Taking Your Home Off The Market And Re-Listing!

Business

6 minute read

October 11, 2013

It’s sooooo hot right now!  Everybody’s doing it!

Although this is far from a new trend, I’ve been involved with a buyer in two situations this fall where the seller has rejected all offers on “offer night,” and re-listed the property higher, or for lease, the following day.

Let’s take a deeper look at the numbers, and whether or not holding onto the property longer is a financial decision, or an emotional, reactionary one…

PriceIncreaseArrow

When I was in university, I spent three years selling tickets; concert tickets, sporting event tickets – I probably would have sold tickets to a funeral if I thought I could make money doing so…

I don’t recall how I got into the business, but I did, and for three years, I middle-manned everything I could get my hands on.

Like any other business, there was a steep learning curve, and I had my trials and tribulations.

I remember in 2000, when I purchased $1,200 worth of Britney Spears tickets for her show at the Copps Coliseum in Hamilton and I decided to try my hand in the pits outside the venue, only to learn that the market for walk-up business was non-existent.  I ended up selling them to a scalper for $100, taking a brutal $1,100 loss on the spot.  The scalper didn’t sell a single one, and lost the $100 I gave him, but it didn’t make me feel any better.

It’s ups and downs, like any other business, and a week after the Britney Spears fiasco, I bought 25 tickets to a band called “Zwan,” which was a small side-project by Billy Corgan (of the Smashing Pumpkins), only to find out that lunatics who worshipped the freaky, bald-headed God were willing to pay up to $500 per ticket to see him at the Kool Haus……even though tickets to the sold-out show retailed for $30.

You win some, you lose some.

That was the lesson I learned, and by the time I finished university and moved on, I’d like to think I had won about 8/10 times through the years.

What’s the parallel to real estate here, you’re asking?  Why do you care that I sold tickets to a band I’d never heard of called “Cold-Play” before anybody in Canada had heard of them?

Well, it’s the “win some, lose some” and the “take your profits when you can” mentality that I want to explore today, as it pertains to builders and speculators in the Toronto real estate market.

Last week, I looked at a house with my buyer-clients, listed at $995,000, that had a hold-back on offers as the sellers and the listing agent clearly expected multiple offers.

I expected multiple offers too, to be honest.  The house was probably one of the best semi-detached homes in the area that I’d seen this year, and it was definitely the best one of the fall market.  It was in a great school district, and literally across the street from the school itself!

I told my clients that I expected the home to fetch closer to $1,100,000, but regardless, it would end up with 3-5 offers, and probably $50K over asking, minimum.

Due to the new mortgage rules that require the purchase of a $1,000,000+ house, my clients would need 20% as a down payment, which they did not have.  They were maxed out at $999,999, so we didn’t really think we had a shot at this home.

I told my clients, in fact, I tell all my clients, “You have to be opportunistic in this market.  If we expect a certain house to sell for beyond our price point or beyond what we’re willing to pay, we still need to be ready, ‘just in case’ the market doesn’t respond.”

We’ve seen a few cases of this recently, where the market doesn’t respond.

You can call it a cooling of the market if you wish, but I have another theory.

I think it’s like the pretty girl at the dance, that stands alone, as every boy simply assumes that she’s so pretty – everybody has asked her to dance.  They feel they have no shot, so nobody asks her to dance.

It can be the same way with houses sometimes.  Once in a while, the buyer pool thinks, “That house is going to get ten offers – it’ll be a gong-show!  I’m not getting involved.”  Only to find out later that nobody stepped up to the plate.

And with this $995,000 semi-detached home that my buyers were interested in, that’s exactly what happened!

On offer day at 2pm, there were no offers.  That’s normal – sometimes people wait to register.

At 5pm, there were still no offers, but I figured the chances of no offers at 7pm were slim to none.

At 6pm, I told my clients to get ready, just in case.

And at 7pm, with no offers, we put one together – for $999,999, representing their maximum affordability, and a minor incentive (or olive branch to the surely-disappointed home-owners…)

Guess what happened?

The seller turned down our offer, insinuating that he would list the property for lease the next day.

That’s an old wives’ tale, isn’t it?

Sellers and listing agents have always said, “If we don’t get our price, we’ll re-list the property tomorrow $100K higher, or just put it up for lease.”

But nobody actually does that, right?

I was shocked that they turned down our offer.  I really was.

And they weren’t bluffing either – they really did re-list the next day for lease, at $4,199 per month.

Does this make any sense?

Should they have taken the million-bucks and run with it?

Or should they hang on to the house for another year, hoping that the market “catches up” to the value of the home as they perceive it?

Well, I guess it depends on how much they have into the home, and their level of risk tolerance.

They paid $771,000 for the home, and that came with Land Transfer Tax of $23,040.

The renovation was likely in the $150,000 range, maybe more, maybe less.

They’re paying out 5% to the agents involved with the sale of the home, or $50,000, and they’ve staged the house as well, but let’s assume that the listing agent paid for it.

This means they’re in for $994,040, or thereabouts.

Now maybe the renovation was only $130,000.  Or maybe it was $170,000.  But either way, I think they were really banking on $1.1M so they could collect a 6-figure profit, and move on to the next property.

Our offer of $999,999 would not have made them any money, but it would have allowed them to move on to the next project.

Win some, lose some.

Right?

Isn’t that the mantra?

In my event ticket example above, the one major difference was that I was dealing with a perishable product.  As soon as the Pearl Jam concert or Maple Leafs playoff game came and went, the tickets were worth zero, not unlike a seat on an airplane once the flight leaves.

With houses, you can hang on to it, pay a carrying cost, and hope that the market for your product improves.

So was putting the property up for lease a smart move?  Let’s examine.

I’d like to assume, for sake of argument, that they bought the house with a 20% down payment, and that they used cash to pay for the renovation.  It’s not unreasonable to assume that they had $154,200 for the purchase and $150,000 for the renovation liquid.  It could very well be that they financed the renovation as well, which would add greater credibility to the conclusion of this blog, but let’s be conservative and use the above assumption.

To finance 80% of the $771,000 purchase, the renovator is paying $3,000 per month (rates were lower six months ago) to carry the property.

So if they were able to lease the property for $4,199 per month, how would things look?

The yearly taxes are $5,100 (reflecting a very old valuation – not the $771K or $995K), which is $425/month.

Insurance on the house is $1,500, or $125/month.

Gas, electricity, and water, which probably wouldn’t be paid for by the tenant for a $4K rental (although perhaps electricity would be…), would amount to around $3,000 per year, or $250/month

So all in, you’re paying out $3,800 per month, and collecting $4,199 in rent.

Cash flow positive, right?

Not so fast.  I want to talk about opportunity cost as well.

Had you sold the property for $999,999, you’d have got back the $300,000 you put into the project to begin with.  Even at a ridiculously conservative 3% rate of return, you’d still get $9,000 on that money over the next year.

So suddenly the $3,800 per month that you’re paying to carry the property could be viewed as $3,800 + $750, and thus you’re LOSING MONEY to keep this property.

So what’s the upside?

Well, the plan is to keep the house for a year, and list in the fall of 2014 for $1,099,000, and still chase that 6-figure profit.

But that’s not so easily done either.

First, you have to wait until the tenant leaves to sell the property, which means a vacant home, that has to be staged, and could be vacant for 3-4 months in total during the preparation, sale period, and closing.  So you’re out $12-16K there as well.

Second, and most importantly, what if the crystal ball is wrong, and the market doesn’t go up?  Then what?  Lease it again, and sell in 2015?  Maybe 2016?

I don’t profess to have all the answers, and I know it’s not easy for somebody to work for free, but I think the developer should have taken the million-bucks, chalked it up in the “tie” column, because it’s not a win or a loss, and moved on.

I’m dying to see how this one plays out.

Too bad I’ll have to wait a full year to find out…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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19 Comments

  1. Vincent Cheung

    at 8:12 am

    So David I assume based on what you said, someone did lease out the place for $4,199?

    I usually see in my area places not selling and then they relist for sale and rent but the rent is a ridiculous amount that makes no sense.

    1. Joe Q.

      at 10:36 am

      ^ This is an excellent point. The number of people who are willing or able to rent a house for $4.2k per month is pretty tiny.

  2. Trevor Pereira

    at 10:46 am

    The tenants usually pay the utilities but the big question is in what state will the tenants leave the property? Not all tenants bother about routine home maintenance. Agents very seldom advise their clients of that aspect.

    1. Jason H

      at 11:30 am

      “The tenants usually pay the utilities but the big question is in what state will the tenants leave the property? Not all tenants bother about routine home maintenance. Agents very seldom advise their clients of that aspect.”

      Why would I? It’s not my place – maintenance is the responsibility of the owner. If I have to put money into maintenance then my rent should drop to accommodate that.

      1. JC

        at 2:42 pm

        I find that with many rentals at this price point that the Landlord not only wants his monthly rent, but he/she also expects you to pay utilities on TOP of that, and maintain the property. Cutting grass, raking leaves, snow removal, replacing light bulbs, fixing appliances under $100 fees etc. The landlord doesn’t want to be called for any reason it would seem, unless his house is burning down.

    2. CS

      at 1:32 pm

      Why would a tenant do anything about routine maintenance. That is something that the landlord/owner needs to do.

  3. Vincent Cheung

    at 10:59 am

    PS: just saw a unit at my building, SAME unit as the one I am renting.

    I am paying $1550 and the unit just listed is asking $2900 for short term rental. INSANE!

  4. Jeremy

    at 11:08 am

    My guess is that this segment of the market is going to have a lot of trouble breaking the $999,999 barrier because the CMHC restriction is severely restricting the pool of eligible buyers. They should have taken the deal.

    1. Long Time Realtor

      at 6:55 pm

      This meme about the million dollar market being constricted due to CMHC is more myth than fact. The latest stats from TREB indicate that 7% of TREB sales are over a million. For the longest time it was consistently hovering around 5%. ( P.S. For members who wish to verify: From the home page click Market Watch, then “What they sold for” and the sales stats are segemented by price range).

      1. Jeremy

        at 1:16 pm

        @LongTimeRealtor It’s not a myth, David’s example illustrates this perfectly. He thought there would be 3 to 5 offers and it would sell for $1.1 Million but it only got one offer below a million. If this restriction wasn’t in place David’s Clients would have come in with a stronger bid, and others probably would have to, and the house probably would have sold.

        1. Long Time Realtor

          at 12:49 pm

          David’s example is what is known as anecdotal. It is not representative of the entire data set, otherwise how does one explain the rise the percentage of sales over $1M?

  5. Andrew

    at 12:45 pm

    Isn’t it a bad sign that your client buying a million dollar house can’t come up with a 20% down payment? Why is CMHC insuring people buying a 999k house? I mean I can see the argument for insuring people getting a starter home with a low down payment but this is a million dollars. Seems very imprudent to have such a high loan to value ratio on such a big mortgage.

    1. Dave

      at 1:15 pm

      Andrew, I don’t think it’s a matter of having $200K of assets; those people probably had better uses for the extra $150K, which could generate a return greater than the cost of borrowing the additional $150K plus CMHC cost.

      1. Greg

        at 12:56 am

        Face it, David. Nobody in their right mind would be willing to pay 35k in CHMC fees (hst included) plus the cost of borrowing 150k when they have the means to put down the 20% minimum. That’s what? 25% return on investment right off the batch. I feel so sickened that people like these are shopping for million dollar properties while shifting all the risks and burden on the shoulders of taxpayers.

  6. FroJo

    at 5:24 pm

    I stopped reading after you stated that your clients could not front $200K on a $1×10^6 house.

    I am truly afraid about what the next five to ten years hold for this city.

    1. Stats

      at 9:19 am

      Bingo. Regardless of the need for “flexibility”, it is insane to take out a $950k loan on a $1M house. And, it is borderline unethical to give that kind of advice to clients.

      1. Greg

        at 10:42 am

        No. It’s not 950k. When all costs are added up, including double land transfer taxes, lawyer fees, title insurance, cmhc premium plus hst etc, you are looking at closer to 1.1 mil. But that’s not the point. If it were their money, they can buy as much house as they want, take out as big a mortgage as they want. But we’re talking about them touching a million dollar home while putting taxpayers’ dollars at risk.

      2. David Fleming

        at 4:14 pm

        @ Stats

        You can’t say it’s “unethical” if an agent doesn’t urge his clients to take a safer course of action.

        We’re not financial planners, life coaches, or crystal-ball readers.

        I’m a very conservative guy by nature. I put down 50% when I bought my primary residence, but that’s a personal choice. I don’t have a single penny in the stock market, nor do I “invest” in a host of instruments that the general public chooses to put their net worth into.

        If a client wants to buy a $1M house with $50,000 down, that’s their choice. Sure, I’m going to ask them, “Can you afford this?” And if they use my mortgage broker, we’ll definitely examine the monthly carrying costs as a group and try to budget for the next few years, but what more can I do?

        Should I REFUSE to sell real estate to anybody without 20% down? That’s just not my place.

        Back in 2005, a client of mine bought a house for $1.1M with 107% financing, meaning he got $1.1M from the bank to purchase his house, and an additional $77,000 to pay for his closing costs, and buy his furniture. His reasoning, “I’m a hedge-fund manager and I’ve made 20%+ per year for five years running, so why the hell would I put my own money into this house when the bank will loan it to me at 5% interest?”

        We’re all different, and we all have different investment criteria.

        It’s simply not fair for anybody to suggest that there’s ONE financial model for ALL home-buyers.

        1. Sidera

          at 12:33 am

          One day you will sit back and realize what a massive housing bubble this truly is.

          When a family barely has 50k to buy a 1million dollar semi, there is a very large problem.

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