January’s numbers have just been released by TRREB (Toronto Region Real Estate Board) and based on what I’ve personally experienced we are in a very strong seller’s market for most property types. Downtown condos are also starting to trend upward for the first time in 10 months. I’ve had a lot of clients ask about how to move forward in this hectic market. Let’s take a look at what to expect if you are buying in a hot seller’s market.
What to do if you’re a first-time buyer?
As I mentioned earlier the market for most property types in the GTA is a HOT seller’s market, so what do you do if you’re a first-time buyer in this tough situation? First of all, familiarize yourself with a solid home buyer guide. You will learn all the steps that you need to take prior to even looking at homes. Once you’ve done that and you’ve sorted out the financing you have to have a meeting with your agent and have a real conversation about what you can expect in this market. It will be challenging and exhausting. Learn how to win a bidding war, because you will most likely have to compete. If what you are looking for isn’t in your price range, maybe shift your attention to something else. Condos, for now, offer value and potential growth in the future that will be easier to purchase. The key is to get into the market, which is challenging, so starting off a bit smaller may be the wiser choice.
Pro tip – What to avoid
Here is a hypothetical scenario. You start looking for a property, you find something that you really like and you’d like to make an offer. After doing your research with your agent, you realize that it’s an extreme seller’s market (an absorption rate of less than 1 month of inventory). Don’t be fooled by the listing price, it really doesn’t matter when the market is like this. All you should be looking at is what did a recently comparable home sell for. The closer in type, style, and condition the property is to the one that you like the better. If that comparable property sold for $1,000,000 two weeks ago and the absorption rate is so low that there isn’t enough inventory to last a month, this property WILL sell for higher than the last comparable sale. If you are really thinking of making an offer on this property, try to win! In other words, you are making an offer of $1,025,000 or higher, firm no conditions (please do your due diligence on the no conditions part) I’ve heard from clients on many occasions “well, let’s just try making an offer, it doesn’t hurt”. Actually, yes it does! Any additional offer on that property just gives the listing agent and sellers more leverage and increases the final sales price, . Guess what’s going to happen with the next property on that street that hits the market? They’re going to expect a higher price again, so the best course of action is if you’re not trying to win it, don’t make the offer.
What about conditions in a multiple-offer scenario?
The more offers there are the less your chances are to win a “bidding war” if you have any conditions. There are things that you can do to mitigate risk, even in these circumstances.
- Inspection – get an inspector in prior to the offer date. Some sellers will pay for a pre-sale home inspection, but keep in mind that the inspector has no liability towards the buyer in this case. If you can it’s still better to have your own trusted home inspector check the property out.
- Financing – this is a tough one, your lender will most often say that they will not guarantee anything even with a pre-approval. The best thing you can do is work with a mortgage broker that will reach out to their lenders with your file and ask them for their opinion on how certain they are to approve it. This is still not a guarantee but it’s usually the best you can do. Having access to an emergency fund or purchasing below your maximum approved amount will help you in this scenario.
- Status certificate review (condos only) – prior to beginning your search for your condo you should have a lawyer ready to go. They can review the status certificate (if available) prior to making the offer and give you the green light. Some lawyers will charge you upfront for this, others will roll it into their closing fees
Once you have completed these steps you can confidently make a firm offer and hope that you win!
The deposit matters
The deposit is a very important aspect of the purchase and sale agreement to the seller. Keep this in mind, if the seller is looking at two competing offers that are almost identical they will almost always go with the offer that has the higher deposit. It shows confidence to the seller that you intend on closing the deal. In the GTA, a typical deposit is around 5% of the purchase price. In a multiple-offer scenario, a higher deposit amount is going to help you in winning the bid.
Do letters to the seller work?
If you asked me this question 5 years ago you may get a different answer. The problem is that this tactic has been tried and very rarely works anymore. For the most part, the sellers will not even have a chance to read it if they have to deal with 10+ offers. The second disadvantage of trying a letter to the seller is Covid. Right now in-person offer presentations are no longer a thing and the only thing the buyer agent can do is to e-mail the offer to the listing agent along with reassurances that the buyer they represent has the financial capabilities to close the deal. Better than having the agent send their reassurances though is a firm offer with a large deposit and a solid offer price.
What’s a bully offer and should you make one?
A lot of properties, actually I’d say most of them, have offer dates now. The strategy for the listing agent is to list the property below market value and not accept any offers for about a week to create a bidding war for their seller. In the GTA housing market, a lot of sellers write in the broker remarks (which can only be seen by agents through TRREB’s MLS) that they may accept a pre-emptive or bully offer. If the listing agent is inexperienced or unaware of the current market conditions you may strike gold with this strategy because they will let their seller accept an offer that may be lower than what they could get if they waited for the offer date. Here is how you can succeed in getting a property using a bully offer.
- Be quick to see the property, before most competitors
- Make a strong offer with a quick irrevocable
- Make the offer firm
- Have a solid deposit
The obvious advantage of making a bully offer is that you are either not competing or that the competition is not as fierce as if you waited for the offer date. You have to ensure that you know the market that you are purchasing inside and out. If the market has cooled off or there is a sudden increase in inventory, you may want to wait for things to play out and wait for the offer date. There may be fewer offers than the seller anticipated. The seller is not under any obligation to accept a bully offer but if you do your due diligence early and act quickly you may get ahead of the competition.