Wednesday, April 19, 2017

Bidding Wars – Cause or Effect?

What was once the phenomena of the two, major urban centres – Vancouver and Toronto -- has now bubbled over to smaller cities and communities within commuting distance of the big two. 
Bidding wars are now commonplace and can be both rewarding and stressful.

The numbers can vary to $10,000 to $20,000 over asking price, and that’s at the low end, to upwards of hundreds of thousands over asking. One house in Vancouver went for $1 million over asking recently – what seller is going to say no to that? But can the market sustain it? 

Sales of existing homes rose by 8% in February compared to the same month a year earlier, while the national average home price soared 17% according to a Canadian Real Estate Association (CREA) report.

Some experts point to these bidding wars as the cause of high prices. Others say that the phenomena is the result of lack of supply. It may be a bit of both. 

While sellers may be happy about cashing out, the problem becomes, where to go? And buyers, who want to buy a home may not have the financial means to get into a financial tug of war with other buyers. The stress alone may cause them to just stop looking.

Patricia Boon, a veteran Realtor, who has been working in the Woodstock area for 30 years is not happy with the way houses are being sold these days.

“I don’t feel good about what’s happening. No one is looking out for the buyer,” she said. “This is isn’t good for anyone. Why play a game with the most expensive item you’re ever going to buy in your life?”

In Woodstock prices are up 15% over last year and, similar to other cities, there is a lack of single-family homes available for sale, which is creating a perfect scenario for bidding wars as we head into the Spring market.

Even more concerning for Bonn are the offers that go in with no conditions. “It’s not unusual for appraisals to come back lower than the purchase price two weeks before closing, even with a pre-approval,” she said. “Then the buyer has to scramble to come up with more money for the down payment.”

Bonn recalls a time not too long ago when the housing market was facing a similar situation.  “When it was time to remortgage, homeowners could not qualify. Or the market had corrected and now the mortgage that was higher than the property value. Many people walked away.”

To Condition or Not to Condition

Purchasing with no conditions is a slippery slope. Mike Rogozynski, a mortgage broker with OMAC Mortgages Powered by TMG, who works out of the Woodstock area is seeing more out-of-town purchasers and investors coming into the area, which already has a lack of housing supply.

 “Realtors lining up offers is definitely a factor for making the case that bidding wars may inflate prices; however, it’s a fine line,” he said. “ We already have a growing demand and lack of supply.”
Rogozynski strongly advises his clients to always put in a financing condition, even if it’s just three business days. “Anything can happen, even with a pre-approval,” he said. “A key component is the property. An appraisal may come back with a lower value, or a home inspection may turn up something negative.”

The Appraisal

Many appraisers are looking for marketing support when they value a property. Lending decisions are made on a property’s fair market value, which is defined as the market value of an interest in land at the highest price reasonably expected when sold by a willing seller to a willing buyer after an adequate amount of time and exposure to the market.

So, who determines the value of that property? One could argue that the market itself determines the value, which may be true, but a lender wants to know if the purchase price is reasonable.  An appraiser, who is specifically trained and who has sufficient experience, will be asked to offer an independent, impartial written opinion of the property’s value.

Appraisals are done for a specific client -- the lender. Because real estate is the major security for mortgages, the market value estimate needs to be as accurate as possible. 

One appraiser we spoke to from the Brantford area, who wishes to remain anonymous, says he tries to get to the purchase price when evaluating a property but sometimes the sale is a few weeks ahead of the market. For example, appraisers will conduct a comparative analysis of similar properties in the area that have recently sold. If prices are increasing, it may not show up in their analysis yet.

 “I also get a lot Realtors telling me the client spent $50,000 to renovate a kitchen and expect it to value out at that amount, which is not the case,” he said. “The fact that it was an upgrade is considered and is an added value, but not the costs.”

“At the end of the day, we have to be realistic of a property’s true market value and be able to back that up with data.”

A Realtor’s role in rising house prices

A written response from the Canadian Real Estate Association (CREA) said the 'bidding war' phenomenon is usually limited to very active markets where strong demand overwhelms limited supply. Although other Canadian markets may see multiple offers for exceptional/rare/sought-after properties, at the moment it is in Toronto and environs where this occurs regularly.

Pierre Leduc, spokesperson for CREA wrote, “As a marketing strategy, a REALTOR® whose seller has a property that is: a) located in an in-demand area and/or b) a unit-type that is in high demand (e.g. 4-bedroom SFH with garage) may recommend to his client to accept written offers at a certain date/time, which provides potential buyers clarity on when and how this sale will occur.

“It is the buyer's responsibility to decide whether or not to participate in this type of sale, and ultimately, how much to offer,” he added.  “REALTORS® don't have any special persuasive powers to force their clients to offer more than they can afford, offer more than the lender will loan them based on assessed value, forego a home inspection or remove other conditions just to be the successful bidder.”

A free market?

Paul Taylor, Executive Director for Mortgage Professionals Canada (MPC) said it was probably unfair to vilify Realtors in a market that has a significant lack of supply. “The current market is driven by demand and there are so few single-family homes available.”

MPC has been working closely with the legislatures, sharing information and making suggestions. One idea is to include a minimum 3-day cooling off period for buyers so as to relieve some of the stress.

“We favour a free market system and we don’t want to get in the way of that,” he said. “However, there is increasing impatience among buyers who want to purchase, which increases the pressure they feel to make condition-free offers.  It’s tough to say what’s best in the long run.”

Bidding wars are indeed risky. If this is the only option, here are some tips:

  1.  Do your research -- learn about the market values in the neighbourhood. 
  2. Get pre-approved. Make sure your mortgage broker has all documents upfront. 
  3. Although conditions with offers may get sidelined, try to get a financing condition for at least three business days
  4.  Sometimes, it’s not always just about the money, so write a letter explaining why you want that particular house.

Good luck!

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