In a market in which homes are selling for hundreds of thousands of dollars above the asking prices, how is anyone supposed to anticipate the selling price of a home? In this blog post I explain how I form my opinion about a selling price, and how the process often materializes with my buyer clients. Check out my video on this topic, or continue reading below.
Buying a home in the Greater Toronto Area these days often takes a period of adjustment for anyone attempting to buy a home. It can take time to get comfortable with understanding the strategy of sellers and their real estate agents as it relates to their asking price and, ultimately, the selling prices of homes. More often than not, the asking price is just a number which places the home in a range with other similarly-priced listings, but the asking price is often not be anywhere near the price at which the seller is actually willing to sell the property. When sellers are expecting many offers all at once, then their strategy might be, basically, telling potential buyers, ”Bring us your best offer and we’ll choose the one that we like the most,” and operating a blind-bidding process (i.e., the offerors not knowing the details of the other offers, such as price or other terms).
So, how is someone who wants to buy a property supposed to know what to offer on a property that they want to purchase?
One way, of course, would be to work with a REALTOR® who can provide her/his opinion about what the other top offerors on the market might offer for this property (i.e., the price at which the property will sell at), so that the buyer has a better understanding about what they are competing against.
How is a REALTOR®’s Opinion Formed?
As a REALTOR®, there are several sources of information that I can check in order to come up with my estimate of the selling price. In a perfect world, there would have been several recent sales of the same model of home with the same level of maintenance/renovations, located on the same street, because that would make it easy to estimate the selling price of the subject property. Of course, we are not in a perfect world and the challenge in today’s market, which has a record-low number of listings, is to find enough relevant comparable sales to come up with a good estimate of what other offerors would be offering for this property. So, I use various methods to broaden the search, as needed, and here are 3 examples:
1. Broadening the Search Geographically
When there are not enough comparable home sales on the same street or even in the same neighbourhood as the subject property, then we can look at homes that have sold further away. When the selection of home listings is as limited as it has been in the current GTA market, and also given that the pandemic has allowed people to have more freedom to live anywhere they want (less commuting, more working-from-home), the home values across different areas converge, making homes that are further out in the neighbourhood more comparable in price than they would have been, one reason being that people now don’t have the opportunity to be so selective about the exact street that they are buying on, so certain specific characteristics currently do not carry much influence on selling prices.
2. Broadening the Search by Looking at Inferior and Superior Homes
When there are not enough similar home sales to use as comparable sales to form an opinion, we can look at other recent sales in the neighbourhood which are both inferior (e.g., smaller house with less bedrooms/bathrooms/parking spots, smaller lot size or less well maintained/renovated) and superior (e.g., larger house with more bedrooms/bathrooms/parking spots, larger lot size or better maintained/renovated) to the subject property. By studying the home sales which are both inferior and superior, we can form an idea of that in-between price for the subject property.
3. Broadening the Search in Time
When there are not enough similar home sales in the recent past (about 45 days), then we can make an adjustment to past selling prices (of home sales from earlier months) to bring them to a theoretical “current” selling price. The MLS® Home Price Index (“HPI”) provided by the Toronto Regional Real Estate Board is the tool that I use.
For example, if I am estimating the current selling price of a detached home in Whitby and I want to compare it to a similar sold home which April 2021 for $1,000,000, then I would take the HPI for detached homes in Whitby in April 2021, being 344.8, and compare it to the latest HPI available, which, at the time of this writing, is October 2021, being 384.8, to calculate that detached home prices in Whitby went up by 11.6% in those 6 months. I adjust the selling price of the home which sold in April to come up with a theoretical current selling price, being $1,116,009 which I can then use as one piece of information to help me form my opinion about the current selling price of the subject property.
A Note About Tax Assessment Values
Property tax assessment values can not be used at face value to estimate current market value. They can, however, provide clues as to how comparable two properties might be. If the assessed value is significantly different between the two properties, then there is probably a significant difference in the size of lot, the size of the home, the zoning, or some other material reason which may indicate that the two homes do not make a good comparison to each other in determining the current market value of the one that is for sale.
A Note About Computer-Generated Valuation Modelling
There are many websites available to the public which provide automatic home valuations. While these may be useful for a rough estimate of a home’s potential selling price, I would suggest that the value generated by an automated computer valuation model cannot be relied upon for decisions as important as your offer price on a property, or at what price you can expect to sell your home; let a real estate agent or other expert provide a customized opinion after looking at the property.
You Can Do It!
As with any estimate, nothing used to predict the future offers by other offerors can be 100% certain, and there is always the possibility that there will be an offeror on the market who is motivated enough to win a bidding war by offering a price that is well above the expected selling price (perhaps because they have already lost in numerous previous bidding wars).
Naturally, any home buyer might want to attempt to make conservative offers in the beginning of their search process, as they get a feel for the competitiveness in this low inventory market, and that is normal and natural. As a REALTOR®, I believe in letting a home buyer have the time and experience (looking at homes and submitting offers) to develop an understanding of the market for themselves. It is common for buyers to experience a few failed attempts at making offers on homes, before their offer is the chosen one, in a multiple-offer blind-bidding process.
Ultimately, once a home buyer understands the current market, I usually advise home buyers that if they are offering in a multiple offer situation with many other offers, then they are most likely to succeed if they submit their best offer. In other words, they need to determine the best price, and other terms and conditions (e.g., closing date, deposit, etc.) that they can comfortably submit without regretting their decisions the next day if they do not get the house (or if they do). This concept is likely to be nerve-wracking for someone who is just starting out in their home search, but, after looking at enough homes, understanding selling prices and likely experiencing a few rejected offers, home buyers usually become more confident with submitting their best (comfortable) offer. Buying a home is a process, and though it may be challenging at times, with a bit of perseverance and flexibility, anyone can eventually be successful.
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