In yesterday’s gonzo blog posting, the omnipotent Ryan told you why Real estate in Toronto (plus most of southern Ontario, and formerly Vancouver & Calgary) is in a bubble. Which cannot last.
Lack of supply, cheap money, speculation, Chinese dudes, the Bank of Mom – combined, they form a heady mix of desire. It’s all true. But the picture’s incomplete. The way real estate deals are now consummated has changed fundamentally, shifting the power from buyer to seller – almost regardless of market conditions. So long as regulators allow this to continue, property values will continue to squirt higher than a lovesick grapefruit.
First, there’s the purposefully-low price. It works like a charm. Every. Time.
A creative realtor will list a property for 10%, 20% or even a third less than the current market value of surrounding houses in the hood. The listing price, however, has nothing to do with what the sellers want nor where the agent expects the deal will end. It’s just bait. The desired result is (a) an open house that looks like an Adele concert, (b) massive buzz on the street, (c) multiple offers and a vicious bidding war, (d) a final price that likely surpasses anything a reasonable listing price would have brought, and (e) a local media story about how real estate is going nuts because of the ‘premium’ paid, complete with a nice quote and photo from Mr. Realtor. It’s cheaper than advertising.
Then there’s the blind auction. This really blows.
In a real auction, like when you buy a ’71 Plymouth Hemi Cuda at the car barn, or a Lawren Harris painting at Heffel’s, the final price is unknown, but buyers always have a fair and equal chance to compete. When you’re in a bidding war for a slanty semi worth $1.2 million, no such luck. It’s a crap shoot, and completely under the control of the listing agent.
On offer night the bids are reviewed in private by the agent and the seller. Potential buyers know only the asking price and (maybe) the number of competing offers. They’re all encouraged by their own agents (or mothers and spouses) to ‘make the offer your best one’ – which means no conditions, whatever closing date the seller wants, and an absurd pile of money. Sometimes a begging note is included.
The agent may then appear at the door, summon two or three of the top bidders, and tell them they need to cough up more. How much more? Lots more. All of it. And in the end, one buyer emerges – the greater fool winner.
Throughout this process everything’s opaque. In a blind auction nobody knows what anyone else is offering, which means all buyers are powerless to act correctly. Bid too little and be punted. Bid too much, and seriously overpay. And who was there in the kitchen with the listing agent, ensuring the process was ethical? Nobody.
And then there’s the certified cheque.
As you can see from the listing copied above, this is common practice in a hot market. Bidders are expected to come up with cash – and many agents will not even accept an offer that does not have certified funds stapled to it. Big money, too. Normally 5% of the purchase price, which is $75,000 on the average Toronto detached. Many agents will tell their buyers that a round $100,000 “looks better” attached to the offer. “It shows you’re a little more serious.”
The certified cheque is not a legal requirement. An agent has absolutely no foundation for not accepting an offer allowing a deposit to be paid within 24 hours of acceptance – yet it happens daily. When a bidder has to come up a hundred grand just to enter the game it ratchets up the stakes, puts more psychological pressure on the players, and likely results in higher prices. Shame.
Yes, then we have the pre-emptive offer. Sometimes known as a “bully offer”. Most listings now inform other agents whether the seller is willing to consider an offer at any time, or will force everyone to wait for the blind auction. This is especially frustrating in a market with scant inventory where bidders go to an open house, round up their giant pile of certified cash, craft an offer for the Big Night, then find out that afternoon the property’s been sold. In a hot market, this just makes things hotter – changing bad rules to make them worse.
How much better would the Australian method be – when everyone stands around the front porch and calls out their bids for the house. Or, as blog dog Bruce suggests: “Instead of allowing the Realtors to Rush-Rush-Rush get the deal, if there was a 7 – 12 day cooling off period it could slow down the market overnight. Note, there would still be just as many houses sold but people would have time to think about what they are doing.”
Silly Bruce. Cooling off? Actual ‘thinking’?
The system is rigged in favour of sellers and their agents. It is amoral, inefficient and sleazy. There is no other commodity which changes hands in a more obtuse, unfair and non-transparent fashion. And, ironically, real estate is the most expensive thing any of us will ever purchase. To do it under these conditions, intimidated and manipulated, is a crime.
Correct this. The market will follow.