How Much Competition Is Too Much?

How many competing properties is too many to continue to attempt to sell yours?

Ask the sellers of some downtown condos right now who are facing unbearable competition…

CompetitionDeMotivational

One of the most frustrating facets of real estate is that you can’t predict inventory.

You can predict, based on previous years or months’ sales, what the volume of listings or sales will be, but you can’t predict the quality of inventory, the type, or the timing.

I often tell my buyer clients, “We’re at the mercy of the market and what it gives us.”

If a buyer is looking for a 3-bed, 2-bath, semi-detached house for $599K on East Lynn or West Lynn, south of The Danforth, we might find that next week, or it could take six months.  There’s just no way of knowing when that property is going to hit the market.

I often email my buyers five or six listings in a week, and just as often, I’ll send them a Friday email saying, “Sorry, it was a slow week!  Nothing new, but let’s see what next week brings!”  That upbeat, helpful email gets pretty old after the third or fourth consecutive week!  But when there’s NOTHING to show your clients, your hands are somewhat tied.

Some buyers have incredibly specific needs.  “For $370,000, I’m looking for an 800 square foot, authentic hard-loft conversion, east of Dufferin, west of Bathurst, minimum 12-foot ceilings, west-facing with large windows, and no owned parking space.”  Okay, well, you may have just limited yourself to about fourteen units in the entire city of Toronto, so I’ll let you know when it hits the market!  It could be a year, FYI…

Houses or condos, east or west, big or small – it’s next to impossible to predict inventory.

There is, however, one caveat to that rule, and it comes with new developments.

You can GUARANTEE that when a new condominium, in the occupancy phase, is finally registered as a “Condominium Corporation” and owners undergo final closing, units are going to absolutely flood the market in the coming weeks.

It doesn’t matter which building we’re talking about, how much the units cost, what the demographic is, or how long the occupancy period was.

You can guarantee that a newly-registered condo will provide the market with more supply than is needed.

And as a result, it’s very difficult for sellers to sell.

It’s basic supply and demand, folks.

And what happens when there is too much competition among sellers?  Prices drop.

Let’s start with the resale market for an example…

I remember back in 2011 when I had a listing in my old building at 230 King Street.  This building, for a short period – say back in 2008, was one of the hottest buildings on the east side of downtown.  It’s funny how buildings run hot and cold, but while this building had a period where every unit received multiple offers, that died out, and in 2011, I had a listing I couldn’t get rid of.

My clients had purchased only one year earlier, and suddenly got spooked by the condo market.  They purchased a house in Leslieville, which was a downright steal, and has out-appreciated the market average since, but they ended up taking a small loss on the condo.  Here’s why…

As I said before – this building used to get multiple offers on all its units.  In 2008 and 2009, you might get one listing available for sale, and there might be 6-10 buyers looking to buy it.  The supply was low, the demand was high, and I was in bidding wars with a dozen buyers on more than one occasion.

When my clients went to list their condo in 2011, there was one other unit on the market that might have competed with us.

The day we listed, a very similar unit was listed as well.

And two days later, a slightly more expensive unit was listed, making it four units, priced between $379,000 – $429,000.

The following week, as luck would have it, two more units were listed in and around our price point.

I had never seen a time when SIX units were listed for sale, all 1-beds or 1-plus-dens, some with parking, some with a second bath, but all within essentially the same price point.

To make matters worse, there were two other listings for larger 2-bed, 2-bath units, around $499K, so people browsing MLS would see that EIGHT units were listed for sale in the building, which made people ask, “What the heck is going on there?”

The perception was bad, and the feedback wasn’t any better.  We had a ton of showings, but no offers.

We knew it would only get worse, so we made an aggressive price drop, and got the unit sold.  My clients sold for slightly more than they paid 12 months earlier, but they got out, and the other five units continued to sit and rot.  One of the units made four price reductions before it sold – three months later.

Sometimes, the timing just doesn’t work out.

But in the resale condo market, you can’t predict the inventory.  And when the supply is high, the prices suffer.

So back to the conversation about new condo developments; you can sure as hell expect that 10% of the building will be for sale in the first month after registration!

I remember when 150 Sudbury Street was registered in 2010, there were over forty active listings within the first six weeks, and sales, as you’d expect, were sluggish!

My colleague recently listed a unit at another west-end condo development (the deal is still conditional, so I don’t want to give out the name), and he said from the start, “This is not going to be easy.”

There are currently thirty-three units for sale in this condo, which is a mid-rise development.

The problem, of course, is that no matter what unit you have, there are going to be 2-3 units directly competing with you, and probably 5-6 in the same price point.

My colleague’s unit was a small 1-bedroom, priced at $299,000, and competing with his listing were:
five other condos listed at $299,000
eight other condos listed between $260,000 – $298,000
four other condos listed between $300,000 – $320,000

So you’ve got five units that are directly comparable at the exact same price, and every buyer who walks in there is going to see them all.

Then if you add in the eight units priced slightly lower, and the four units priced slightly higher, you’ve got SEVENTEEN units that are competing with your listing.

SEVENTEEN.

What leverage could the seller possibly have in a negotiation?  (That was rhetorical…)

Imagine being priced at $299,000, with seventeen competing units, and getting an offer for $280,000 as a “first and final offer.”  How the heck do you turn that offer down?  What’s the upside?  Even worse – what’s the downside?

What if next week, five more listings hit the market?  And then five more after that?

I’m not saying you need to firesale the condo, but I am saying that you need to have a plan.

Any buyer of a pre-construction condo has to have some sort of long-term strategy (most don’t…) regarding the disposition of the property.

I always reccommend that the owner lease the condo out, and wait 6-12 months to sell after final closing.

Sure, there are the GST implications when you rent a condo out (you no longer qualify for the rebate), but what’s the alternative?

First, consider that you’ll eat the occupancy cost (assume on average, $1,200 per month, and assume the average occupancy period is ten months in Toronto) when the unit sits vacant, then you’ll probably take one on the chin when you go to sell and compete against SEVENTEEN other units.

Maybe foregoing the $6K in HST rebates is worth not losing 3-4 times that?

The problem is that most people are so drained after the occupancy period and final closing, that they just want the unit gone.

But if you have the wherewithal to wait until the market has absorbed all the inventory, you’ll be competing against a fraction of the sellers down the road.

I would hope that anybody who is currently holding a condo in the occupancy phase is aware that as soon as the building is registered, the floodgates are going to open.  But what I’ve come to realize through some conversations in the past few months, is that many people are caught off guard.  I received an email from an owner of an east-end loft (smaller project – only 80’ish units) that said, “I wanted to sell my condo, but there’s six units on the market already!  Where did all these people come from?”

Where did they come from?  Really?

I can’t tell you how many $499,000 bungalows are going to be listed in East York in the next month, and I don’t know when you can expect that renovated Victorian semi in Beaconsfield village.

But I can tell you that any condominium that is just about to undero final closing is going to have a painful amount of competition

9 Comments

Post A Comment

Your email address will not be published. Required fields are marked *

  1. Jason Molluso says:

    Hi David,

    Good post! I’m going through the same situation with your ‘favorite’ developer right now and I’ve decided to take the unit off the market and wait until next year. I was aware that a number of units would come on the market, but I have an early close and I thought I may be able to beat the crowd.

    As an aside, a GST/HST rebate is also available for rental properties where you sign a 1 yr lease. It is equivalent to the rebate for owner/occupied units, but you have to file all the paperwork yourself and wait a couple of months to get the refund.

  2. AndrewB says:

    Insightful article, and a topic that I have often thought about as I search for a place to buy. With so many new constructions coming so quickly and prices being so ridiculously high for so little space, one has to wonder where the value is in new construction condos. Almost 400k for a mere 700-800 sq.ft.! That’s nothing.

    One particular area I had interest in at one point was Liberty Village. Condos were popping up left right and centre. Now, there are literally over 50 listings in that small little neighbourhood alone, with units that don’t seem to move. Quite frankly, the new developments needs to slow down and allow existing inventory to start dwindling.

  3. lui says:

    David if there is say three identical condos would it be wise to say rip out the carpet in the bedroom and install laminated,add a fresh coat of paint,stage with some nice furniture ..would that give a seller a bit of a edge…..

    1. @ lui

      Absolutely – a seller should do everything possible to showcase the unit! Most new condos don’t have carpet, and theoretically, everything should be “done” in a new condo. But if a seller of, say, Unit #1001 is competing against #901 and #1101, and they’re all the same floor plan, better flooring, nice paint colors, custom closet organizers, pretty light fixtures – these things can be done for a few thousand dollars, along with staging, to showcase the condo.

      Think about a vacant condo, that has foot prints all over, busines cards scattered on the counter, junk mail slipped under the door, with dirty windows, and no character. Now consider a clean, updgraded, staged condo with great flow between couches and tables, that says to buyers, “THIS is how you’re going to live.”

      Spend some money, and get the condo sold. What’s the alternative? Sitting on the market for 6 months and complaining that the condo won’t sell?

      1. lui says:

        On the other hand I seen some terrible staging at some newer condos where it look like they found some old furniture in their basement and dusted it off and decided to use these items as “staging pieces”.I seen one condo where EVERYTHING was from DWR (design within reach) but it didn’t sell for months,I think if you put lipstick on a pig its still a pig but at least you would take notice…lol…..

  4. Jin Won Choi says:

    That’s very insightful. Thank you.

  5. Jin Won Choi says:

    Thanks for being very frank. It sounds like there are a lot of speculators today that’s in the game of flipping presold condos. Has that always been the case, or are there more of them today?

    1. @ Jin Won Choi

      I’d have to say that there are far more today.

      Back in the early 2000’s, you could throw a dart at a board to pick which pre-construction condo to invest in, and you’d make $100K.

      $100K profits were easy pickings up until about 2007-2008.

      Once the masses caught on, developers raised pre-construction prices to be level with resale.

      The problem is – everybody and their grandmother had heard about “how much money can be made flipping pre-construction condos,” so now your barber and your cab driver each own three condos in pre-construction.

      The early adopters made all the money, then as the curve went south, the laggards are the ones helping developers to make profits while they contemplate selling at a loss while competing against 40 other units.

    2. Huuk says:

      Jin, Toronto has been condo flipper paradise since the early 2000’s. Much (Most?) of the marketing for condos in the past decade has been dedicated to positioning the property as an ‘investment’…thus drawing in flippers.
      Without any metrics to base your question on, I would give my opinion that there more flippers, year over year, today than there were 10 years ago. With that being said, I think we have gone over the top of crest and there will be less flippers in Toronto condos moving forward…its just too risky with the number of units being build and the high price per sq foot.

TWEETS