By: Jenelle Cameron
7 Tips For Buying In a Seller’s Market
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“I was actually hoping the market would be depressed because of the pandemic,” says Fleming, 46, a technology director at a design agency. With many Canadians unable to work because of the mass lockdowns enacted to control the spread of COVID-19, he figured cash-strapped homeowners might be motivated to sell at favourable prices, providing a great buying opportunity.
But that’s not how it played out. Buoyed by historically low interest rates, buyers came out in droves to purchase single-family homes—especially those with backyards—in search of housing that would minimize their exposure to others and give them outdoor space to socialize more safely. At the same time, the number of houses on the market dwindled, as owners became cautious about strangers (and any pathogens they might be harbouring) parading through their homes.
Similar scenarios took place in housing markets across the country and, according to the Canadian Real Estate Association (CREA), only intensified by the start of 2021. “On New Year’s Day there were fewer than 100,000 residential listings on all Canadian MLS Systems, the lowest ever based on records going back three decades,” CREA senior economist Shaun Cathcart noted in a January news release. “So, we have record-high demand and record-low supply.”
What do you get when a surge in demand is met with a lack of supply? As any intro to microeconomics student will tell you, the answer is: skyrocketing prices. Indeed, the actual (not seasonally adjusted) national average price of a single-family home increased by 17% in the past year, hitting a record $740,900 in January 2021. Similarly, average single-family home prices in the Greater Toronto Area shot up to $1,074,600, from $921,600 in January of last year.
Buying in a seller’s market
Needless to say, all this posed a challenge to house hunters Fleming and Power, who had unwittingly entered an extreme seller’s market rife with bidding wars. Few properties in their price range met their criteria, and those that did garnered multiple offers.
“We found our dream home [in Toronto’s west-end Corso Italia neighbourhood], put in a bid, and didn’t get it,” says Power, 40, a senior operations manager at a tech company. So, they reviewed their finances and upped their budget to more than $1.3 million, but still had no luck even after looking at dozens of properties. “We always got outbid,” she says.
Finally, after months of searching, in November 2020 they landed a sweet three-bedroom with a fair-sized backyard and basement just south of Corso Italia. They offered and paid the asking price: $1,299,999—despite a similar property down the street selling for more than $1.5 million the day before.
How did they pull off this feat and, more importantly, what strategies can you use to be a more competitive buyer? We asked homeowners and industry pros to share their best tips for buying in a seller’s market.
Know what homes are selling for in your desired area
In a seller’s market, the asking price is often of little use. That’s because owners commonly underprice in the hopes of generating more interest and creating a multiple-offer situation—also known as a bidding war. “The listing price is just an offering to market and has nothing to do with the value of the property and what it’s going to sell for,” says Bruce Cram, a sales representative with RE/MAX Hallmark Realty Ltd., Brokerage, who was Power’s and Fleming’s agent. “Instead, you should focus on recent comparable sales.”
An experienced realtor can tell you what similar properties in the area are selling for, and it’s also important for buyers to familiarize themselves with the market by viewing multiple homes (virtually, if necessary) and seeing what features their money can buy. “That gives them the confidence to bid aggressively,” says Cram.
That’s exactly what worked for Power and Fleming, who had viewed and bid on that property up the street which eventually sold to another bidder for $1.5 million. “It had high-end renos, including an addition onto the back and a two-bedroom basement rental suite,” says Power. So both the couple and Cram were confident the more modest home they eventually bought would sell for less, reinforcing their decision to bid at the list price.
Consider making a bully offer
The other factor that cinched the deal for Power and Fleming was their timing. The listing hit MLS (the Multiple Listing Service that allows realtors and their clients to see other properties on the market) at 1 o’clock that morning, and Cram emailed it to them immediately. The couple took time off work to see the place that same day and discovered it checked all their boxes. “The sellers were taking offers at any time, so we said let’s offer them the list price and see what happens,” says Power. By 10:30 p.m., their offer had been accepted. That means the home was on the market for less than 10 hours.
In a seller’s market, you need to be quick. “We would check the listings from our agent every morning and prioritized seeing the ones we were interested in, even if it meant skipping dinner,” says Power, who got in the habit of keeping snack bars in her car for this reason.
“When a home comes on the market, you need to see it immediately because many won’t reach the offer date—they’ll have a pre-emptive offer,” says Cram, adding that such “bully” offers are one of the primary strategies buyers should implement in a seller’s market. Being first with an offer presents the seller with an enticing “a bird in the hand is worth two in the bush” scenario. Sure, they could wait for other offers, but what if they don’t get any as good as yours and you go on to buy something else? They’d be out of luck.
If you can’t drop everything to see a property immediately, see if your agent can conduct a virtual showing for you. Cram does this with clients via FaceTime, so they can at least decide whether it’s worth making special arrangements to view in-person.
Make an offer with no conditions
In a seller’s market, when you’re up against multiple other buyers, your offers must be unconditional to be competitive. After all, why would a seller choose an offer that’s conditional on the buyer obtaining financing or on a getting a home inspection done—which might put the deal in jeopardy—if there’s a selection of unconditional offers to choose from?
That means pre-approved financing is a must, and if you want to conduct a home inspection (which is usually advisable), it needs to happen quickly, before you put in your offer.
“The good (selling) agents will have a pre-list home inspection done, so buyers can rely on something to put in unconditional offers,” says Scott Ingram, a CPA and realtor with Century 21 Regal Realty in Toronto. Of course, it’s a buyer’s prerogative to get their own inspection, as well, considering that home inspection is more of an art than a science, and opinions may vary from one inspector to another.
The home Power and Fleming bought did not have a pre-inspection and they didn’t pay for one, either, although there was a list of upgrades the homeowners made and the years they were done. The couple decided to put in an unconditional offer anyway, which can be a financial risk since it’s hard to know if a home needs pricey repairs without having an expert give it a once-over.
“It feels uncomfortable, but it’s the only way to operate in this market,” says Fleming. “Fortunately, it doesn’t look like there’s anything that needs fixing that we didn’t know about.”
Re-evaluate your options
If you’re getting frustrated because you keep getting outbid, it may be time to review your wish list. “Real estate, like many things in life, is a tradeoff,” says Ingram, who likes to use the acronym SLAP to remind clients that they might benefit from rethinking their preferred home’s Size, Location, Amenities or Price.
“For most people, price isn’t much of a variable, since they have a finite amount they can spend,” he says. “But they can choose a smaller lot, fewer bedrooms, a place that’s got the same kitchen from 50 years ago, a different area of the city or look farther out.”
In some situations, however, you may even be able to up your budget by revisiting your mortgage application.
That was the case for Meg Jensen (not her real name), a development manager in her 40s who was struggling to afford a home in Kelowna, B.C. after returning home from an eight-year stint in Alberta. Despite earning a six-figure salary and socking away a sizable down payment by living with her parents for a year and a half, she was coming up short. The problem? Her student loan, line of credit and car loan made her debt-to-income ratio too high to qualify for a mortgage. “I had to get caught up on enough of the debt to make it feasible,” says Jensen. “But the market was outpacing my savings.”
That’s when Tracy Head, a mortgage specialist at Headstart Mortgage Architects in Kelowna, suggested that Jensen pay off her $23,000 car loan using some of the funds she had earmarked for a down payment. By lowering her debt-to-income ratio, Jensen opened up more borrowing room and was able to qualify. In December, she put in a $420,000 bully offer on a two-bedroom townhome, which was accepted.
“Sometimes a fresh set of eyes can help you fine-tune your application,” says Head. “Often there are ways to get your ratios in line.”
Don’t shop at the top of your home-buying budget
While it’s easy to get carried away and throw everything you’ve got at a home you love, that’s a risky proposition. In a seller’s market where prices are increasing rapidly, there’s a possibility your lender will appraise the home’s value below your purchase price. “Bank’s appraisers are generally quite conservative,” says Ingram, as they usually look at the past three months of sales activity on comparable properties to determine value.
The problem is, because banks will only lend you up to 80% of their appraised amount, you can end up in a default situation if you shop at the top of your budget.
Say, for example, you’ve been pre-approved for an $800,000 mortgage and you have a $200,000 down payment. So, you go ahead and bid $1 million on a property and your offer is accepted. If the bank then appraises the home at $900,000 instead of $1 million, they’ll only lend you $720,000 (80% of $900,000)—even though you were pre-approved for an $800,000 loan. If you can’t get mortgage insurance to cover the difference (which is not an option for homes of $1 million or more), where’s that extra $80,000 going to come from?
“Perhaps you can borrow from an alternative lender or the bank of Mom and Dad,” says Ingram. But if those possibilities aren’t available, you won’t be able to close the deal and you’ll not only lose your deposit—you could also be sued for damages if the home ends up selling for less than you offered.
That’s what happened to a Victoria, B.C., buyer, who couldn’t close on a $1.75 million purchase in 2018 due to financing issues. The sellers sued when the property later sold for a much lower $1.56 million, and the buyer had to forfeit a $50,000 deposit and pay an additional $195,000 in damages to cover the difference in selling price and the seller’s legal fees.
Another reason to stay well within your budget is that there’s no guarantee that the home you purchase will continue to appreciate. If prices fall, you could end up owing more on your home than it’s worth, leaving you with negative equity or what’s referred to as an underwater mortgage.
While most experts predict continued growth in Canadian housing prices for the foreseeable future— especially with continuing low interest rates and record low inventory—nobody has a crystal ball and anything can happen. “In the near term, I think prices will continue going up,” says Ingram. “But if you had asked me last year to make a prediction for the next 12 months, I would have been way off.”
Keep your down payment liquid
When home prices increase 17% in a single year, it’s logical that you’d want to invest the funds you’re saving for a down payment to avoid losing ground. After all, if you’re looking at homes in the $600,000 price range, and you have $75,000 to put down, that’s 12.5% of the purchase price. But if you’re still searching a year later and those same homes are now selling for $700,000, your $75,000 down payment has diminished to 10.7% of the purchase price.
Unfortunately, investing your down payment puts you at even greater risk, Cram cautions. If you find a place you love tomorrow and your offer is accepted, you’ll have to come up with a deposit immediately and your down payment at closing, which is usually within 30 to 90 days of signing a purchase agreement. What if markets tank in the interim? You’ll have to sell those investments at a loss, and you won’t have enough for your down payment—putting you in a perilous default situation, as described above. “That money can’t be fluctuating,” says Cram. “It needs to be in a cash account.”.
So, unless you’re taking a prolonged break from house hunting, your best bet is to park your money in short-term GICs or a high-interest savings account, where your cash will at least earn a little bit of income.
Don’t give up
Seller’s markets can be discouraging for buyers—especially given that home prices have already become unaffordable for many Canadians in an increasing number of urban centres. According to a recent National Bank report, median-income households in a combination of 10 major metropolitan areas across the country would have to save 10% of their pre-tax earnings for five years to come up with the minimum down payment on a median-priced home. Then they’d have to put 40% of those pre-tax earnings toward the monthly mortgage payment.
“There’s a growing wealth disparity of haves and have-nots. Almost all my first-time buyers need parental assistance,” says Ingram.
Still, persistence can pay off, as it did for Power and Fleming. “We must have looked at 40 places, if not more,” says Power, who adds that they almost couldn’t believe it when their offer was accepted. “Just keep looking until you find the one.”
Article by Moneysense.ca | Tamar Satov