Risk, Reward…

Business

4 minute read

February 9, 2009

Properties are taking longer to sell these days and as they continute to sit, buyers begin to salivate at the thought of an eventual price drop.

The situation presents an interesting scenario for buyers, however; should they act quickly on a property they like, or wait with fingers-crossed that the property continues to sit?

It’s a risk/reward proposition…

riskreward.jpg

Every January, my brother runs an NFL Playoff Pool that attracts about fifty entrants.  I have played in this pool for the last six years, and I have never won.  I’ve come close once before; I think I was 4th or 5th out of 50 two years ago.  But what does it matter if you come 5th place in a pool where you only get paid if you win?

I’ve begun to realize that in order to win, you must be willing to lose.

That is to say that you must have no fear of coming 50th out of 50, so long as you have a shot at coming 1st.

When all the entrants pick the favorites or act in a similar manner, they really have no chance of winning at all.

It’s the entrant that goes off the board and picks underdogs and makes “unlikely” picks that will end up winning…..or coming dead last.

It’s a risk/reward proposition.  You must be willing to take big risks in order to have any shot at the reward.

I see some serious parallels in our real estate market right now for buyers.

I was showing properties to my client, Sara, on Saturday afternoon, and we were looking at hard-lofts in the Queen West area.

We checked out 24 Noble Street, 27 Brock Street, and then moved up to the Robert Watson Lofts at 363 Sorauren.

You simply can’t find a more authentic hard-loft than this one at 24 Noble Street:

noble2.jpg

Sara really liked the unit at Brock Lofts, priced at $309,900, but it was somewhat out of her price range.

The unit had only been on the market for six days, and she asked what I thought about the price and if they would accept less.

Here is where the risk/reward equation begins to take shape.

We all know that if a unit has been “sitting” on the market for a while, it is just screaming for a buyer to come along with a low-ball offer.  But what about a unit that’s been on the market for six days?

The fact of the matter is, we can’t come along and offer $290,000 for a unit priced at $309,900 when it’s been on the market for less than a week.  It just makes no sense.  Put yourself in the seller’s shoes for a moment ask, “Why would I even look at this low offer right now when I just listed my property last week?”

It takes time to fully expose your property to the market, and six days is simply not enough.

So what then does Sara do?

She really likes the property, but she can’t afford $309,900, nor does she see the value in paying that price.

She has two options:
a) work with the $309,900 price right now
b) wait for the days on market to pile up

If she waits one month, and the property is still on the market for $309,900, then she has won a small battle.  After thirty days with no sale, the seller might begin to think about his price and if perhaps reducing it would garner some positive reaction.

Not only that, after one month the seller would be more antsy to receive an offer, and might look more favorably upon a $290,000 offer than he would have when the property was listed over one month ago.

The issue here is that in order to get herself into a more favorable negotiating position, Sara must risk losing the property to another buyer during that month.

If the property sells while she is waiting, she’ll never know “what might have been.”

She has to be willing to lose in order to win.

I’m not saying you can’t low-ball the seller the very day the property comes onto the market; you can do whatever the heck you like!

But it makes no sense in this market, or any market, really.

If a property has been on the market for 60 days, the seller must know that his price is not accurate, and thus he should expect any and all offers to reflect that.

For Sara, she has to sit back and hope that this property at Brock Lofts doesn’t sell in the next month so that she can go in with a low offer and effectively say, “Look, Mr. Seller, your property isn’t selling.  It’s sitting on the market.  The ball is in our court – it’s a buyers market and there is a ton of product out there.  If you don’t want to work with my offer, then good luck with your property as it continues to sit…”

But if the unit does sell in the meantime, how will she feel?

How much does she like this unit right now, and how devastated would she be if it were to sell before she ever got the chance to throw her hat into the ring?

Only she can answer that question, just as she is the only one who can evaluate the risk of losing out on the property versus the potential reward of being in a far better negotiating position four weeks down the road.

My only question: How many other buyers have looked at 27 Brock Ave and have adopted the exact same strategy as Sara?

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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2 Comments

  1. fidel

    at 12:19 pm

    24 noble are authentic brick & beam, but you get what you pay for (very poor sound proofing)

    The problem with waiting, as you suggested, is many others may also be employing that strategy. Knowing this, it couldn’t hurt throwing a low offer early. I was looking at the brock lofts prebuild, and 309K is a long way from what was paid originally… so there’s probably lots of manuevering room

  2. Krupo

    at 12:00 am

    I might be mixing up my basic economic concepts, but this vaguely sounds like the prisoner’s dilemma, eh? 🙂

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