The Toronto market is kind of funny right now!

Funny, like “ha-ha” or funny like “quirky,” you ask?  Not so funny for those prospective tenants who keep submitting offers only to find they’re competing with six or eight other candidates, that’s for sure!  And not so funny for those buyers who targeted the typically-slow August real estate market, only to find that prices have risen over the last several months and they’re right back where they started in March.

I suppose I meant quirky.

I actually meant more “unpredictable” as it pertains to certain segments of the market.

In any market, hot or cold, spring or fall, there’s going to be a level of unpredictability.  In a red-hot market, we find that we simply can’t predict how high a potential sale price might be.  In a mixed market, we often can’t predict if a sought-after semi-detached house is going to receive enough offers on “offer night” for the seller to actually pull the trigger, or if they’ll re-list at a higher price the next day as we continue to see out there right now.

When it comes to the downtown condo market, there’s unpredictability out there.  With the interest level, with the number of showings, with the prices, and with the offers.  Would you assume that a particular unit should sell for more than the identical unit sold for back in February?  What about May?  We’re certainly not seeing as many showings as we did back in the spring, but if we adapt to the changing market, we can ultimately attain the same price regardless.

One place where I’m seeing a lot less predictability in the downtown condo market is with respect to conditions.

Let me pull up a few spreadsheets from listings in the spring and look at offers and corresponding conditions…

Property #1:
Listing Date: March
# Offers: 11
# Conditional Offers: 2

Property #2:
Listing Date: April
# Offers: 18
# Conditional Offers: 4

Property #3:
Listing Date: April
# Offers: 13
# Conditional Offers: 5

Those three were picked off the top of my head, and all told, there were 42 offers and 11 were conditional – that’s about one quarter.

Fast-forward to the present, and I have offers on a condo listing where one quarter were not conditional, ie. I had literally one out of four offers that was condition-free.

Here’s where the market becomes unpredictable at times.

You do what you can in order to solicit unconditional offers.  You order the condominium’s status certificate well in advance of the listing and have it available for the buyers and their lawyers to review.  You make yourself available to speak to agents at any and every opportunity to answer questions as needed.  In a competitive market, buyers and buyer agents want to provide an unconditional offer to give themselves a leg up.

So what do you do, as a seller, when you are presented with multiple offers and some are conditional but some aren’t?

This all depends on a seller’s risk tolerance and the parallels to gambling are going to be obvious.

What are the chances that a conditional offer firms up?

What are the chances that a buyer changes his or her mind, or that they can’t obtain financing, or that the lawyer finds something in the condominium’s status certificate that raises a red flag?

The answers to these questions will always differ depending on the individual buyer and his or her agent, the specific building, and of course the relative temperature of the market.

But the seller will always be faced with the same question: what’s the value of the condition?

Let’s say you’re a seller with a property listed for $589,900 and you have five offers on the table.

Here are the top three offers:

1) $666,000, conditional on review of status certificate and financing
2) $660,000, conditional on financing
3) $650,000, unconditional

What do you do?

In this case, it seems that the value of a condition is somewhere between $6,000 and $10,000.

On the one hand, we have an unconditional offer at $650,000, and a conditional offer at $660,000, hence $10,000.

On the other hand, we have an offer with one condition at $660,000 and an offer with two conditions at $666,000, hence $6,000.

You can choose to look at this either way and you wouldn’t be wrong.

You may also choose to see the value of a condition as $16,000, since that’s the spread between the highest conditional offer and the first unconditional offer.  Why?  Because I’ve always said that one condition is as good five, since a buyer can walk away for any reason regardless of the conditions in the offer.

If you’re the seller in this particular scenario, how do you walk this through in your mind?

You know that your floor is $650,000.  That’s great.  So you can take this offer tonight, have your property sold firm, no worries, and sleep well!

Or, you can roll the dice on a conditional offer and make yourself $10,000.  The agent for the buyer with the $660,000 offer says that “the financing is a rubber-stamp” and that the buyer just couldn’t bring himself to submit unconditionally, but despite the five business-day condition, “this could be wrapped up tomorrow or the next day.”  This would also avoid a lawyer reviewing the status certificate and finding a red flag, and it would provide a little more peace of mind knowing that there’s only one bridge to cross and not two.

Or, you might figure that if you’re going to take a conditional offer, as I noted above, you probably don’t care if there’s a second condition, so take a chance on the $666,000 offer and hopefully come out $16,000 ahead.

What do you think?

Personally, I think circumstances dictate actions here.

If a seller has bought a house firm and needs to sell the condo in order to obtain a bridge loan from the lender to close on the house, that seller is probably taking the $650,000 offer if the closing of the house is less than a month out.  If the closing is two months out then the seller can “risk” the condo sale falling through and still have time to drum up another buyer.

If a seller happens to own a handful of condos, and perhaps this is an investment for them and there’s no timeline attached to the sale, then they’re more inclined to take the $666,000 conditional offer and wait it out.

There are so many variables at play when making this decision.

Let’s say that we have a case with the same three offers: $666,000 with two conditions, $660,000 with one condition, and $650,000 with no conditions.

Now let’s say that the agent representing the buyer with the $666,000 offer is somebody we know and trust, have dealt with before, and they tell us that they were on vacation and didn’t get the groundwork done in advance, and further says, “I haven’t had a purchase fall through on a condition in three years, and I’m not gonna start now!”  Let’s also say that they have a deposit cheque in hand for $60,000.

Are you more likely to accept that offer now?

Conversely, let’s say that the agent with the $666,000 offer is an out-of-town agent who had his client hand-sign the offer and he took photographs of each page of the printed offer, saved individually as JPG files, has a $20,000 deposit but no bank draft accompanying the offer, and sent you the offer with the salutation, “Yo whaddup J-Bear” when your name is actually Cam.

Are you less likely to accept that offer now?

Like I said, there are so many variables at play that there’s not one answer out there, or even one way to evaluate the decision.

Think back to Grade-12 economics, or as I later experienced, first-year university “Commerce 1S03,” when we made decision trees.

If you feel that there’s a 90% chance that the $666,000 offer goes firm, and a 98% chance that the $660,000 offer goes firm, then the expected value of each offer is $599,400 and $646,800, so armed with an unconditional offer for $650,000, there’s no reason why you would accept a conditional offer!

The funny thing is, despite the fact that anything less than 99% in the two above cases would lead to an expected value that’s lower than the firm offer, few sellers would ever use this model, even though it’s somewhat “correct” in this case.

So you can use a predictive model, weigh the strength of the buyer, consider the relationship and reputation of the buyer agent, or look at all the other terms of the offer such as deposit, closing date, clauses, and other conditions.

There’s no one way to do this.  Every decision is unique.

Now what if the spread was larger?

Let’s say you have a house for sale, listed at $1,999,000, and you have a handful of offers.

The top two offers are as follows:

1) $2,500,000 conditional for three business days on home inspection
2) $2,400,000 with no conditions

What do you do?

Again, there are so many variables!

Did you do a pre-inspection?  If not, you’re a moron, and/or your agent is cheap and useless.  But in any event, if you haven’t done an inspection, then the condition is somewhat reasonable. If you did do a pre-inspection, and you used Carson Dunlop and printed the full inspection, in colour, glossy, and bound it nicely to place on the kitchen counter, and the buyer still wants their own inspection, then doesn’t that give you less confidence?

Because ordinarily, you’d look at your house and ask, “Would we buy this place?”  If you feel confident in your home, inside and out, and you’ve kept up with preventative maintenance and know that the house is in great shape, then you’d usually say, “Go ahead, inspect it!”  But if you already did an inspection, and the buyer doesn’t trust you, then there’s something else at play here, and I would be more inclined to work with the firm offer.

Now, what if you had offers of $2,390,000 and $2,380,000 behind these two, both unconditional?

I would think that makes me more inclined to take the risk on the $2,500,000 offer because if that offer falls through, and the $2,400,000 buyer has found something else or lost interest, then I know I still have two other buyers lined up who are really, really close on price!  So I’ll take the $100,000 upside ($2.5M vs. $2.4M) knowing my downside on that $2.4M offer is only $10-$20K.

Again, so many variables!  No two situations the same!

Now, what if the $2,500,000 offer comes with a condition that’s only 24 hours?

That’s a green-light special, I move on that one for sure!  I tell the buyer with the $2,400,000 bid, “Hang tight, we’ll let you know tomorrow,” and just bide time.

Now, what if the $2,500,000 offer improves to $2,600,000, but they want five days for their inspection?  Now you’re playing against a $2,400,000 second bid, but holding off way longer.

Me?  I’d take the money.

It’s a risk but it’s also a tax-free capital gain the likes of which most people will never see again!  How do you turn that down?

Earlier this year, I had a condo townhouse for sale and we had a $650,000 conditional offer and the next highest was $620,000 but without conditions.

My client wanted to take the firm offer.

I told her not to, even though that might not be my place.

I told her that she can’t turn down $30,000 and that the condition was only one day, not only that, I knew the agent with the $620,000 offer and I felt confident that if the $650,000 offer didn’t firm up that we could go back to the $620,000 bidder that same day.

She took my advice.

And one day later, the buyer signed a waiver and we had a firm sale at $650,000.

Now, a cynic might say, “David, if you told her to take the $650,000 conditional offer, and she did, then that deal fell through and the $620,000 bidder disappeared, and she sold for $600,000, would you make up the $20,000 difference?”

No.

I provide advice and my client is free to make up his or her own mind.  And even if I argue, twist the client’s arm, and convince them to take my advice, the financial burden still doesn’t fall on me.  But that client is free to never use my services again, curse my name, and not refer me, just as any buyer of any service is free to do so.

Personally, I think that’s what our clients are hiring us for.  An agent who says, “You have an offer for $650,000 conditional and one for $620,000 unconditional, pick one and let me know” has absolutely zero value.

The final decision is left to the seller.  And that seller simply has to ask him or herself, “What is the value of the condition?”

What’s the upside, downside, cost of a sleepless night (or seven), potential financial fallout, and worst-case scenario?

And while there are only really two ways that a seller could go, the really interesting part is: there are an infinite number of ways that a seller can get there…