There’s no doubt about it. We’re officially in a sellers’ market… which means the buyers are NOT having a very fun time.
Demand has remained high, and the biggest story is the lack of listing inventory. When demand is greater than supply, prices are on the way up.
Proof of reduced inventory can be found in this graph. We’ve been on a steady decline of new listings since the second quarter of 2018.
Want more proof? In the month of February so far, the average Milton property has sold for 102% of list price. That doesn’t happen unless there’s a major imbalance between supply and demand.
In this type of environment, buyers need to play their cards right to succeed. Sometimes success means going after a home, and sometimes it means walking away.
Like Kenny Rogers said, “You gotta know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run.”
So let’s talk about some things to think about as you’re gearing up for a round of competition with other buyers. But before we do, let’s look at how a multiple offer situation typically works in Ontario.
When you compete against other buyers, there will be a set time and date to “present” offers to the Seller, usually in the order they are “registered”.
A “registered” offer is considered official when it’s signed, and the listing brokerage is notified about its presence.
After all offers have been presented to the Seller, they will have the choice to either sign and accept one of the offers, or to ask some (or all) of the Buyers to improve their offer.
How much should you improve? Very often, you’re not given that information. These “rounds” may continue for as long as the seller chooses, but in 99% of cases, it’s no more than three times. The most common is two, but there are times when the seller will accept an offer in the first round.
As you’ll read below, this means you need to put your best foot forward right away.
A buyer with an offer submitted should always be informed of the NUMBER of other offers, but you will typically NOT know the terms (price, conditions, closing, inclusions, etc.) of any of those offers.
Scared of a bidding war? Make it your VERY BEST offer right away
We prefer to use the less intimidating term “multiple offer” instead of “bidding war”, because it’s not often an auction-type of environment.
The only difference between traditional negotiations and multiple offer situations is that you MAY only get ONE shot, and ONE round.
So… it’s rather simple. Just put your best foot forward on step ONE.
Regardless of how many times the listing agent and the seller decide to open up to other buyers to improve their offer, your job is to put your absolute best offer out there, and see if you get it or not.
Want a test to see if the offer is REALLY your best? Ask yourself, “If I found out that this home sold for $500 more tomorrow, would I have paid it? Would I be upset?” And keep doing that until you reach the absolute max number where you would cheerfully walk away if someone offered even a small amount more.
That way, there will be no regrets.
Four things EVERY seller wants
If you really think about it, and look at it from the sellers’ perspective, they ALL want the same four things in any offer:
Least (or no) conditions: A condition on financing and home inspection is standard in a more balanced market, but as the number of competing offers increases, it’s much more likely that at least one buyer will remove all of their conditions. Remember that the presence of conditions INCREASES certainty for a buyer (by allowing them to examine the home thoroughly with a home inspection, for example), but they DECREASE certainty for a seller. An offer without conditions is often called a “cash offer” because it’s a done deal once all parties have signed. From our experience, if there’s more than five offers… you won’t win unless you remove all your conditions. But
Deposit cheque in hand: We recommend to many of our buyers to bring a bank draft or certified cheque with them, or to get one from the bank and take a picture to send to us. “Cash” deals without conditions sometimes fall apart because the buyer doesn’t bring the cheque in the next morning… so having it in your hand is an immediate and recognizable sign that you’re serious about buying the home.
How much deposit is required? Generally 2-5% of the value of the home, although in some cases it can be more. It’s not unusual in the City of Toronto to see even higher deposits, sometimes as high as 10%.
Highest price: This seems pretty obvious, right?
The sellers’ ideal closing: If you’re not prepared to give the seller THEIR date to close (if they have an important date in mind), you’re going to struggle to get your offer accepted.
These four things are written in order of importance. There are times when the seller might look at two competing offers – one with a higher price AND conditions, and the other with a slightly lower price with NO conditions – and many sellers will choose the slightly lower offer because it means they’re more confident that the sale will firm up without problems. Other sellers might decide it’s worth the risk to get the extra money.
Your odds also increase when you and your agent are physically in person at the time of making the offer. Or at least within a very short drive, if you’re taking care of kids. As much as digital signatures are convenient, showing up and being ready to make last minute changes to your offer can show a seller that you want the home more than the other buyer.
Comparable sales mean nothing
One of the ways we establish value in real estate is to look at recent sales and then make value adjustments for things like flooring, finished basements, fireplaces and premium lots.
It’s called the “direct comparison” approach to value. And it’s almost useless in a strong sellers’ market.
Because the reality is… every new sale breaks the previous record. It doesn’t matter that the last townhouse, which was nearly identical, sold for $600,000. This one could go for $620,000 or more.
I remember back in 2017, in one of the hottest markets we’ve ever seen, there was a house listed for $719,900 that sold for $752,000. We offered $722,000 because the last sale was $710,000. Lost that one. Less than two weeks later, the exact same model, about ten doors down on the same street, with VERY similar finishes, listed for $750,000. It ended up selling for $801,000.
$49,000 difference… in 12 days.
The market doesn’t always make sense, and there’s no logic in a strong sellers’ market. All it takes is one buyer who has lost a few offers to throw a huge number out there. Or a buyer that’s running short on time and needs to buy may get caught up in the emotion and go WAY beyond the rest of the offers.
The next time will be worse
The decision most buyers will make in a sellers’ market where prices are rising with nearly every sale is:
“How much do I need to overpay NOW, so that I can avoid competing next time?”
It’s not a very attractive proposition, but it’s true. This is exactly what happens.
Was it better for the buyer to pay $752,000 instead of $801,000? Definitely.
You may have to buckle up and pay a higher price than you want… because next time it could be (and probably WILL be) worse.
Choosing the right offer amount will depend on your own market experience, your timeline, the number of other offers, and how many other homes you’re interested in… just to name a few.
Your safety cushion is a larger deposit and a longer closing
Banks have two ways they establish value, because they will only lend in situations where they feel the price paid was fair value. One is to use a computerized algorithm, and the other is to send an appraiser to the home.
Often in a sellers’ market, there’s no justification in the neighbourhood sales history for the price paid. Every new sale breaks the previous record.
And if the price paid was significantly more than asking… the bank WILL send the appraiser. It’s pretty much guaranteed.
Since the bank will only fund the lower amount between what was paid, and what the appraiser says it’s worth, the buyer is left to come up with the difference between the two values IN CASH to close the deal.
If the appraisal comes in low, a buyer who has 5% down is not in a very good position to bring more cash to the table to close the transaction. But a buyer with 40% downpayment can take $10,000 out of that amount to buffer the difference between the price paid and the appraised value, and still have plenty of downpayment left to satisfy the bank’s requirements.
Now keep in mind that a low appraisal DOESN’T mean the buyer overpaid. It means the appraisal can’t justify the price paid based on historical sales.
The other thing that can help is to get a longer closing, perhaps 90 days. By the time another month or two comes, there’s a good chance there WILL be other higher sales that can be used to justify the price the buyer paid. Second appraisals closer to the closing date are very common in a sellers’ market, and they often come in much higher than the first appraisal.
Be sure to get a GOOD mortgage specialist in this market. It helps a LOT.
Don’t like competition? That’s okay.
I sometimes laugh inside when people say, “I will NEVER compete for a home!” Sometimes it’s unavoidable. If you want THAT house, you may have to go up against other buyers.
Unless you only want to buy homes that nobody else wants. 😁
Remember that you’re in control, and you don’t HAVE to do anything that you’re not 100% sure about. Make good choices, listen to your agent, and don’t get caught up in the pure emotion of the game.
Stay grounded in your values and what’s important to you, and you’ll find a great home for the right price.
Even if that price is higher than the last sale…