can afford. If you get it, great. If not, you move on.”
“No,” I told her. “Absolutely not; that’s not how it works in this market. We’re looking at three houses tonight – yours, Woodycrest, and Pretoria. We’re looking for the one that might sell under a million dollars,” I explained.
“Well David,” she told me matter-of-factly, “That’s just not how it works. You pick the house, not the price.”
“Well,” I told her right back, as I desperately tried not to make it personal, but clearly failed, “I do fifty buy-ends a year, and I’m telling you this is how it works.”
She fought right back with, “Well I’ve been in the business twice as long as you, and I’m telling you, aa-gain, that it’s not.”
The conversation ended somewhere around there, and by 7pm, she only had four offers, but the property still sold for over $1.2M.
We ended up buying another house for, you guessed it, $999,999.
But I looked back at that conversation so many times last fall, and even more so into 2017.
I still think that her logic is flawed in this market.
I think it’s misplaced, and belongs in a completely different market, where the ratio of buyers to sellers is balanced, and where supply is much higher.
Picking the house you “like” and then seeing if you can afford it just isn’t a luxury we have in this market.
It’s like the buyer client working with a $900,000 budget, who constantly sends you MLS listings for properties that are priced at $899,900, with a hold-back on offers. You know these are going to sell for $1.1-$1.2M, and you’ve told her that before, but she still keeps sending them.
“These are the ones I like,” she always says.
Life isn’t like that.
And nowhere is that more abundantly clear than in the 2017 Toronto real estate market.
In this market, you have to look at what you can afford, figure out the house type, style, size, and location that will fall within your affordability range, and target those properties as they hit the market.
To look at “houses you really, really like,” ignore feasibility, and hope one day you can find one at your price level, is like continuing to cast your fishing line in a pond with no fish. You’ll just sit there, and time will pass you by.
Except in the real estate market, time is a currency. As time passes, prices increase.
So if you’re an active buyer in this market, learn this lesson now, instead of after you make three offers at $900,000 only to see those houses sell for $1.2M.