Be a Successful Buyer In This Seller's Market!
Wednesday Mar 03rd, 2021
Last March my clients, David and Lisa, with a bank Financing Pre-Approval, for a purchase price of $1.65 million, thought it would easy to find a detached home that met their top priorities: turnkey, in a great neighbourhood, 3 bedrooms, 2 baths, a parking pad (maybe a garage?) and a backyard for their 4 year old son to play in.
They thought that COVID 19 would shoot down Toronto's home prices and they'd have a great chance to buy their first house.
That definitely didn't happen. We entered (what I call) a 'medically induced coma' not a financial one. Since the spring of 2020, we've had consistently low interest rates which have propelled many Buyers to purchase homes. At the same time, however, there has been a record small number of homes for sale as Sellers held back because of the pandemic. There's currently only 1.1 months of inventory available - one of the all time lows.
All across Canada, this is still happening. “On New Year’s Day there were fewer than 100,000 residential listings on all Canadian MLS Systems, the lowest ever based on records going back three decades,” CREA Senior Economist Shaun Cathcart reported, in a January news release. “So, we have record-high demand and record-low supply.”
What do you get when a surge in demand is met with a lack of supply? Skyrocketing prices. Average single-family home prices in the GTA have shot up to $1,074,600, from $921,600 in January, 2020.
BUYING IN A SELLER'S MARKET
My clients, David and Lisa, who thought prices would go down, stepped into an huge Seller's market overrun with bidding wars. Few properties, in their price range, met their criteria and the ones that did, had multiple offers. Unfortunately, they kept getting outbid.
Finally, after so many months of searching, just before the holidays, they successfully purchased a great home. They knew, from the comparables I provided, that one down the street, much more renovated, sold for $1.75 million a few days before and what the value of this home was. They offered $1.636 million and they got it!
Here are some tips to keep, in mind, as you navigate buying in a Seller's market.
WHAT ARE HOMES SELLING FOR IN YOUR DESIRED AREA?
In a Seller’s market, the asking price is often like putting at $100 price tag on it. That’s because Owners underprice their properties to create more interest and a multiple-offer bidding war. The listing price is just an offering to the market and has nothing to do with the real value of the property and what it’s going to sell for.
This is where knowing the market comes in. I shared all the recent comparable sales in the area and even some sales, that weren't comparable, so we could calculate the differences and reasons for that. It's also important to view the other 'for sale' properties in the area (even virtually). This gives you the knowledge about what the home, you're thinking of offering on, is really worth. It's always a plus and minus calculation.
DO YOU WANT TO MAKE A PRE-EMPTIVE OFFER (ALSO KNOWN AS A 'BULLY' OFFER)?
The other factor that secured the deal for David and Lisa was their timing. The listing hit MLS on Tuesday night, and being on Preferred Client Updates, I was able to email it to them so they would see it as soon as they woke up Wednesday morning. We booked a showing for that afternoon and when they saw it, they knew they wanted to make an offer. The Sellers were asking for offers on a specific date, 6 days later, but were open to reviewing a pre-emptive offer. What is a pre-emptive offer? It's an offer a Buyer will make, prior to the offer date, that is such a good offer that maybe the Sellers will accept it. Remember, the list price is not the price the Seller is looking for and doesn't reflect the true value of the property. By 8:30 p.m. Wednesday night, David and Lisa were the successful Buyers! And, as is more often than not, right now, that home was on the market less than 24 hours. To be honest, some listings aren't even lasting that long.
In a Seller’s market, you need to be fast. Your agent must send you properties as soon as they are listed. I see them come out 'in real time' and make sure they get to you, immediately. Not only did David and Lisa check the listings, from me, every morning, all day long I would update them with anything new so we could book showings as soon as possible.
When a home comes on the market, you need to see it immediately because many won’t reach the offer date—they’ll have a pre-emptive offer. And “pre-emptive” offers are one of the primary strategies for Buyers in a Seller’s market. Being first, may very well give the Seller the incentive to accept your offer.
MAKE AN "UNCONDITIONAL" OFFER
In a perfect Buyers' world, we would have a Financing Condition and a Home Inspection Condition so your financial institution has the time to appraise the home. We'd also have time to bring in our own Home Inspector to make sure the home is structurally, electrically, mechanically and functionally sound. But, in a Seller’s market, to be competitive going up against multiple other buyers, your offer must be unconditional. A Seller is going to choose an offer that’s not conditional on the Buyer obtaining financing or on a getting a home inspection done, either from which the Buyer could walk away.
That means Pre-Approved Fiinancing is a must, and if you want to conduct a Home Inspection (which is usually advisable), it needs to happen quickly, before you put in your offer. But most often, there isn't time to do either.
Most Listing Agents will have their Sellers conduct a Pre-Listing Home Inspection, so Buyers can rely on a professional Home Inspection, allowing them to make an unconditional offer. Sometimes, there may be enough time for you to have your own Home Inspection, but with properties flying off the shelves, right now, it isn't the case, lately.
The home, David and Lisa bought, did have a Pre-Inspection done so we were well aware of the minor repairs the property needed. Fortunately, there was nothing major - structurally, mechanically, electrically or functionally.
RE-EVALUTATE YOUR OPTIONS
If you’re getting frustrated because you keep getting outbid, it may be time to review your wish list. Sometimes we need to revisit your preferred location, size and price. We don't want to end up 'chasing the market': when the cost outpaces your buying power.
I believe strongly that we need to stay within our budget. Just because you are approved for a higher purchase price, doesn't mean you should spend it. There are property taxes, monthly utilities, home maintenance to consider. I don't want you to become 'mortgage poor': not be able to take a vacation or plan ahead for major life changes. It just isn't worth that. We need to stick to our budget and maybe rethink our top priorities. Sometimes, this won't be the perfect home you'll stay in for more than 5 years, but with my knowledge and advice, it will be a home that will increase in value because of its location and stature. Maybe you'll be able to do some renovations, now or over the next few years, that will increase its value immediately without having to wait for the market to go up again. And then you can 'buy up' to your absolute dream home.
DON'T SPEND MORE THAN YOU SHOULD
Don't throw everything you have at a home you've fallen in love with. In a Seller’s market, where prices are increasing rapidly, it's my role to make sure you do not overpay for a home. Banks are using recent comparables (within the last 3 months) to appraise the home you're buying and determine the real value. In my blog "There are 2 Mortgage Approvals", I explain, in detail, that first you personally get mortgage approval, then your financial instutition will appraise the property to give it its own mortgage approval. The last thing we want is for your financial institution to give the home a value lower than what you just paid for it. This why it's absolutely critical that we keep within the budget and make use of the sold comparables.
Not having the proverbial crystal ball, most experts believe 2021 Canadian housing prices will continue to rise — especially if interest rates remain low and so does inventory.
DON'T GIVE UP
A Seller's market can be discouraging —especially when there are so many Buyers and so little inventory for sale and prices are on the rise. Don't give up - we'll keep looking until the right new home becomes yours.