At times, I feel like that is my job. And when I’m successful, I feel like I should go out and actually buy a ticket from the OLG…
I’m talking about attempting to pick the “winning” number when guiding a buyer-client through a multiple offer process, and competing against, five, ten, or twenty other offers.
Somebody suggested to me the other day that, in this market, “it’s all luck.”
I couldn’t possibly disagree more…
What is the opposite of luck?
Is it skill?
For the purposes of this argument, I’m going to suggest that it is.
If you’re a buyer trying to decide between offering $915,000, or $918,000, and one of those offers gets you the property, and one doesn’t, then I suppose there’s some luck involved.
But what was it that stopped you from offering $815,000? Was that luck? Or was that skill?
A cynic, ie. me, might suggest that it was logic, and perhaps a most basic level of intelligence. But take the cynicism out of it, realize that market participants in the Toronto real estate game are cut from many different cloths, and alas, it is, in fact, skill.
Why else would a buyer look at a $599,900 listing, and knowing that there are eight competing offers, decide to submit an offer of $590,000, when that property ends up selling for $775,000?
Call it “skill” if you want, or experience, knowledge, understanding, or some other term, but in this market, there’s a lot more that goes in to picking the “winning” price, than luck.
It’s complicated, it’s often unpredictable, and above all, it’s frustrating.
A client emailed me last week saying she and her husband went into an open house on the east side and were “excited” beyond belief, since they loved the house – listed at $889,000, and felt it was affordable to them, and could sell within their $950,000 budget.
I took one look at this house – this 3-storey, 3-bed, 4-bath, with a fully finished basement, build new less than ten years ago in an area dominated by 80-year-old houses; this 2,500 square foot home, with 2-car parking; this absolute farce, and knew that I had the unenviable task of telling my clients that they would miss this house by, oh, about $200,000.
This house, in my estimation, although listed at $889,000, would sell for somewhere around $1,150,000 to $1,200,000.
My clients were crushed. They had just started their search, and during our very first meeting, one of the largest warnings I gave them about today’s market was not to put ANY stake into the listing price, and not to make any decisions, financial or emotional, about a house until we go over pricing.
The house sold for $1,161,000 in the end, and I’m not sure how many offers there were, but I’d imagine there were over ten. Maybe fifteen. Maybe just ten, but in the end, it doesn’t matter.
Of the offers – the ten, the fifteen, or the twenty, you know that somebody, somewhere, offered $880,000. And you know that somebody offered $950,000, even though it had no business being offered. You know that somebody out there said, “I’m prepared to go……wow…..I can’t believe I’m going to do this……one hundred thousand dollars OVER the asking price.” And in the end, that offer too had no business being presented.
You don’t want to fault the buyer for this. You want to fault the seller and the listing agent, for the rampant under-pricing. But in the end, that’s the way the game is played. Like it or not – I and I’ve gone on many times saying I don’t like it, that is the way the game is played, so if participants want to play, they need to learn how.
Somebody bought that house for $1,161,000, and I’m sure right behind them, there was an offer of $1,155,000. And there were probably 5-6 offers over $1,100,000, which is where the offers should have been clustered for this house.
The $889,000 list price?
That’s meaningless. Absolutely meaningless.
So for any buyer, or buyer’s agent, that’s using some sort of “above asking” metric to predict the sale price, you have to start over. You have to go back to basics, and fundamentals, and that means learning the market, understanding value, and having the knowledge and experience to price a home.
I asked two experienced agents in my office what they thought that house would sell for, and one said $1.2M and the other said “Mid one-one’s.”
How come the three of us knew what it would sell for, and yet there were likely ten offers nowhere near that price?
Was it hope?
That word has no place in this market, but did a buyer somewhere “hope” that their offer of $950,000, for this $1,161,000 house, would have a chance?
I certainly hope not, pardon the pun.
To be quite frank, it’s often buyers and buyer agents misreading the market. Maybe a bit of hope comes into play, and maybe some buyer agents just want to sign their buyers up to a contract and use the offer submission process as an opportunity to do so. But for the most part, it’s agents not being able to pick that “winning” number, and/or the buyer having even less of an idea.
Of course, we could all “win” the real estate lottery if we simply bid $10,000,000. That’s the other end of the spectrum – the one we don’t want to approach.
We buyer agents have an impossible task.
We need to “pick” a number that is more than any other buyer is going to pick, but we need to make sure that number isn’t all that much higher.
Of course, we need to make sure that this the number is high enough above the second-highest, that we don’t get “sent back,” after the listing agent wanes, “your offers are just so close, it’s hard to choose one.”
Put it all together, and see how hard the task at hand is?
1) Pick the highest number
2) Don’t make that number too high
3) Make that number high enough above the second-highest to avoid being sent-back, but still not too high
4) Somehow read what that acceptable “gap” between highest and second-highest is, according to the listing agent, and every listing agent is different
5) Do all this, knowing that there is no one, set, identifiable practice for how to review multiple offers
Do all that, successfully, and you really are picking a winning lottery number, are you not?
Yes, there’s always some luck involved.
I was in that 24-offer melee a couple of weeks ago, and I had the second-highest offer.
Out of 24.
Ouch.
My client was debating about whether to go $704,000 or $706,000, and in the end, he went $704,600.
The property sold for $705,000.
Was that luck – that we lost by such a small amount?
Perhaps, at that point, it was. But with 24 offers, somebody was going to lose by an amount that small. Somebody had to be second-place.
And the property was listed for a paltry $535,000 to begin with.
Sure, we lost by such a small amount that it could have been considered “luck,” but how did we get there in the first place? Was that luck? Or was that skill?
With a house listed at $535,000, how did we figure that “just over $700,000” was the magic spot?
This is where we plainly see the notion of “luck” is a farce.
Of those 24 offers, how many were under $600,000? Why would anybody submit an offer under $600,000?
I know, I know – you don’t like the “under-listing” and you don’t think this is fair. So you think I’m being unfair to chastise those who offered under $600,000.
But honestly, all you need to do is search for the last 2-bed, 2-bath, semi-detached house to sell in that same pocket in the past month, and you’ll find a $725,000 sale from December, for a property listed at $599,900, that is quite similar, albeit with moderately better features.
So now let me ask again: is it unfair for me to chastise those who offered under $600,000?
I don’t think so.
To sit back and say, “How am I supposed to know? All this under-pricing is unfair, and I figured my $600,000 offer had a shot, given the property was listed at $535,000,” is just being in denial, and remaining there, by choice.
It’s sticking your head in the sand and refusing to take it out.
The listing prices in Toronto are utterly irrelevant, and have been, for quite some time.
You need some sort of skill, experience, knowledge, gut-feeling or “feel” for the market to know where the price is going to end up.
Those who bid under $600,000 did so either because they have no clue what they’re doing, or because they’re in denial about the Toronto real estate market, or both. And dare I say – those that bid under, say, $670,000 could be accused of the same thing.
An experienced agent “should” know where the value is going to end up.
Now, not every buyer is going to listen. But if I told my client, “This is going to sell for $700,000,” and he or she wanted to offer $550,000, with 24 offers, I wouldn’t let them make the offer. It’s pointless, and it only serves to artificially increase the purchase price in the end. I only wish other agents had the stomach to follow suit.
But getting to that final price point may be easier said than done.
I sold a house two weeks ago for $811,000, listed at $699,900.
We offered $801,000 initially, among six other competitors, and were told our offer was “tied” with another, and thus how we ended up at $811,000. That’s a topic for Wednesday’s blog…
But after the first “cut,” whereby the listing agent sent five agents home and whittled it down to two, a colleague of mine who was cut, told me “Good luck” and then figuring he had nothing to lose, said, “My offer was exceptional, so I have no clue where the other offers are. I was at $751,000, and I don’t see it going any higher. It’ll be interesting to see what happens.”
And there you have it. There you have the unfortunate reality of our market, where real estate has no fixed value, and we’re all left trying to pick a winning lottery number.
With respect, $751,000 was low for this house. I had it pegged as “high-$700’s” as soon as I sent the listing to my clients. The $801,000 initial offer was representative of our read of the market, and the $811,000 final sale price was representative of the price we had to pay in this market to get the property.
We got this property by less than $1,000, and there were two other offers just outside the “first cut” as well.
But amazingly, there was an offer for $690,000 too.
How come everybody isn’t at the same price?
Is it because our buyers value the properties differently? Or because buyers want the value to be something it’s not?
I’ll accept an argument that it often can be.
But more often than not, it’s lack of market knowledge.
“Winning” in multiple offers, in this market, isn’t luck.
And picking that “winning” number, against double-digit competitors, while not over-paying, and yet paying enough to not get sent back, is an unenviable task that, when done successfully, perhaps isn’t really like picking a winning lottery number, but really – just doing your job…
Ed
at 8:30 am
Put it all together, and see how hard the task at hand is?
1) Pick the highest number
2) Don’t make that number too high
3) Make that number high enough above the second-highest to avoid being sent-back, but still not too high
4) Somehow read what that acceptable “gap” between highest and second-highest is, according to the listing agent, and every listing agent is different
5) Do all this, knowing that there is no one, set, identifiable practice for how to review multiple offers
– David reviewing your 5 steps and speculating what if 5 knowledgeable agents and their clients submitted offers on the said house would it not be reasonable to expect 3 are going to be sent back because they are ‘that’ close?
Furthermore can one argue that this offer process is pushing prices up faster than the old way of selling?
Long Time Realtor
at 9:37 am
Multiple offers are a function of demand and it is demand that is pushing prices higher. The process for presenting multiple offers has not changed much in 30 years, there’s just a lot more of them now.
It’s also quite natural to assume that the process is unfair when 23 buyers and their agents walk away empty-handed. There tends to be a good deal of grumbling and conjecture as to what actually happened after the fact, when in reality all that happened was that you got out-bid. Sour grapes if you will.
By all means if you can devise a better method, I’d be pleased to know.
Ed
at 4:03 pm
I’m not saying it’s unfair nor is there any sours grapes from me. I’m enjoying the ride up.
I was simply wondering if perhaps prices are going up quicker than they would if the more traditional pricing method was used.
condodweller
at 1:06 am
A better method would be to make any valid offer above the listing price binding. Perhaps it wouldn’t help in this market where some knowledgeable agents are offering real market value. But as soon as there is a soft patch in the market where there are no offers near fair market value and a low priced listing only gets slightly higher than list price, the seller is screwed because he/she must sell to the highest bidder, even if it’s $100k below what they hoped to get. This would stop sellers from listing significantly below market value.
I said this before, I would be very pissed if my higher than list offer wasn’t accepted by the seller.
condodweller
at 10:38 am
I should clarify my last sentence with adding of course if it was also the highest offer.
Ed
at 8:36 am
Re skill or luck. Is it a skilled agent who will be successful in getting their client to make the highest offer?
Julie
at 8:56 am
It’s been my experience that selling agents work hard to get as many offers to the table as possible as a house with 12 offers sells for more than a house with 4 offers. They don’t care how low the offers are, just as long as they can count them. You’re in the minority if you don’t encourage clients to join the fray.
Kyle
at 9:12 am
The Toronto market has gotten to be pretty “efficent”, it’s pretty rare to see massive outlier sale prices, especially on the low side. IMO, a skillful Agent should consistently be able to predict a number within 4% of the final selling price on a routine basis.
Mark N
at 9:58 am
Much as our market is overheated, thankfully we are not subjected to the unsavoury Vancouver practice of ‘shadow flipping’ where properties are speculated on and change hands between the sale and the closing. There is one example of a $5M sale assignment changing hands several times before the closing and reaching $7M by closing time, with the $2M ‘lift’ being gained by middlemen and not the original seller of the property:
http://www.theglobeandmail.com/news/investigations/vancouver-area-home-flipping-leads-to-call-for-inquiry/article28641828/
Appraiser
at 10:39 am
@ Mark N. Assignments are commonplace in Toronto. Even Garth Turner dismisses the article on his blog for crying out loud.
The original Globe piece is nothing more than a sensationalized pseudo-investigative story based largely on hear-say, conjecture, the bleatings of a few disgruntled former employees and a number of unsettled law-suits. Total crap.
Boris
at 3:43 pm
This happens in Toronto, I have seen it.
How does a thing that is happening and never discussed in the media get dismissed as total crap?
Ahhh because APPRAISER wrote the article.
David Fleming
at 12:25 pm
@ Mark N
Yes, this is definitely in the queue for discussion.
I’m trying to see if there are properties listed on MLS right now that are assignments.
Kyle
at 2:31 pm
LOL, their smoking gun is that some buyers have the same name as some Realtors.
What the article fails to mention is that all those buyers and sellers all happily signed their agreements without a gun pointed to their head. And the more obvious point that what a new owner does with a property is no longer any of the previous owners’ concern. Is it “unsavoury” for someone to buy a collectible sports card at a garage sale, then sell it for more at a convention? Is it “unsavoury” for someone to buy a painting then sell it for more, once the Artist gets discovered? Is it “unsavoury” for someone to buy a bunch of houses in a row, then sell them for more to a Developer?
The only thing that i find troubling about the article is that there are people out there, silly enough to just go and accept a price and sign an agreement with some stranger who knocked on their door, without seeking any kind of professional opinion.
Appraiser
at 7:52 pm
@Kyle: I also found the premise that supposed owners of multi-million dollar homes somehow got duped by someone knocking on their door – to the point that I doubt that it is entirely true. Finding out that your previous home sold for more money at a later date seems to play havoc with one’s memory.
Kyle
at 9:23 pm
Totally agree the whole article sounds like pure BS. In what world are people so oblivious to the value of real estate that a seller would accept 5M and a buyer would pay 7M for the same house? Both buyer and seller would have to be either unfathomably stupid or literally trying to throw money away for that to occur. I get that pricing a house isn’t an exact science, but there is simply no way for there to be $2M dollars of arbitrage opportunity on a $5M house. Nothing about this article passes the sniff test, are we seriously supposed to believe sellers just sign below market offers presented by strangers who show up on their doorstep? Are we to believe that buyers in a foreign land are too stupid to use the internet to see what other properties are asking before spending 7M for a house they’ve never seen? And just say we suspend our disbelief and accept that this *could* happen, are we then suppose to feel sorry for these incredibly stupid people?
Marina
at 10:04 am
As with most things in life, I’d say it’s 80/20. 80% is the skill that will get you in the ballpark. 20% is luck that will get you to #1.
Part of the issue is that there are a LOT of buyers using inexperienced agents – friends, out of town agents, low commission, etc. Couple that with an inexperienced buyer (because ;let’s face it a knowledgeable buyer will hire a knowledgeable agent), and you have your 10K under asking offer with 10 other offers on the table.
Before we bought our house, we lost in a multiple situation where we never should have bid. We offered 10K over asking and it sold for about 70K over. It was a combination of our inexperience, an out of town agent (now we know better), and being early in the process where we just were not being realistic. A better agent could have helped guide us, but I think we needed to lose that one offer just to get some sense beaten into us.
I think some people don’t move past that point. They just help inflate pricing. Ah well.
Joel
at 1:17 pm
I find that it is often the bidder that is most frustrated with their search that will put in the highest offer, Once you have lost 5-10 bidding wars and have an idea of what the value is, it is easy to add an extra 20K to ensure you don’t have to go through the process again.
With the agents that price much too low I find it fitting that they have to sit through 20 of 30 offers that are not close. If they are going to play that game they need to understand that they are going to have to waste a few hours listening to those offers.
Boris
at 3:42 pm
http://www.theglobeandmail.com/news/investigations/the-real-estate-technique-fuelling-vancouvers-housing-market/article28634868/
Appraiser
at 7:58 pm
As previously stated – total crap.
Duncan Bray
at 6:45 pm
I am told that in order to circumvent this process, more and more buyers in the 416 are dealing only with listing agents, figuring that this way they will get a chance to beat any other offer if they really want the house. This is one reason for the coming soon signs and ads. the listing agent wins by double ending, the purchaser gets the house, and the Seller gets a little more than the highest offer from a co operating broker.
Appraiser
at 8:05 pm
@ Duncan Bray.
What if more than one (or several) buyers want do deal only with the listing agent? Seems plausible if not probable, if that’s what’s really going on. Which of course defeats the purpose.
Fro Jo
at 8:46 am
A good agent will also know when the farce has ended, when the “add X to Y” formula ceases to apply, when the list price becomes an aspiration instead of the knowing joke it is now.
Of course this is not likely to happen in our lifetimes, nor in our children’s children’s lifetimes, and certainly not in the GTA.
But the prophecy tells of one who will… (Sorry about that; I’m working on a script about a dystopian property market.)
Wut
at 11:14 am
The true lottery winners have been homeowners who got in on the lower floors. Leveraged at low rates, the returns have been spectacular.
Brandon
at 4:06 pm
What do you do if prices decline?
Appraiser
at 9:23 pm
Simple, you get to live in your house. What if the stock market continues its precipitous decline?