Bidding wars begin — and the peak spring market is still weeks away

Susan Pigg – Toronto Star

Kingston realtor Manson Slik has sold hundreds of homes over the last 20 years with both the stroke of a pen and the slam of a gavel.

He’s become an evangelist for auctions.

Comment: Curious why we are asking a Kingston realtor to comment on the Toronto market.

“They are the purest way to achieve market value. There’s no smoke and mirrors, there are no games or tricks. It is an open and transparent process.”

With weeks to go until the peak spring real estate market kicks into gear, a worrisome new level of bidding wars is emerging in a market where, since the recession, new listings have remained well below historic norms.

Comment: Listings are done more than 30% in the past few years. While the number of buyers stays the same or increases. Pretty easy to see where all the pressure is coming from. Even with mortgage rule changes, it cannot stop the supply/demand unbalance. And with mortgages on properties over $1 million harder to get, it has only increased pressure on houses under that. So pressure from below on the $400-600,000 houses as first-time buyers scramble to find something, with added pressure coming from the $800k range as people try to spend less than $1 million. Add in 31.2% fewer listings and you get exactly what we have right now. Chaos.

A simple, three-bedroom semi — in fact, it’s really an end row house — in the Junction Triangle went for $848,625 this week in a frenzy of 32 bids.

That’s $210,000 over its $639,900 list price.

Comment: Yes, but the accurate value would have been more like $750,000. Still way above that, but not as big a jump as it appears.

Another house at Yonge and Steeles reportedly went for $280,000 over it’s $730,000 list price (final prices have yet to be made public) with some 30 would-be buyers.

Comment: And those ugly old bungalows always sell in the $1 million range, as people tear them down and build big new houses on the large lots. That has been going on for years now, nothing new. But $848k and 32 bids in the Junction? That ain’t happened before!

“It’s tight right now. We have slim, slim product to offer buyers out there,” says one Toronto realtor who’s also seeing more agents doing “exclusive” listings they just show their own clients that never hit the MLS home marketing system.

Listings of lowrise houses — the Holy Grail of Toronto’s unusually tight real estate market — are expected to pick up toward spring. But likely not enough to offset strong demand in much of the 416 and some prime 905 neighbourhoods.

Comment: Remember, 31 people lost out on that house in the Junction. With only 2 active listings in the area at the moment, there is more frenzy to come. I imagine that the pool of buyers increases constantly, so there are certainly more than 31 people out there who want to live in the area. And only 2 listings. One is priced at $599,900 with a bid date, I am sure it will make the news soon enough. And an older duplex for almost $900k. Bet they sell for close to the same amount…

The lack of listings, and bidding wars defying logic, begs the question: Is it fair for realtors to keep using tactics that, on purpose or not, only fuel the frenzy.

Comment: Come on! How many sellers want a bidding war? They all read the news, they hear about these frenzies, they want the same thing for their house. It is not all our fault, believe me. Every seller wants as much as they can get for their house. And when any of these buyers sell, trust me, they will use every trick in the book to squeeze every last dollar out of their property. How well do you think I would do if I suggested they list the house for $600,000 and take the first offer that comes along? I will not have the listing. Sellers control the market, do not fool yourselves.

That ranges from “underlisting” properties (which brings a bigger crowd and breaks the hearts of novice buyers thinking they’ve found a rare bargain) to “holding back offers” (not accepting bids for six to eight days, ostensibly to allow time for buyer due diligence, but with the added benefit of driving up desire.)

Comment: And yet, this is exactly the auction style of sale that Slik is advocating. How is it he is right and I am wrong? I have a client who works in the financial world. Blind auctions are the way he and his brethren buy trades. They all submit offers and the highest gets the sale. Another client is an engineer, his company submits closed bids for construction projects. Blind bids. Same as the way our bidding wars work. The time delay is not necessarily for due diligence, it is to allow all potential buyers to see the property. Again, were I to list the house for $600,000 and take the first offer, I will get calls from 50 outraged agents upset that I did not give them time to view the property. They will hate me for not allowing them to make an offer, they will all claim their buyers would have paid more than the selling price. There is no way to make everyone happy!

Slik believes auctions short-circuit a lot of that raw emotion. They also reflect the market, and the value of a neighbourhood, at that moment in time, rather that a realtor’s “opinion of value” based on previous sales in the area and pressure from the seller to get as much as possible.

Comment: How does it avoid emotion? If prices are open, it makes it even worse as everyone is doing their best to beat the others. Ever been to an auction and seen the emotion in the room rise when a desirable item comes to the gavel? And again, the sale price, or value, is set by the buyers. The listing agent sets the price, but it is the 32 bidders that set the final sale price. My opinion of value has nothing to do with another agent’s client and what they have in the bank. Take the entire GTA real estate market – with 87,111 sales in 2013, there are at least 348,444 (with a buyer and a seller and 2 agents per sale) involved in the year’s sales. Add in some friends and family and other opinions and you have a good 1,000,000 people involved in setting the values of sales for the year. And note, the most important part of that paragraph: “pressure from the seller to get as much as possible”. That is what it all comes down to.

His company, Gordon’s Estate Services — which has auctioned off everything from Muskoka condos to the Cobourg jail — uses third-party, certified appraisers to determine market value. From that comes the published minimum bid which is revealed to interested bidders long before they walk into the auction.

Comment: And how is the minimum bid related to the market value? Is the market value given to the public? Heck, the city appraises my house for less than it would sell for tomorrow. And I bet the bank has a different number in mind as well. Bring 20 people through and there are bound to be 20 different opinions of value. Which one is right?

Sellers are bound, by contract, to hand over the house if final offers come in at or over asking: There are no sign backs.

Australia has one of the strongest home auction market in the world, accounting for close to 20% of all real estate deals and picking up steam, says Sydney-based realtor Angus Raine, CEO of the country’s oldest (130 years) and third-biggest brokerage, Raine & Horne.

He believes the traditional system — where potential buyers are bidding blindly against an uncertain number of competitors — is “messy,” in need of transparency and based on flawed property assessments, historic sales, that can be badly dated.

Comment: No, here the number of bids is certain, we are bound by law to share the number of bids with all involved parties. You don’t know the details of the bids, but you know the number. I agree with transparency, I think that after the dust settles and the deal is done, the details of the other bids (minus names) should be available to the agents involved. If people could see all the bids that did not win, it might give some clarity to the whole process.

“You’re looking in the rear-view mirror when all the action is in the traffic ahead.”

Underlisting has, in theory, been outlawed by some Australian states: Realtors can face fines of $22,000 if properties are priced more than 10% above or below comparables, says Raine.

Comment: But then you enter into dangerous territory. How comparable is one house to the other? We all know what a difference a block east or west can make, quality of finished basement, 1 or 2 feet of extra width in a bedroom, etc. That is very hard to account for in an appraisal or comparison.

Bidders are also vetted to make sure they aren’t neighbours, or agents of the sellers, looking to drive up bidding for personal gain, said Raine. But so far, at least, they’ve taken off largely in urban centres and high-end neighbourhoods, but not so much among seniors.

Comment: So a neighbour cannot buy a new house on the same street? Friends of the seller cannot buy on the same street? These rules sound dangerous, arbitrary and exclusionary.

They find watching their family home, and biggest nest egg, sell in what can be a boisterous, short-lived “event” a bit too hard on their heart.

But even auctions aren’t without their issues: Sellers tend to get even higher prices via auctions than negotiated deals, he’s found, as some bidders get caught up in the flurry.

Comment: Wow… open auctions are like blind auctions. And just like I said above, emotions take hold, both for buyers and sellers.

The difference is it takes a lot of unbridled emotion to get to $210,000 over the minimum bid.

Comment: Not minimum bid, asking price.

Allegations of “underquoting” have re-emerged over the last year or so as Australia’s market has heated up, through a combination of factors also plaguing the Toronto market: an increasing population, a surge in would-be buyers, low interest rates, a shortage of listings and a problem just starting to hit the radar: a shortage of newly constructed houses.

Australia’s National Housing Supply Council has estimated that the gap between demand for new homes, and the actual number being built, is 200,000 across the country and slated to grow to 370,000 by 2016.

Comment: So let’s check back in a few years and see how this “better” system is holding up.

—————————————————————————————————–
Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto Realtor with Century 21 Regal Realty. He did
not write these articles, he just reproduces them here for people who are
interested in Toronto real estate. He does not work for any builders.
—————————————————————————————————–