Until more recently, it was pretty much expected that when you decided to make an offer on a house, it wasn’t just a matter of whether you could purchase it for below the asking price, but how far below asking you could negotiate. While the past few years have been unbalanced, 2016 marked the beginning of a new era in Guelph real estate where the Sellers are firmly in the driver’s seat and any Buyers looking to enter this crazy market better buckle up.
First off, many Guelphites are wondering what the heck even caused this to begin with? The concept of “holding offers” on new listings only makes sense if current market conditions support this strategy. So what has changed in the market to support such marketing strategies?
Everyone and their uncle has an opinion, but let’s remember, I don’t take legal advice from a plumber, so why would you take real estate advice from anyone other than a realtor? If you want accurate, reliable real estate advice, find a knowledgable realtor and cling to them like glue. From my vantage point as an experienced realtor, the issue is really quite simple and relates to two main factors: lack of supply and GTA buyers coming West more and more.
Economics 101 will teach you the most basic concept of supply and demand. When supply > demand, prices go down (or at least don’t rise as fast) since there are more Sellers than Buyers in the market, thus the availability of substitutes is high. When supply < demand, prices go up since there are more people looking to Buy at any given time than there are houses available for purchase. For instance, if Guelph currently has 150 active listings on average, but 200 individuals looking to purchase a house, supply is less than demand by 50 units. Essentially, the real estate market would have 33.3% less houses available for purchase than a market equilibrium ( supply = demand) would dictate.
The second market condition within Guelph is a byproduct of the ongoing real estate saga in the GTA. A large, important market such as Toronto will naturally have higher prices due to the the availability of jobs, central location, and high population density. Furthermore, with urbanization promoting high-density multi-residential development in place of single family dwellings, detached homes are becoming that much more scarce. So, if you’re a large family who requires a detached home, but cant afford a $1,000,000 to $2,000,000 price tag for just your average detached home, what do you do? You move Westward where houses are easily 50% cheaper. You weigh the pros and cons of a commute to save hundreds of thousands of dollars on a house and the decision has clearly been a simple one for many. With prices in the GTA ever-rising, the spillover to more affordable communities is only natural, especially to cities such as Guelph which are well known for a high quality of living, low crime rate, and vibrant downtown. This spillover effect impacts the Guelph real estate market in a multitude of ways. First of all, as explained in the previous paragraph, Guelphites alone are already noticing a shortage of houses. Throw a pile of GTA’ers who are now moving West and the arbitrary numbers in my example of 200 Buyers in a market with 150 active listings, now becomes 300 Buyers with still only 150 active listings. The relative price of Guelph real estate compared to the GTA now further compounds our issue of a lack of supply. Moreover, with the average price of a detached home in the GTA at about 1.25 Million and the average detached home in Guelph around 500k, even if GTA buyers have to spend 100k over the asking price to secure a detached home in this market, they are still at only half the cost of a comparable home in the GTA. It makes amazing sense to them, but to Guelphites, it prices many of us out of the market. Furthermore, with the GTA being so competitive, citizens of Toronto have realized that the only way you can win a house is by coming in firm (i.e. with no conditions in your offer – financing, inspection, and insurance being the most common). This has caused a shift in the manner in which Guelph Buyers have had to construct their offers to compete not only with the high GTA Buyer’s willingness to pay, but also the clean terms of their offer. An additional result of this is that real estate in the South end of Guelph, where access to the 401 is easiest, has become a prime investment opportunity. With so many GTA’ers looking to buy or rent specifically in the South end of Guelph to reduce their commute as much as possible, investors in the GTA are scooping up detached homes and townhouses to rent in the meantime as prices continue to skyrocket. So realistically, Guelph Buyers are not only up against GTA Buyers, but also GTA investors. It’s no surprise that in 2016, over 50% of houses sold in the South end of Guelph were sold to Buyers from the GTA.
Now that we understand what factors are actually causing such a competitive market environment, we can discuss multiple offers in more detail. So, in “the olden days” (A.K.A. 2015), when supply was greater than demand, you simply listed your house maybe 10k above what your realtor’s suggested market value was, it sat on the market for weeks or months and then you’d eventually get one offer for say 20k below asking and after some good old fashioned negotiating, you’d arrive right in the middle at your target sale price of 10k below asking. The Seller got what they wanted and the Buyer actually felt like they got a bit of deal – win-win right? In a competitive market where we tend to see anywhere from 3 – 30 offers on any given property, it doesn’t make sense to just throw it on the market and let the first person willing to give you 10k under asking the property. You may still end up with multiple offers on day 1 even if you take that approach, but there is a better approach that Sellers can take – holding offers. What holding offers means is that we get the Seller to sign this fancy form called a FORM 244 and they stipulate when they want to “hold” off on looking at any offers until. Basically, they are instructing Buyers that, for example, if they list their property for sale on February 2nd, the Buyers will have a certain period of time to check out the property, undergo any pre-offer due diligence, and then only on the agreed upon date in the FORM 244, say February 8th @ 5:00pm, will they look at any and all offers. What this achieves is it gives a week, give or take, for as many Buyers to get through the house as possible and prepare for offer day when all hell breaks loose. Oh yeah, and part of the strategy is to list the house purposely below market value to get more Buyers interested and ultimately pump up the final sale price through competition.
Why would Sellers purposely list their house at 399k when they think it’s worth 430k though? Isn’t that a huge risk if only one person offers 390k? Wouldn’t they be better off listing it at 440k and hoping to get full asking or slightly below? Until recently, yes. However, when you have more Buyers than Sellers, people fight over houses in the form of multiple offers. A multiple offer is of course when more than one Buyer makes an offer on a property for sale at the same time. The low pricing strategy can be frustrating for the unfortunate Buyers out there, especially first-time homebuyers, but it makes all sorts of sense if you’re a Seller. The initial impact it has is getting Buyers that could never afford this home if priced at market value to now be interested. This in turn creates more interested parties and when you have more interested parties, you get more offers. Once the word of multiple offers comes out, the desperation and psychology of human beings takes care of the rest. Frustrated and desperate Buyers who have already lost out on several other properties in competition decide to finally put their foot down and go in heavy to finally secure a place to live. Also, when bidding against others, there is a huge psychological component. If you’re bidding on your own, it only comes down to whether you and the Seller can arrive at a mutual price. When you are up against one other Buyer, you know that the other Buyer is aware of your offer too. So one of you may originally think you can get the house for the full asking price of 399k, then the second Buyer submits their offer assuming you are at full asking price and decide to come in at 410k. Once more than one offer is submitted, the parties are informed by the listing agent that they are in competition and are given a chance to improve their offer before they are conveyed to the Seller. So, now the original Buyers will soon realize 399k isn’t going to cut it and up their bid to 420k and the second Buyers in anticipation of the first Buyers improving their bid, end up improving theirs as well to 430k. Yeah, that was super confusing, sorry. Ultimately, the end result, even just from one other Buyer, is that a house can instantly jump 30k in value. Now try having 5, 10, 20 offers come in for a property and that’s where 100k over asking happens, especially if the house was already priced WAY below market value to begin with.
The one thing I keep hearing with all of this multiple offer talk going on is that “the market is going to crash man!” I could talk about this for pages, but I’ll save you the headache and just touch on it briefly. I’m not the head of economic development or have a plethora of celebrated professional designations to my name, but I can assure you the market is not going to crash any time soon. Let’s start with the whole houses selling 20k, 50k, 100k over asking thing. Hearing that a house sold way over asking used to have some meaning, but now that agents are purposely listing houses for cheaper than they are worth to artificially build competition, when a house sells for 50k over asking, it’s not crazy at all because the house was worth more than the list price to begin with. There’s no doubt housing prices have risen dramatically over the past year due to the 2 factors I listed earlier, but by no means are houses selling 50-100k more than they are currently worth – market value and list price are not synonymous. Additionally, Guelph is a growing City, many jobs available, and is a great place to raise a family. This isn’t just a trend, it’s a place people really want to live in badly. Also, even if the GTA finally hits a bubble and prices plateau or even depreciate slightly, as long as the GTA remains significantly more expensive than Guelph (which it will), there will always be spillover from the GTA seeking more affordable housing in exchange for a longer commute. Then as far as investing is concerned, the South end will continue to be a great investment and being a major University city, investment properties around the campus and downtown will always be a hot commodity too. Lastly, even if housing prices were to take a slide, you can only lose money on your house if you sell it. Just like any other investment (stocks, bonds, etc.), the value on paper is trivial until you decide to sell. The whole issue with the mortgage crisis in the U.S. in 2008 was that sub-prime mortgages were being handed out at very low interest rates, for very long amortization periods, with no money down. People were overextending themselves plain and simple. This made finding yourself in a foreclosure situation very common because having not put a downpayment on the house and having a mortgage at a very low interest rate, if interest rates rise and housing prices take a dip, there’s absolutely no cushion. When your house becomes worth less than what you owe on it, you go into foreclosure. In Canada, the rules were already stricter, but as of late 2016, new mortgage rules were put into place to allow for a “stress test” in case interest rates were to rise, you now have to be approved at the bank rate of 4.84% even though current interest rates are hovering around 2.84%. Additionally, minimum downpayment has risen, especially in more expensive homes. 5% must be put down on houses below 500k, 10% for the portion of the price above 500k – 1M, and 20% for houses above 1M. These rules give Canadian homeowners the necessary cushion that if prices were to drop and interest rates were to rise, that they wouldn’t find themselves in a Power of Sale situation where the Bank becomes the owner of your house and sells it whether you like it or not. For all of these reasons, it can be said with much confidence that the Guelph real estate market will not crash due to current competitive market conditions.
Still want to buy a house in Guelph? Good! Here’s a few tips of mine for Buyers trying to purchase a house in this market:
- work with a realtor, it’s FREE as a Buyer, why wouldn’t you benefit from their expertise in ANY scenario, but guaranteed you will need one in this market
- don’t be fooled by the asking price, have your realtor send you the comparable sales in the area and determine value logically
- conditions are bad, if you’re not going in firm, you’re not going to win the property 99 times out of 100, so get out and see listings the first day they hit the market, then if you want to undertake any pre-offer due diligence like a home inspection, you can do that during the holding offer period and then on offer day come in with a firm offer, rather than having a condition in your offer for a home inspection
- Sellers place a large value on a firm offer since conditions can make a deal fall through. They will generally accept 20k less (depending on the price of the home) just for it to be a firm offer, so be aware that there is a risk with coming in firm, but it’s likely your only chance of winning unless you want to grossly overpay for a house (you’d have to be like 30k+ higher than the next closest bid to win with conditions in an average competitive scenario)
- consider a fixer-upper to avoid the super intense competition found on already-renovated homes
- get realistic, houses aren’t as cheap as they used to be and they aren’t going to go down, so procrastination is your worst enemy…those shiny stainless steel appliances and quartz countertops that you categorize as a NEED should be recategorized as a WANT or a future renovation to be completed to stay within budget for the time being. Simply put: re-evaluate your wants vs needs and be more willing to compromise.
Finally, it’s worth considering the impact multiple offers are having on other industries aside from acquiring/disposing of real estate. One excellent example can be found for those contemplating certain career paths. Home inspectors were in high demand and could make a solid living without much education or training. Multiple offers are resulting in the majority of Buyers foregoing their option to include a home inspection since firm offers are becoming a necessity in competitive situations. A recent report released figures that 70% of home sales in Canada had historically involved a home inspection and that number has recently dropped to only 25%. This means that home inspectors are seeing a drop of over 64% in demand for their services.
Overall, things are not as grim as the picture the media and uninformed citizens tend to paint. The best thing we can do is become better educated to avoid much of this confusion and set ourselves up for success.