Welcome to this month’s installment of Dear Urbaneer – and by virtue of its real-time insight a – Tales From The Real Estate Trenches segment where I tackle tough real estate questions put to my team and I by our clients. This month, I’m going to address the pricing strategy that is commonly seen in Toronto where a listing comes to market with a ‘holdback on offers’, how bully offers result, and the propensity for bidding wars. All of this will be with a focus on the Buyer’s perspective. Stay tuned for a complimentary blog that turns the table and highlights the Seller’s point of view and the strategies employed to get top dollar in multiple offer scenarios.
Without further ado:
We’re new to house hunting, and have found a promising property in our price range. The thing is, the listing price seems pretty low given the size, location and condition of the home. What’s the catch? Are the Sellers wanting a bidding war? How should we approach making an offer?
Is This Too Good to be True?
Here’s my reply:
Dear ‘Too Good to be True’:
When the list price of a property appears to be low relative to the size, location and condition of the dwelling, there’s a good chance you’re witness to a pricing strategy which often is deployed in the Toronto real estate market – called a ‘holdback on offers’. Essentially, the Sellers list their property at a price below market value and then sets a holdback date (usually five to seven days after listing but not necessarily) before they will entertain offers. The idea here is to generate sufficient interest from Buyers to garner multiple bids as well as encouraging Buyers to put their best offer forward in a one-shot-deal after completing their due diligence. Usually (but not always), the more offers you receive as a Seller, the more likely you will generate a higher price, which is why this approach is common in the original City of Toronto.
When you see this kind of scenario (i.e. a home listed well below its true market value) consider that list price as a starting point for offers – which in that sense makes it kind of ‘too good to be true. This is a pricing strategy that both Buyers and Sellers should understand how to navigate to ultimately achieve their goal – whether that is to achieve top dollar as a Seller, or to successfully secure the property as a Buyer. Since you are a Buyer, let’s consider these critical points:
The Psychology of Holdback Offers for Buyers
Pricing is an important strategy in real estate, because of its strong psychological impact. An asking price will pique Buyer interest, communicate subtly the sellers’ motivation, position the value proposition of the property, and in combination reflect how the property relates to the dynamics of the market at the time it’s listed for sale.
Click here to read this article from the New York Times “The Psychology of Pricing”.
As we know in real estate (and in any other commodity market) value is really based on how much someone is willing to pay for it. The nature of a ‘holdback on offers’ forces Buyers to consider the very top end of their budget for a given property as their purchase strategy. Because all offers are submitted confidentially, Buyers are effectively bidding blindly against other buyers rather than negotiating with the Seller. This effectively heightens the sense of demand and, ultimately, the sale price.
Considerations For Buyers
Navigating a holdback scenario, as a Buyer, is one of those instances where you truly need to rely on the skill, strategy and experience of a seasoned realtor who is representing your interests exclusively.
Here’s how I assist my Buyers. When a property comes to market on MLS matching my Buyers needs, there is a specific list of criteria and details I look at on first review: floor plans, additional photos/videos, mention of a presale home inspection, the Sellers’ preferred closing date (is it a set date or a broad range which can indicate motivation), any specific disclosures which indicate a bearing on value (being sold in ‘as-is condition’, whether it’s an ‘estate sale’, it’s a realtor selling their own property, it looks like a flip, etc.) and listing history (when it last sold, how many times it’s been on the market, etc). I also check in the Broker’s Comments to see if the listing says:
Offers are 7 days from now with no pre-emptive offers considered (which the listing realtor would have in writing as a direction from the Seller)
– or –
Offers are 7 days from now but the Seller will consider a pre-emptive offer (which invites a Buyer to attempt to secure the property with a bully offer before the posted offer date)
– or –
Offers are 7 days from now (with no mention of either). When this happens – fairly frequently though it’s technically a no-no (one realtor was fined $10,000 by RECO for selling a property via a bully offer before the offer date because he didn’t stipulate bully offers would be considered by the Seller) – I contact the listing realtor to determine the actual likelihood that the Seller would entertain a pre-emptive offer and to gauge how high that pre-emptive offer needs to be to be considered. If I determine that the Seller will consider a strong pre-emptive offer (that means a substantial sum with no conditions and the Seller’s preferred closing date), I get to work drilling down what exactly that value needs to be.
To determine this, I complete a comprehensive analyze of the sales of similar properties over the past year (including the peak of the market last year of which values today are fast approaching), in order to assess what data the Sellers and their realtor are basing their pricing strategy. I will often email the realtor back saying “Based on my assessment, would it be fair to say that your Sellers’ expectation would be a sum of $_____ or higher for a bully offer to be successful?”. At this point, the realtor will provide some insights or direction. Often the answer falls along with this recent reply ‘Yes, in my discussion with my sellers that would be a fair assumption…etc.”
This gives me a baseline to inform my Buyers. For example, if the sum the Seller wants is within their budget then it would make sense to proceed with a bully offer. After all, why not try secure the property for a sum you’re willing to pay without blindly bidding against others? However, if my Buyer’s budget doesn’t run as high as the sum that the Sellers ultimately hope to get, I would suggest looking at the house and submitting a bid on the offer date, recognizing that the budget isn’t as high as the Sellers expectations are at this moment.
It isn’t unusual for my Buyers to forgo submitting a bully offer that isn’t within the expectation of the Sellers but still submit a bid on the offer date. Why? Because there’s always a possibility that no one will bid as high as their offering sum, such that they could still beat out other competing Buyers. Even if the Sellers aren’t seeing the sum they hoped for, they may still accept the highest bid. Alternatively, the Sellers may relist the house at a higher price, or terminate/cancel the listing. But there are many occasions where the Sellers will still work with the highest bid even if it’s below the sum they wished for. After all, the market is demonstrating what the market thinks the property is worth at that moment in time, and if the Seller is keen to sell, their realtor will guide them to the rational understanding that the highest bid is reasonable.
Value Isn’t All Math And Market
Here’s the thing. No appraiser, or realtor, or any other player in the world of real estate can peg the value of a freehold property in the original City of Toronto for any less than a 5% variance. In other words, a $1mil house that comes to market right now could sell for $50,000 more, or $50,000 less, and no one could even question the validity of the sale price. Why? Because every house in the original City of Toronto is different than its neighbours. Even in your house appears identical to its neighbours, it’s still possesses it own unique value. Why? With our housing stock dating from the 1850s, there’s no telling from a MLS listing and its accompanying marketing material the specificity required to narrow its value within 5 percent. Your row house may even look identical to next door, but perhaps it’s been renovated, or had an extension, or the basement was dug out and finished, or it has a concrete garage versus a frame garage, or maybe it has had no renovations, or the improvements were of a poor quality, or it has termites, or poor feng shui. Because of every conceivable variable that exists in the freehold property market, a $1mil property could have two appraisers – using any one of the approaches to valuing real estate – and on the same day provide an evaluation which varies by $100,000.
So if two seasoned realtors or appraisers can assess the same property and arrive at a value having a 5 percent variance at any given time, then it stands to reason two different Buyers viewing the same property on the same day may determine the sum it’s worth to them may be even more radically different than the other. Why? Because their personal motivation to secure the property presents the opportunity for an even greater variance in pricing.
For example, on April 2nd a semi on the east side near Danforth and Coxwell sold for $1,090,000. Then, on April 7th another semi three blocks away of a similar size within a similar range of condition sold for $1,170,000. Even I, a realtor who is on offer every 72 hours in our current market climate, can’t concisely explain why – five days apart – two near identical semis sold for $80,000 apart. I simply couldn’t discern the tangible differences to arrive at the $80,000 price differential, which suggests the Buyer added their own intangible premium that reflected what it was worth to them. And guess what? Spreads in values like this are commonplace.
Now, take note this is less likely to occur in the suburbs where the housing stock is more homogenous. It’s also the case in townhouses of a similar vintage, and certainly in condominiums where there are mutiple units that only vary by floor level. However, do keep in mind that the older a neighbourhood, or building, the more opportunity for variation exists, as the opportunity for modifications, or customization, invites a larger discernment in value. The same even goes for outdoor space, as I recently wrote in my Dear Urbaneer blog: What Is The Value Of A Condominium Balcony Or Terrace? **
Does A Bully Offer Make Sense?
The key on whether you submit a bully offer is dependent on whether the sum you’re willing to pay is sufficiently attractive to entice the Seller to accept. Before I even have that discussion with my Buyers, I first have to analyze the market and determine if the property is listed fairly, or too high, or sufficiently low to incite competition. Again, if it is listed low I’ll have a conversation with the listing broker to try determine where the Seller’s expectations are to see how they align with the budget of my Buyer.
It doesn’t make sense to submit a bully offer if the property comes to market without sufficient information to make an informed decision. Sometimes the holdback on offers genuinely allows the Buyer ample time to complete their due diligence and be comfortable to proceed with a bid. Take, for example, if a property comes to market without a home inspection, which you as a Buyer considers an essential piece of information to make a rational educated decision. If a home inspection isn’t available, then you’ll have to be prepared to enlist an inspector at your own expense to complete your due diligence and then, if the report doesn’t deter you, proceed with an offer. You could still proceed with a bully offer, but you have to be on the quick to organize and execute it effectively.
This sort of situation occurs fairly frequently. A house comes to market and within 24 hours the Buyer and I have viewed it, we’ve then enlisted an inspector within the next 24 hours to assess the dwelling, and if it’s a go we move into submitting a bully offer not only in advance of the offer date but preferrably before any public open house, to avoid the possibility that even more Buyers may proceed with bully offers. After all, you could find yourself in a full fledged bidding war even before the Offer date.
Regardless of whether you’re submitting a bully offer, or you wait until the offer date to find yourself in a bidding war, read this blog of mine which shares The Four Values Of Real Estate For Bidding Wars And Bully Offers In Any Market Climate (Plus Cats!).
What Is Happening In Toronto’s Real Estate Trenches This Spring
So far this year bully offers and bidding wars are occurring with great frequency. To give you a real-time snapshot on how real estate has been playing out in the original City of Toronto so far this year, here’s some of my Tales From The Real Estate Trenches posts:
On January 24th I shared the tale of “35 Offers On 3 Downtown Properties Signals Rocketing Demand“
On February 14th I wrote how “Four Toronto Properties Went Into Bidding Wars In The Past 48 Hours“
and on March 7th I followed up with “On Toronto’s East Side 42 Buyers Bid On 3 Properties Tuesday Night“!
With respect to bully offers, here are some recent examples:
This home in The Junction sold this month with a bully offer for $1.2M (list $1,088,000):
In my correspondence with the listing realtor, I had determined the house below – which sold in October for $1,208,000 – located nearby but with no parking but a higher calibre of renovation, was the barometer of value by which the Seller’s expectation of value was determined. I shared this information with my Buyers, so they knew the framework by which to be competitive with a bully offer. Because the sum was higher than their budget, they did not submit a bully offer, but another Buyer did successfully.
The house below, in Leslieville, located in an area which is still considered transitioning, sold in November 2016 to a renovator for $875,000. I had been in the house back then. It was ripe for renovation, though it had some structural issues, including several steel support columns to address settlement issues and a failing foundation (rendering the basement only suitable for storage). At the time it was a 2 bed house with a massive second floor washroom which filled the former middle third bedroom.
The renovator reconfigured the house back to a 3bed with a second ensuite to have broader resale appeal, and literally rebuilt the property (although all those structural steel columns remained). The house post-renovation was relisted for $999,000 with a holdback on offers while inviting ‘Significant Pre-emptive Offers Only’. The list price was well below the acquisition price of $875,000 plus closing costs – with double land transfer taxes- and resale costs even before taking into account the actual renovation costs.
Even by my calculations the Sellers had invested a sizeable sum in this property: acquisition + closing costs + renovation costs/carrying costs + selling costs to my estimation landed at around $1,225,000 as a break-even, hence the reason for the ‘”Significant Pre-emptive Offers Only.” mention on the listing.
Final sale price via a bully offer? $1,380,000. Personally, the $155,000 profit margin (at best) required an enormous undertaking given it took 18 months. Don’t assume quality renovators make bags of loot.
The property below on The Danforth sold this month on a Saturday (instead of the following Wednesday which was the original offer date) when a bully offer registered on the Friday triggered a bidding war of 10 bids on the Saturday at 330pm. In advance of these multiple bully offers, 5 home inspectors completed 5 inspections for 5 different buyers in the house at the same time on the Saturday morning in their effort to compete. Given each inspection costs $350 to $700, a lot of coin was spent by Buyers without success. Personally I always provide a presale inspection with my listings to avoid such capital expenditures being spent for naught, but each to his or her own I guess.
Listed for $825,000, it sold for $1,170,000:
Personally, I think a Seller may do equally well – if not better – by simply holding back offers for the full time frame without considering bully offers. It served the Seller of the house below, near Dundas and Broadview, which sold this past week with 21 offers. Listed for $829,000, it spiked to a precedent-setting $1,101,000 (given it backed onto the Don Valley Parkway).
The Toronto real estate market is complex, and in the original City of Toronto it’s firing on all cylinders. For those who love it, like the Urbaneer team, it’s invigorating, but it’s not for the faint of heart. Especially for Buyers.
Here’s our complimentary piece that revisits bidding wars & bully offers, but with a focus on holdback psychology and strategies for Sellers: Dear Urbaneer: About Holdbacks, Bully Offers, & Bidding Wars For Sellers
Want to learn more about strategy in Toronto real estate, and how the market has been faring this past year? Check out:
Want a macro-overview on the Toronto real estate market? Read my Urbaneer Real Estate Forecasts!
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~ The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000
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