I'm sure you've heard many people talk about what is happening in the current real estate market. You've probably heard the stories of your friends looking to buy a house, submitting offers, and getting rejected because the sellers accepted an offer $20K-$100K over list price. These stories accurately depict the current real estate market in Ontario. We are in what is called a "sellers market".
In a sellers market, the buyers greatly outnumber the sellers. This can be understood through the basic economic model of supply and demand. The supply (sellers listing their homes) and the demand (buyers looking to buy a home). When the model is balanced we have an equal number of buyers & sellers and prices are stable in equilibrium. However, when quantity of demand increases, price increases.
On a microeconomic level, when one highly desired house is listed for sale, there will be anywhere between 3 to 10 competing offers. With multiple buyers interested in that one particular house, each buyer increases their own willingness to spend in the effort to out bid other buyers. This essentially creates a bidding war between buyers, and eventually the house is sold to the buyer who can afford to buy it at the highest price. Thus, this rises the purchase price well over its initial asking price.
On a macroeconomic level, when houses are being sold over list price this causes other similar properties to increase in value. Why? When real estate agents are asked to determine the price of a home, they begin by looking at sold comparables in the area that have similar attributes to the subject property. When these sold comparables are sold at higher prices, it is believed that the subject property can also now be sold at a higher price. Hence increasing the overall prices of similar houses in that area.
Now you can see where this is going. With the way the market is going, it is becoming more and more difficult for buyers to purchase a home for the value it is actually worth. So what does this mean for buyers? With prices inflating, it is forcing buyers to adapt their purchasing strategy. From working with clients in the market, here are a few tips I give my buyers that are crucial to your purchasing strategy:
1. Set your property search price range lower than your maximum budget
Due to the bidding wars on properties, buyers must be prepared to submit offer for list price or over list price in order to be competitive in a multiple offer situation. For example, if you're budget is $500K, you should refine your property search to properties listed anywhere from $350K-$450K. The properties you may look at may not be in the best shape, however the money you don't spend on a house within the higher price range can be put towards renovations and repairs.
2. Get pre-approved financing
In a sellers market, there is likely going to be many competitive offers submitted on listed properties. In order to be most competitive in a competing offer situation, it is greatly advised to submit an offer with no conditions. That's right no financing condition and no home inspection condition either. Most sellers are aware of the leverage they have in the market, and are expecting offers to be greatly in their favour.
3. Use a local, reliable, and knowledgeable REALTOR
It's easy for me to say use a realtor because I have a biased opinion on my profession. But using a realtor as a buyer should be a no brainer. Realtors will set-up all the showings, they have access to all market tools, and the best part, you don't have to pay them a dime! (in most cases). When choosing a realtor its important to chose someone who is a local expert with a good reputation. Use a realtor that will set you up to be competitive in the market. A realtor who, at the bare minimum, will guide you through getting approved for a mortgage and share their knowledge during house showings to avoid missing unknown defects on the property. Quick plug - this is something I am qualified to do for you!
My Closing Remarks:
I hope you found some valuable insight through reading this short blog. My hope is to keep you informed about what's happening in the market so that you can make a proper, informed decision about whether you want to buy and sell. If you are someone who is looking to buy or sell real estate, or if you are curious about getting into the market, don't hesitate to reach out and chat. I am more than happy to meet with you and talk about real estate.
Until next time,
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