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Ah, Toronto bidding wars. There was a time (not that long ago) when Realtors gathered around the water cooler (or furiously texted each other) to excitedly discuss a property that sold for more than $100K over asking. Was the house underpriced? Was the supply of houses in that neighbourhood that low? Was the house that great?

We’re having these conversations again this week. Only now, we’re talking about houses that have sold more than $200,000 over asking. Yes, $200,000 over the asking price. We personally know of 7 houses that have done just that in the last 2 weeks alone.

But $200,000 over asking? Really? What the heck could be going on?

 

  1. The asking price of the house is far below fair market valueYes, these days it’s tough to price a house – it’s often a moving target. When agents evaluate what a home is worth (thus determining an asking price), they look at recent sales, other properties for sale in the area (the competition) and the current market conditions. Yes, some agents will purposely under-list a house to generate multiple offers, and slightly under-pricing a house can be a good strategy for a Seller. But we don’t often see agents under-pricing by hundreds of thousands of dollars. Some of the homes that have sold for $200K+ in the last few weeks were listed by reputable agents who know their business and their neighbourhood- could they have gotten the price that wrong?
  2. The Buyer has motivations we aren’t aware of. Some buyers are prepared to over-pay for a house because of factors we can’t possibly predict – maybe Grandma lives down the street and will provide free babysitting, or the house is located in a hot school district. These kinds of Buyers are impossible to compete with-their motivations are personal and impossible to justify to the average person.
  3. The Buyer is buying and selling in the same market.  If a Buyer has already sold their home for 100K more they expected, then turning around and offering the same on a purchase is really just numbers on paper. The actual additional mortgage will the same as it would have been had they sold and bought for asking.
  4. Inventory is low. Good old supply and demand reign supreme in the housing market – if there are too many Buyers chasing too few houses, the prices go up. There are even fewer nicely renovated houses that are in good condition (by far the most popular with Buyers these days). When a ‘good’ property comes on the market, it’s not unusual for 50+ people to show up at an open house and 30 people to book private showings.
  5. The chicken and the egg dilemma.  People aren’t listing their houses because they are afraid they won’t be able to find something else – they don’t want to sell their house, only to realize they can’t find (or win a bidding war) for their next dream home. For many people, it’s cheaper to renovate their house then pay the costs of selling and buying (boo to the double land transfer tax).
  6. It’s February. Realtors know that that historically, February is the month that often yields the highest price/asking ratio. Buyers have come out of hibernation – but Sellers are still prepping their houses for the ‘spring market’ (which they assume starts in April).
  7. People have lost their minds.  Yes, it’s important to forget about the asking price and focus on what a home is really worth (both in the marketplace and to you) – but if you over-pay for a house today, you’d better hope you don’t need to sell anytime soon. Even if there isn’t a market correction, if you overpaid by 20%, it’ll likely take a long while for the real value to catch up to what you paid. Some people have gone through the emotional roller coaster of losing so many bidding wars that they’ve lost perspective. (We’ve actually been known to make people sign a waiver acknowledging that they are going against our best price advice.)

What’s the morale of the story? If you’re in a position to sell now, then do it.  If you’re a Buyer, get yourself a good Realtor who knows the area and knows the game. And don’t become one of the people referred to in Reason #7. Click here for more information on How to Win a Bidding War 

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