This week, a house sold in Toronto’s Yonge and Lawrence neighbourhood. That alone is hardly newsworthy, but the details on how the sale took place has likely been the most talked about real estate story in a long time.
On April 17th, a house on Glencairn Avenue was listed for sale for $699,000 with an offer date set for this past Sunday. The house was in rough condition – according to the listing, it was full of knob and tube wiring and was being sold in “as is” condition.
However, the home is located in a nice area of Toronto, where the other homes on this street have sold between $1.4M - $4.4M so far this year. A house listed at $699,900 is considered a major steal – if you could actually get it for anywhere close to the asking price....
Offer night rolls around, and according to the media and inside sources, here is how it played out:
- More than 1,000 people had booked showings to see the home
- 72 offers were submitted on the property
- The asking price was $699,000
- The sale price was $1,365,888
- The sale price was 195% of the original asking price
- The winning buyer’s agent was also the listing agent for the property
I have several questions.
Why did so many buyers waste their time submitting an offer on this house?
Think about it. 72 offers were submitted. That’s 72 buyers who took time to visit the home. That’s 72 buyer’s agents who visited the home with their clients, prepared an offer, and met with their clients to sign it, and then present it to the listing agent. That’s 72 buyers who spoke with their mortgage professional to see if they could get financing for this house (because you can bet that almost all the offers submitted were firm – no conditions). 72 buyers went to their bank to get their deposit cheque, and 71 buyers returned to their bank the next day to return those funds to their account. Many of the buyers likely performed home inspections before submitting their offer. So much time was wasted, and trees were wasted! 72 offers and all the accompanying paperwork. Call me a tree hugger, but I can’t help but think about the wasted paper!
I also can’t help but think that out of the 72 offers submitted, some of them likely had no right being there. Unfortunately buyers can sometimes be poorly educated by their agents, with expectations not being realistic about what homes are selling for in the city. To think the house was going to sell for anything less than $1,000,000 was unrealistic, based on past sales in the neighbourhood, but of course no one can predict the eventual selling price. But participating in a bidding war by submitting an offer below the market value for the home only helps to add to the craziness and bid up the eventual sale price.
Why is it ok to significantly under price a home?
Regarding the anticipated selling price, the listing agent was quoted in the Toronto Star saying, “We expected in the $1.1 million range.” When a real estate agent openly admits to underpricing a home by at least $400,000 it makes my skin crawl. Are we in the business of misleading the public? The tactic of underpricing homes and then holding back on receiving offers for a week has been widely used across a lot of the GTA, and it works most of the time. But in most situations, the house is underpriced by no more than $50,000, maybe $100,000. I understand that it’s next to impossible for a listing agent in this type of situation to predict what a home is eventually going to sell for. But when you can see that no home has sold for $700,000 in that neighbourhood in at least 15 years, then why would you think it’s ok to price the home based on what it would have been worth 10-15 years ago??? We are professionals, and we are hired for our knowledge and skill, not for smoke and mirrors.
Are the sellers happy?
I am sure they are. Their agent got them 72 offers to review. They probably looked them all over while sipping wine and laughing at the low offers, and grinning widely at the off the chart offers. I am sure the sellers are bragging to all of their friends about how awesome their real estate agent is. The agent did a great job of creating buzz and getting a high sale price for the home (mind you, anything would seem high when it's under priced so significantly to start with).
I am also sure the seller is thrilled with the fact that he is saving commission on the sale because the winning buyer was also represented by the listing agent, and there was a collateral agreement in effect. This means that the listing agent agreed to charge the seller a reduced commission if it was his buyer who bought the house. It’s done fairly frequently in the biz, but when there are multiple offers on the table (let alone 72 offers!) most agents will terminate the collateral agreement in an effort to create a level playing field, and give all buyers a fair chance at competing for the house. The listing agent chose not to do that, giving the buyer(s) that he represented an advantage. I would love to say more about this, but I can’t without getting myself in trouble. :)
I hope for the sake of the seller, that the property actually appraises for what the buyers agreed to pay for it. No lender is going to give a mortgage for more than what they deem the house to be worth. The bank doesn’t care that the buyers might need a mortgage of $1,092,710 (80% of $1,365,888) if the house is only worth $1,100,000 in their eyes, then the buyers will get a mortgage of $880,000 (80% of $1,100,000) and be left to come up with the difference in cash before closing. Ouch! If they can’t do that, they will have to walk away from the sale, and the seller will be looking for a new buyer, but will at least have the buyer’s deposit cheque to wipe their tears with.
Is the buyer happy?
Winning a bidding war feels good for about 30 seconds, until you realize you’re the person that just beat out 71 other buyers for the same house. You paid the most. And you have no idea how much more you paid compared to the second highest bidder. You might have won by $1,500 or by $150,000. You’ll never know.
Same concerns apply regarding the appraisal – you better hope your lender appraises the property at the same value that you paid for it, or relatively close. I hope the buyer has lots of extra cash sitting around to make up the difference if the appraised value doesn’t match the sale price.
What are the implications?
Many buyers are already struggling with bidding war burnout, some offering on 3, 5, 10+ homes before finally getting to call one of them their own. Unfortunately for buyers, the sale of this home has just made it even more challenging for future buyers to be able to purchase a home in this neighbourhood. With home prices increasing so quickly, each home that sells sets a new standard for the area. And the sale of this home will likely have the same effect.
Not to mention, this kind of sale sets unrealistic expectations in the minds of sellers. Not every house will get 72 offers, not every house will even get 2 offers. Each home is different, and sellers that think that their home should now sell for almost double the asking price because this one did will end up being disappointed.
Buying a house shouldn't feel like a game. It shouldn't feel like you’re blindfolded and just throwing cash at a house in the hopes that you have the deepest pockets. Significantly under pricing a home and selling it for double the asking price is great for news stories and grabbing people’s attention. But it does little for improving the reputation of an industry that is often highly criticized by the public. Not to mention, stories like this can potentially scare buyers right out of the market because they think there is no way they can buy a house in a market where homes can sell for almost double the asking price.
Generally, I am proud to call myself a real estate agent. I feel I do a good job educating my buyer clients and ensuring that my clients are never the ones blindly throwing money at a house. Yes, you have to be competitive to get a house in this hot market, but I never want my clients to be the ones waking up after winning a bidding war saying “what did I just do?!” It is also possible to get your seller clients an amazing sale price for their home that doesn’t involve pricing a home at half of what it’s actually worth. No, it may not make the headlines, but does that mean it was any less successful? Could the same results have been achieved if this home was listed at a reasonable asking price? We’ll never know. But on behalf of my buyer clients, I do know that we wish the games would stop.