Welcome to my blog on housing, culture, and design! I’m Steve Fudge and I’m celebrating my 34th year as a realtor and property consultant in Toronto, Ontario, Canada.
It’s time for this month’s installment of my Dear Urbaneer series, where I answer real estate questions from followers and clients. This time, I’m guiding a potential Seller who is curious about Letters of Opinion, and the role they play in determining value.
Dear Urbaneer:
I’m thinking of putting my home up for sale. How does one figure out what their property is worth in such an uncertain market, and by extension, should one set the asking price higher to leave some room for negotiation? Furthermore, I’m familiar with property appraisals as a determinant of property value, but a neighbour of mine who recently sold their home also received a Letter of Opinion from their realtor at the beginning of the process. What’s the difference?
Signed,
How Will I Know What My House Is Worth?
Here’s my reply:
Dear Worth:
In short, a property is worth whatever sum a rational educated Buyer and an informed objective Seller agree to at a given point in time, but this also oversimplifies the complexities that ultimately create value.
Market dynamics, interest rates, seasonality, price range, the property itself (size, age, type, condition, and location), and even political climate can factor in what a property is worth because of the influences these each bear on supply and demand-propagating value.
But to your question. What is the difference between a property appraisal and a Letter of Opinion?
An appraisal is an unbiased professional opinion conducted by a certified property appraiser. There are many circumstances in which a formal appraisal may be required or appropriate. For example, when you have purchased a property conditionally on securing satisfactory financing your lender will likely order an appraisal as part of their due diligence to ensure the property is worth the value that you’re paying, or at least the total of the mortgage debt plus costs to ensure they’re secure in recovering the funds, in advance of issuing mortgage approvals. Furthermore, they may also have one completed when your mortgage is up for renewal or, if you’re considering a new lender, they may want to complete an appraisal to ensure the veracity and value of your property; they visit your property and conduct a comprehensive inspection based on several set criteria, including the location of the property, the features and detriments of the site, and the size, age, and condition of the dwelling. Further reasons for a formal appraisal might include insurance, legal proceedings, or if you’ve recently completed substantial renovations.
Appraisals may rely on one or more of The Three Approaches To Value In Appraisal Practice to determine their appraised value. The appraisal comes with a comprehensive report, which comes at a cost. Here’s my helpful post called Dear Urbaneer: Do You Have Guidance On Property Appraisals & Appraisers In Toronto? You also will want to ensure that you choose an accredited appraiser with a good reputation. When looking for a professional, it is a good idea to consult the governing association. That way you can connect with people who are properly accredited and therefore accountable for their work. You can consult the Appraisal Institute Of Canada to find someone in your area. And like when sleuthing other professional services, seek references and reviews. And ensure you choose someone who knows your location.
What Is A Letter of Opinion?
A Letter of Opinion essentially sums up and ratifies the valuation of a property by a real estate professional, and while it takes into account similar factors in its assessment as an appraiser, the degree of detail is somewhat less than that of a formal appraisal.
For such a letter, the ‘market value’ being determined is defined as “the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale”. The authoring realtor begins by assessing the list and sale prices of the most comparable properties in proximity to the subject property (weighing the former heavier than the latter), takes into consideration the overall size and condition of the dwelling, and makes adjustments to allow for variables like location, parking, recent upgrades, renovations, uniqueness, and quality.
A lot of our business as realtors starts when a property owner or their representative reaches out to get an estimate on the current value of a property. They may be doing preliminary research in advance of listing a property for sale, or simply looking to gain a sense of their asset value – one that is both up-to-date and considerate of current real estate market dynamics.
This service, which is the baseline of our real estate listing service and how we hope to earn your trust, and then your business, is both informative and helpful.
After making our introduction, touring the property, and getting a better sense of your objectives and timeline so we know how to serve you best, with your consent we prepare a comprehensive evaluation that includes an overview of the market conditions as it pertains to your dwelling type at that moment in time, a synopsis of the factors currently impacting and influencing real estate values in your neighbourhood, and a comparative analysis of recent sales of similar properties in proximity to yours.
From this, we extrapolate the range of value we estimate your property would sell for. Alternatively, if you’re seeking an opinion on the value of a property at an earlier period or specific date, we can use the MLS archives to find appropriate supporting data in most instances. How this is executed and the fee it costs, if there is one, is determined by the realtor and/or their brokerage.
Right now, word is that many realtors are providing written estimates of value with a range of variance between 10 and 20 percent, meaning that a realtor might say it is their opinion the property is worth $1,000,000, but that it could vary by $100,000 to $200,000, more or less, and either higher or lower, than that sum. I can’t say I would find that helpful but it would open the door for me to have a candid conversation on why they can’t be more specific. After all, if there is no recent reliable data and some lukewarm comps from a few years ago, the best course of action for the realtor and the seller would be for them to seek the services of a professional appraiser.
Incidentally, like all occupations, it’s pretty easy for realtors to become accustomed to following a particular process or program in how they trade property, especially when market conditions have been consistent for a long time. Entrenched habits and patterns of behaviour can also breed complacency, meaning when a real estate market does go sideways, realtors may be in a state of stasis they believe the circumstance is only temporary such that they brush it aside until things ‘return to normal’.
It’s important to mention that the projected value of a property is not absolute, particularly in a fluctuating market where we are currently sitting. It may sell for more, for example, in the case of a bidding war, or it may sell for less for other reasons. I’ll explore that, and the nuances of Fair Market Value of a home, below.
A Letter Of Opinion Has Multiple Uses
Letters of Opinion might be requested for taxation purposes or a change in title, and are also useful if someone wants to know how much a property was worth at an earlier date in time for the filing of certain documents.
For example, if Revenue Canada requested the valuation of a property on a specific date because the owners, say, changed the use of a property from their primary residence to a revenue property, a signed formal Letter of Opinion by a realtor would be considered satisfactory in most instances.
Likewise, if the members of a family inherit their parent’s property and rent it for a few years before selling it, a Letter of Opinion that provides a value of the property at the time of inheritance will serve in reconciling whether capital gains taxes are owing for the increase or decrease in value while it was rented. Such a letter can also be used when one party sells their ‘Tenants In Common’ or ‘Joint Tenancy’ interest in a property to the other co-owner(s) in an amicable sale.
In other instances – and for less official purposes – these opinions of value are requested at the beginning of a property-selling journey, to help explain and frame price expectations for homeowners, or to shape a selling strategy.
An Opinion Of Fair Market Value
One habit many realtors should correct now, as our market fluctuates and shifts, pertains to how a property’s ‘Fair Market Value’ is estimated. In particular, I believe it’s risky to rely on sales of similar dwellings situated near a subject property that sold in a bidding war no matter how recent.
Why? Because, by definition, ‘Fair Market Value’ is the sum a willing educated prudent buyer and an open informed judicious Seller acting independently of each other agree after negotiating a ‘meeting of the minds’ once the property has been exposed to the open market for a reasonable time.
This is contrary to the circumstances of many houses that sell on their Offer Dates when multiple Buyers blindly compete against other Buyers to secure their purchase, as well as situations like when a condo comes to market using the List Low Holdback Approach with a set scheduled Offer Date but a Buyer secures it by submitting a pre-emptive offer for a considerably higher sum to the Seller within hours of coming to market.
I’m not saying these two examples of how real estate is bought and sold in Toronto are wrong, and if you wanted to dig in your heels and take the position they can serve as indicators of ‘Fair Market Value’ I would acquiesce to your point because I’m not invested in changing your opinion.
However, I do believe the hyper-competitive nature of the bidding war process can fuel Buyers to offer a price that is, in fact, higher than they would if they were negotiating directly with the Seller.
The Intricacies Of Determining Fair Market Value
Back briefly to the topic of Fair Market Value, a client recently asked whether the sale of a property nearby that was the result of an opportunistic vulture negotiating hard with a desperate Seller would now be considered the new barometer for Fair Market Value in their area? It’s a great question.
There are a lot of mitigating factors but by and large, in the freehold market, the first sale in an area does not set the new value. Nor does the second unless it is located closer to your property than the first one. But once the third sale is posted on MLS it starts to muddy the waters because it implies a pattern. In the condo market, the impact can be much more immediate and hard-hitting in, say, a high-density investor-owned tower than in a boutique owner-occupied mid-rise building located in an urban village. In a condo high-rise with hundreds of units, where 10 to 20 units may be listed for sale at any given time, a unit that sells for a substantial discount directly impacts all the similar units in the building, whether by having the same unit number, or similar square footage. As I’ve written before, in a high-rise condo your resale value is always dictated by the most desperate of Sellers.
Not to say a Seller has to be desperate. I was recently researching a condo complex in the Church Yonge corridor that was a 21-storey mid-rise completed in 1989 with 240 suites. A client had inquired about a 1+1 bed 830 square foot suite with deeded parking currently listed for $629,000. Last June 2023, three very similar suites having an identical common fee sold for sums ranging from $641,000 to $690,000 depending on the extent of renovations (because a 35-year-old condo will have units in original condition, varying degrees of upgrades spanning decades of changing trends and tastes, to newly renovated suites – all potentially competing for the Buyer because the space plan remains the same). However, in December 2023 another similar unit with an identical common fee sold for $560,000 which was $81,000 to $130,000 less than the 3 sale prices achieved in June.
As I researched deeper, I discovered the condo that sold for $560,000 had been listed previously in November 2023 for $639,000, meaning that the Seller initially came to market with a list price that was fair relative to the June sales I mentioned but still did not generate sufficient interest to secure a Buyer. The Seller was also an Executor of the Estate who was in charge of securing a sale. This is important because an Executor is not emotionally invested in how much a property garners, and their objective in serving the Estate is to dispose of the property in a timely manner. The listing history shows that they fulfilled their obligations even though the discount in price was significant.
This example demonstrates how one Seller can completely change the optics of a building. Any existing Sellers could sit tight and try to hold out for the higher sums attained in June 2023, but the December sale does serve as a precedent even though it was an Estate Sale. The next sale will tell which way the tide is turning.
Nearly a year ago I published a piece called High-Ratio Homebuyers Take Advantage Of Price Moderation In Toronto Real Estate where I shared my surprise that high-ratio Buyers were securing properties after offering Sellers sums that were as much as $200,000 less than the asking price. Although there are many reasons why a Seller might accept an offer for a sum that is deeply discounted, one clue I found was that a high percentage of these properties had been owned for decades and had seen substantial price appreciation.
Think about it. If you bought a property for $150,000 and 30 years later someone is willing to give you $999,999 despite your $1,1 mil asking price, might you still say ‘Yes’ because:
- the sum is more than you ever thought your house would garner,
- accepting this offer will allow you to move on to the next chapter of your life when, in your senior years, time is shorter supply,
- you are risk averse and – seeing the current shift in the market and reading all the doom and gloom – you think it’s wise to cash out.
Any of these truths, likely combined with timing and motivation, could solidify a decision to sell. I also believe that once a Seller has decided to sell (or a Buyer has decided to buy), at a certain point their motivation takes a higher order than the price they want (and if they’re a Buyer, the property they choose). Value shifts from money to quality of life and supporting those goals.
Because of this, in today’s market, it’s much more difficult to peg a price on everything, but particularly the special and the unique. Fewer sales mean there are generally fewer recent comparables to help use as a guide price, the anomalies of financially-cornered Sellers accepting desperate sums remind us to be cautious and conservative, while the increasing number of Buyers submitting egregiously low bids without regard for what the property is truly worth signal how many wild cards are in play. In these conditions, how does a realtor establish their opinion of Fair Market Value?
A seasoned realtor with experience in real estate development can examine a property according to the fundamentals of appraisal; the political, economic, social, environmental, and physical factors directly or indirectly impacting a site; by assessing the historical merits, current trends, and futures forecast as considerations; and layering it with the intangible opportunities and constraints of the likely target markets to arrive at a realistic sum that is dependent on the property being exposed to the right buyer profiles over a reasonable amount of time.
If this is what your realtor is doing, then congratulations, you’ve got an ally who is serving your best interests.
The Psychological Factors Behind Determining Value
Given Fair Market Value is the result of a Buyer and Seller negotiating and coming to a meeting of the minds, there are occasions when I don’t want anyone to negotiate directly with my Seller. Huh? If my Sellers are getting a divorce, are recently unemployed, or find themselves under financial duress, I may recommend we first try the List Low Holdback Approach to see if we can drive the price to a sum that aligns or exceeds what my clients need to exit the property. After all, if a co-operating broker or their Buyer gets one whiff of desperation it could dramatically impact negotiations which is problematic if time is of the essence.
And believe me, real estate can be cutthroat, so I am very careful not to jeopardize the financial welfare of a client. As an extremely aware person, honed by years of experience in the real estate trenches, I am paying attention to everything. Take for example the instance I was showing my clients a 5-year-old new build in East York occupied by a family with five kids. After completing our tour, we had a casual chat in the open-plan kitchen discussing the pros and cons of the property.
As is standard practice, I engage in a feedback loop starting with my buyer clients identifying where the property hits, where it fails, and what is undecided. I follow it with my assessment as it pertains to my clients, such as the opportunities and constraints of the location; the upside and downside of the calibre and quality of the construction; and in their case how the dwelling could foster or fail to serve their blended family.
I also told them I felt the house presented incomplete and there was an air of defeat lingering in the air. Even from where we were standing, I pointed to a couple of spots saying “Don’t you think that’s where a wingback chair would go?”, and “Shouldn’t there be 4 identical dining chairs around the breakfast table instead of just 2?” I also noted that although the husband’s clothes were in the primary bedroom walk-in with hers, I felt like his best suits and dress shirts were gone.
Deducing this information, I pegged a divorce was underway and how sad I was for the kids while my Buyers just shook their heads in disbelief and said, in unison, “Really?” as they noticed none of it. And then for no reason, I randomly opened the kitchen top drawer closest to me. Sitting on top of all the utensils and cutlery lay a piece of 3-hole punched 8.5″x11″sheet paper surrounded by pieces of worn clear tape with the hastily scrawled words screaming in black marker “STOP! If you come around here 1 more time, I am calling the police!”. After we all stared silently at it for a few moments I pushed the drawer to its soft latch close. As we headed to exit the front door my Buyers said “Wow. You’re really good at what you do.”
The value you are likely most interested in as a Seller is the top dollar amount that you can achieve for your home. There is a myriad of influences that converge to accomplish that, so having a professional with a data-driven, sensible, and focused strategy is essential. I’m here to help!
Did you enjoy this blog? Here are a selection of related pieces:
Dear Urbaneer: Do You Have Guidance On Property Appraisals & Appraisers In Toronto?
Exploring Toronto Real Estate Property Values
The Four Values Of Real Estate For Bidding Wars And Bully Offers In Any Market Climate (Plus Cats!)
Climate Risk Assessment And Real Estate Values
Dear Urbaneer: Interest Rates In The 1980s And Now
Also, check out our tailored approach to selling properties in these posts:
How Urbaneer’s Custom Marketing Program Sold This Handsome Edwardian Residence In East York
How Urbaneer’s Custom Marketing Program Sold This Authentic Broadview Loft In Riverside
How Urbaneer Sold An East York Bungalow ‘Estate Sale’ For Redevelopment
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Since 1989, I’ve steered my career through a real estate market crash and burn; survived a slow painful cross-country recession; completed an M.E.S. graduate degree from York University called ‘Planning Housing Environments’; executed the concept, sales & marketing of multiple new condo and vintage loft conversions; and guided hundreds of clients through the purchase and sale of hundreds of freehold and condominium dwellings across the original City of Toronto. From a gritty port industrial city into a glittering post-industrial global centre, I’ve navigated the ebbs and flows of a property market as a consistent Top Producer. And I remain as passionate about it today as when I started.
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Thanks for reading!
-The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-800
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