Homebuyers have it tough in today’s challenging market. With record low inventory coupled with a high number of buyers competing for coveted houses in the market, winning a home on offer night is kinda like winning the lottery. I wouldn’t know how it feels — having never won a lottery, nor even playing the lottery. But I imagine a buyer would feel that way.
Back in May 2016, I wrote an article about how to win a bidding war on a house in Toronto. I talked about each specific detail that makes a winning offer, and what buyers need to know in order to have a chance to compete in the challenging market almost five years ago.
Fast forward to spring 2021 — and the market is even hotter than ever. Record breaking prices. Record breaking sales. Record breaking low inventory. Houses are selling quickly. Prices are jumping daily.
If you’re thinking of a strategy to help you win a multiple offer situation today, has anything changed in terms of how you should approach offer night?
Let’s have a look.
Back in 2016 I recommended not to ‘overpay’ for a house. But I also talked about knowing the ‘potential value’ of a house. Today I refer to this as the ‘future value’ — what someone is willing to pay for a house today and what it could be worth in the future.
With prices rising quickly, and daily, a buyer has to adjust their way of thinking if they really want to acquire a house in this market. When you see double digit price growth, it’s easy to become skeptical and think that there’s no way the market could be sustainable at these levels.
Well… if you were a buyer looking for a home in 2020… and you’re still looking… you’ve missed out on massive price gains… and you’re paying more for the equivalent house today than a year ago.
How should you price a home without ‘overpaying’ and without buyer’s remorse?
That’s the challenge. And this is why I introduced the lottery metaphor (half jokingly, have seriously) when it comes to winning an offer night in the 2021 market.
I’m going to eliminate the term ‘overpaying’ from my real estate vocabulary even though real estate agents and buyers use this term.
Who’s to say you overpaid when you bought in 2020… when a similar house is now worth 20%?
Mind you, prices could cool (government intervention… increase in inventory) but ‘overpaying’ isn’t really an accurate term to use — because you’d have to know what you’re comparing the house value to in relative terms to determine whether or not you’ve overpaid.
Instead — I propose the term ‘future value’ or ‘future price’ — knowing that real estate is an inflationary good that rises with the cost of labour and materials, and also subject to supply and demand forces, whatever you are paying to get a house today over the most recent comparable sale is what you perceive as the ‘future value’ of the house.
In an upwards moving market, the house you’re bidding on today isn’t worth the same as the house that sold a week ago. Is it worth 1% more? Or perhaps 5% more?
It’s worth whatever you’re willing to pay for it. And what the seller is willing to take for it. That’s what establishes market price.
When you’re working with your real estate agent, you have to figure out what the price of the home is worth ‘today’ compared to how much the price has grown in reference to the previous comparable sale.
If you estimate home prices will continue to rise 5% or 10%…. you’re paying the ‘future price’ or a premium over the most recent sale. And in this market, that price is sometimes unimaginable… but remember… mid to late 2020 home prices seemed unbelievable until you saw what similar homes are selling for right now.
Many listing agents will recommend buyer agents to have deposit cheques ready on offer night. This gives the seller confidence that, if they choose one offer to accept or work with, the buyer won’t just back out and disappear from the face of the earth (this has happened… with legal implications of course).
Be prepared to bring at least a 5% deposit on offer night usually in the form of a bank draft.
Many buyers won’t bring a deposit on offer night. Having one ready will work in your favour (provided the price is right).
What happens if you don’t win on offer night? Simply take the bank draft back to your bank and ask them to reverse it. The money goes back into your account (less any fees you incurred).
Bring a deposit so you have a better chance at winning the multiple offer lottery.
I’ll keep this section very simple and brief. If you’re entering a strong multiple offer scenario for a highly coveted home, you won’t win unless you come with a firm offer.
For newbie buyers — a firm offer means an offer with no conditions. No financing condition, no home inspection condition, no status certificate review condition (if you’re buying a condo), no insurance condition — no conditions.
But wait — isn’t it dangerous and risky to submit an offer with no conditions?
Absolutely it is — that’s why you have to understand what it means, and you have to come prepared.
If your firm offer is accepted — you’ve won the lottery. You’ve bought a house. Period. You can’t back out now.
So how does a buyer come prepared with a firm offer and stay out of trouble?
You, with the help of your real estate agent, have to do your due diligence.
Did you check with your financial institution or mortgage broker to make sure nothing will hinder you from getting a mortgage?
Is there a pre-listing home inspection report available, or is your real estate agent able to point out potential issues with the condition of the house?
Are you able to get a home inspector in prior to offer night (if the seller will allow it)?
For condos — did the listing agent provide a copy of the status certificate for your lawyer to review prior to you making an offer?
Did you check with your insurance company if there are any potential issues with insuring the home?
Before putting in a firm offer, make sure you understand what happens when your offer is selected.
The Personal Touch
Five years ago I recommended buyers to write a personal letter to the sellers about what they love about the home and why their offer should be selected.
With lockdowns and social distancing in full effect, this year it’s time to leverage technology to send a personal message.
Buyers should consider shooting a quick, casual and heartfelt video expressing their feelings to the sellers about how much they love the home and why their offer should be selected.
While this personal touch does help if you have a strong offer (price, deposit, conditions) — it won’t help you if your price is way below the top bid.
I’ve heard stories from colleagues whose seller clients picked an offer that had the second best price, because of a personal message shared to them buy a prospective buyer. But we’re talking about a $5,000 difference between second place and first place.
Still — very much worth putting a video together if you’re every in a similar situation!
Whenever I compare the 2016-2017 market to the 2020-2021 market, I see so many similarities and yet so many differences.
2017 – no pandemic, still low inventory (before the spring market), high buying activity, multiple offers with prices jumping daily… then the non-resident spec tax was introduced.
2021 – pandemic, lockdowns, limitations on showings, no open houses, virtual/digital offer presentations, ultra low inventory, double digit price growth, record breaking sales and prices… new stress test rules.
There will be a frenzy of buying in many real estate markets between now and when the stress test comes into effect.
Many neighbourhoods remain competitive.
But don’t give up — keep trying if homeownership is your goal this year.
Real estate is a long term commitment. And when you look at the historical growth of real estate prices throughout Ontario, chances are — by the time you’re going to sell your home 5… 10… 20 years from now, you’re going to be happy you paid a ‘future price’ for your house and you won the multiple offer lottery.