When List Price Lies: Avoiding the Pitfalls of Under-Listed Homes
Author: Tracy Ruddell
We want to talk about the list prices of Toronto homes for sale today; specifically, the phenomenon that is under-listing. Once a dirty tactic to fuel a bidding war, under-listing has been the norm in Toronto for years now and it’s spilled over to hot Real Estate pockets across the GTA.
Whether you like the tactic or not (and for the record, we hate it and wish the climate was different), it’s a reality that both buyers and REALTORS® have to contend with. And it’s not going away anytime soon. You can, however, learn to play the Real Estate pricing game so that you don’t waste your time and energy on bidding wars you can’t win.
Under-listing has become the norm as of late in the Toronto market. What's shocking is not that it's become a popular pricing strategy but rather how many buyers and their agents think they stand a chance at getting an under-listed home by going in at asking price.
If you're a buyer in this hot Toronto Real Estate market, get bid savvy before you make any bad bids. Here our top tips:
We’ve all been there where we see a home we love on paper in a neighbourhood we can’t afford and it’s actually in our price range! The heart starts to flutter and you think maybe it will go for list… It won’t. Don’t let the sticker price suck you into making a low-ball offer.
The one saving grace of under-listed homes is that they’re usually under-listed by quite a bit. It used to be that sellers would follow a “just below” pricing strategy (think of retail pricing strategies, the psychology of $0.99 versus $1.00) but most don’t bother with that any more. Most list at what they hope to get (and even then, a home could still sell for considerably more) OR if they’re under-listing, they’re under-listing by a substantial amount to fuel a bidding war.
So, as buyers become savvier, low-balled homes are becoming easier to spot. $750k for a finished, detached home in a great area close to downtown? Not going to happen. The listings agent wants to spur more offers on offer night to drive up the final sales price. They also want the open house to be packed to add to the emotional frenzy and the fact is that a lot of buyers (and regrettably, a lot of REALTORS®) are just not educated on home prices and they think that the home is attainable close to list price.
Be particularly wary of the $999,000 or $990,000 listings. This is a tactic to attract an obscene number of bidders because a lot of buyers can’t get mortgaged above the $1M mark. This is due to a combo of the new Canadian mortgage rules with stricter financial stress tests and the requirement of a 20% down payment for homes over $1M. You’ll often see homes that are valued at $1.2M or $1.3M listed just south of $1M to get 20 or 30 bidders to the table when the reality is, likely, only <5 were ever going to be in the running. In fact, often only the top 2 or 3 bidders come in at a realistic number out of the gate.
If there’s one golden rule you need to remember when it comes to setting an offer price it’s that comps trump list price, every time.
In this market, you really need to be reviewing comparative home sales in the area with your REALTOR® in advance of viewing a home so that you go into that viewing knowing market value. I wouldn’t go as far to say that MLS list prices have become meaningless (not all homes are under-listed) but on under-listed properties, they might as well post it for $1.00 because in the immortal words of Cher from Clueless, sticker price is often “just jumping off point to start negotiations”.
The problem with just relying on comps? In this market, often times, there are none. If the last sale was more than two years ago (hell, even one year ago), forget about it. It’s a different world now, with home values in some areas going up as much as +30% or more a year. For this reason, you can’t rely on comparatives in isolation of other information. You also need to work with an expert who knows the area very well.
The single, best thing you can do to alleviate the frustrations of the GTA Real Estate market is to hire an expert REALTOR®. By expert, we don’t just mean simply a “professional”, we mean a Real Estate Agent who specializes in the neighbourhood you’re hoping to buy in AND in the property type you’re looking to buy. For example, you don't want a REALTOR® who mainly sells freehold homes in Burlington negotiating your bid on a Leslieville condo.
Most Real Estate brokerages employ generalist REALTORS®; by that we mean agents who will work with any buyer or seller in any location. Think of them as jacks- and jills-of-all-trades. Unless you’re a client who knows a lot about Real Estate and has been through the buying process several times, a generalist is not what you want.
Today’s market is much more nuanced than in decades’ past and requires a keen negotiator. Generalists rely on online information and MLS sales history to price homes in areas they’re not familiar with–they typically don’t have much first-hand knowledge. As mentioned earlier, with the market shifting so quickly, there just aren’t always decent comps to compare. This leaves generalist agents shooting blind when targeting an anticipated sales price. They also lack the local-area expertise to say which streets are good investments, which areas to avoid, etc. To be frank, inexperienced REALTORS® who lack knowledge, in-depth training and keen negotiation skills are nothing more than glorified taxi-drivers.
At a minimum, you’ll want to hire a Neighbourhood Expert; someone who focuses the majority of their business in the neighbourhood(s) you're looking in. 9 times out of 10, they’ll be able to tell you a reasonable price-range that a home is likely to sell for before knowing the specifics of offer night (i.e. how many other bidders). Many Real Estate companies offer Neighbourhood Experts–particularly smaller, local agents that have their office based in the ‘hood they specialize in. They’ll be able to craft a strong property hunt strategy with you in advance, alleviating the frustration that comes from looking at under-listed homes that they know are out of your price range, regardless of what the list price says.
We’ve actually taken this neighbourhood expert model a step further here at Property.ca. We know that buying a condo is very different than buying a freehold home, for example, despite what generalist agents will tell you. That’s why we’ve built three, distinct teams who focus on individual property types–freehold housing, condos and lofts–with neighbourhood experts within each team. We hire and train by speciality and cultivate a non-competitive, team environment where our REALTORS® team up and share knowledge and skill sets when needed (for example, if you’re selling a condo in the west end but want to buy a house in the east end).
Whether it's with us or another company, take the time to research your options and interview several agents to find the best fit. Here's our advice on how to find a REALTOR®.
Under-listing is the Trojan horse of Real Estate battles. Just when you think you’re home free, that you’ve finally found a place you love and can afford, you find yourself facing a dozen or more competing offers on offer night. The final sales price is hundreds of thousands over list.
There’s nothing more disheartening than losing out on several bidding wars but it may take the average buyer a couple of losses to better understand the market; that’s when buyers get more aggressive in their bids, once they understand first-hand just how strong their offer needs to be to win.
Now, as a buyer, if you’ve hired a REALTOR® who’s an expert and whom you trust to put your needs first, you can save a lot of time and heartache simply by taking their advice. Don’t get sucked in by under-listed properties when your agent is telling you they’re going to sell well above your maximum budget. And an expert REALTOR® should know this. Obviously, there’s no guaranteeing you’ll get the home you want because you’ve hired a great agent–the competition is just that fierce–but an expert should be able to get you in the running in most cases, providing you have the budget.
A lot of times though, a client without the appropriate budget will push to make an offer at list or just a little above even if their agent is advising them that the property will sell for much higher. Even worse, an inexperienced REALTOR® may tell a buyer that their offer is strong at just a little over list, riddled with conditions, when there are ten other offers coming in. You may think, what can it hurt to throw in a low-ball offer and see what happens? It does hurt and here’s why:
If this is the neighbourhood you want to buy in, you’re helping to drive up local-area prices that much further. You’ve now helped create a high-value comp that the next seller is going to look at when setting their target sales price. Think of it as hands going up in an auction, driving the final price up further with each bidder. Don’t waste your time and help to fuel price wars by participating in bids you can't win.
The only thing that’s worse than losing multiple bidding wars? Losing one by only a few thousand dollars OR being the highest bidder that loses because of a condition you would’ve waived had you known it would cost you the deal.
So, when a seller’s REALTOR® (the listings agent) has asked all bidders to come in with their Best and Final Offer (BAFO) right out of the gate, don’t think that this is a poker game and you’ll have a chance to sweeten the pot later. Bring your absolute best offer to the table because your first offer will almost certainly be your only offer.
Your REALTOR® should be in touch with the seller’s listing agent several times throughout the day on offer day. They’ll need to register your offer by a set time (the time will be dictated by the listings agent; it’s the same deadline for all bidders) but you’ll have a bit of time in between registering your intent to offer and delivering your actual offer. The deadline for receipt of offers is typically from two to four hours after the registration deadline, although it can vary.
This “in-between” time is critical. This is the time that a strong negotiator is using to suss out the situation and get you in the running to win the bid. Questions that are okay to ask are how many other offers have been registered, is the seller looking for BAFO or will there be a second round, how flexible the seller is on the closing date and any conditions, etc. There is some information that a listings agent cannot release, however, to keep things equitable and ethical such as the minimum price that the seller is willing to accept. They're also not allowed to tell you or your agent if your offer price puts you in first position, second, etc.
Offer night is when a REALTOR'S® pricing knowledge and negotiation skills are most critical. Even though the listings agent can’t tell you what the other bids are coming in at, an expert REALTOR® will be able to glean a lot of information from the basic exchanges that are legally allowed; just knowing how many other bidders there are at the table gives them a lot to work with. That, coupled with their local area knowledge and review of comps, will enable your REALTOR® to advise you on whether or not you’re likely to be in the running at the offer price you initially discussed.
If your REALTOR® is advising you to bid higher, you need to be prepared to crunch the numbers on the spot and move quickly. Remember, an extra $10k on a condo or $50k on a home seems like a lot of money (and it is, of course it is) but with today’s low mortgage rates, the difference to your monthly expenses is not astronomical. Frankly, you may end up paying much more than that by waiting given the incredible pace of value appreciation on the average GTA home. If it takes you six months to find the next property to bid on, home prices will likely have gone up more than that "sweetened" offer you considered making but didn't. Bottom line: you're not saving money by being too consertive in this market.
One of the best ways to educate yourself on local area home prices is to have your REALTOR® send you the final sales price of every home you view, whether you were interested in it or not. This will help you understand the true value of homes in that area so you’ll soon be able to spot under-listed homes on MLS and better manage your expectations.
It’ll also help you feel more confident in bidding aggressively when you do find a home you want to offer on. Ask your REALTOR® to email you a report every week or two of local sales while your house hunting.
What should you do if you find yourself on the losing end of one too many bidding wars but you’re doing everything right? With major housing supply issues (in relation to demand), increased bidding wars and a record-number of prospective buyers competing against you, make sure that you have a Plan B (and C) in place so you don’t spend a year or more fighting a Plan A battle you’re not going to win. Being flexible on property features, aggressive in your offers, educating yourself on the market and hiring an expert is the only way to realize your property dreams in a tough market.
For those who just can’t seem to catch a Real Estate break, have a read of our recommended house-hunting tactics in Priced Out, Maxed Out. Also, be aware of these Real Estate Lies; don't get taken in by shady tactics.
Lead image by Billion Photos from Shutterstock.