The frenzy is real, folks! All you first-time buyers: we feel for you right now. Actually, any buyer who is trying to find a house in the current market has our sympathy.
So, you have defined your goals, and asked lots of questions. Then you took charge of your finances, saved up a down payment, and chose a neighbourhood. You have your pre-approval in hand, and you know how much you can afford. Now you can’t wait to make an offer on a house and get to the part where you own your own home!
HOW’S THE MARKET?
When Sellers and Buyers have equal power, it is totally normal for buyers to look at houses a little above budget, hoping to negotiate down from the list price. In a balanced market, buyers can ask sellers to repair defects – or at the very least have time to get an inspector to look at the place.
In a lopsided market, one group often has way too much leverage in negotiations, leaving the other side to accept their terms or walk away from the deal. I remember a trip to Florida during the downturn in the United States, when desperate sellers were offering to throw in a car as an incentive with the sale of a house!
Right now, in Hamilton and most of the surrounding areas (with the possible exception of Toronto condos), sellers have the upper hand. In a big way.
Here’s how this imbalance of power affects you as a buyer right now.
HOW YOU SHOP
Whether you have experienced this first-hand yet, or not, you almost certainly will find yourself part of a bidding war sooner or later. The majority of properties that are priced reasonably (read: not overpriced) receive multiple offers these days. [Pro tip: You can tell which houses are overpriced by how long they are for sale. Anything that is sitting on the market, unsold, is either priced wrong or defective somehow.]
Of the properties that do receive more than one offer, most sell above list price. Negotiations are, essentially, happening in reverse.
Because of this, many buyers are shopping below their budget. If you have a pre-approval from your lender up to $700,000, you will not likely be looking at anything in the range between $700-750,000. In fact, many buyers will stop at $650,000 to leave room to offer more than the listed price.
WHEN YOU MAKE OFFERS
In a market that heavily favours sellers, there is often a pre-determined offer presentation date and time. This means that, no matter how much you love a house, a seller will not even look at your offer until their chosen date.
If there is not an official offer date, the seller may ask you for 24 or 48 hours “irrevocable.” This is the period they have to consider your offer before they must respond. Practically speaking, this delay allows them to collect competing offers to see if they can get more money.
The listing agent must inform you (or your agent) of the number of offers against which you are competing.
HOW YOU PRESENT YOUR OFFER
A buyer may always write, sign, and submit an offer anytime. Where there is a requirement for a specific irrevocable period or a set date, you should date your offer accordingly. Otherwise, the seller may never even see it before it expires.
This process means that you could send in an offer and wait a whole week for an answer, in some cases.
Since you may not know, until the last minute, how many other offers there are, you might choose to hold your full, written offer back until an hour or two before the scheduled presentation time.
Some buyers don’t want to show their numbers in case they decide to increase their price based on how much competition there is. In that case, you could instruct your agent to “register” after it is signed, so that you will be included in the updates before the presentation. He or she will send notice to the listing brokerage that you have an offer ready, and it will be included in the offer count. Then, close to the offer presentation time, after you have had time to decide on your best and final price and terms, your agent will email the whole offer.
The rules around multiple offer situations are quite detailed. The listing agent may not disclose any of the contents of an offer to anyone other than the seller.
This is a section of REBBA 2002, the legislation that governs realtors and their dealings in Ontario:
26. (1) If a brokerage that has a seller as a client receives a competing written offer, the brokerage shall disclose the number of competing written offers to every person who is making one of the competing offers, but shall not disclose the substance of the competing offers. O. Reg. 580/05, s. 26 (1).
(2) Subsection (1) applies, with necessary modifications, to a brokerage that has a seller as a customer, if the brokerage and the seller have an agreement that provides for the brokerage to receive written offers to buy. O. Reg. 580/05, s. 26 (2).
What this little snippet of legalese means for you, as a buyer, is that there is no legal way for you to know anything about any other offers. You cannot know the price, the closing date, the terms, or any details about the other potential buyers. (And they are not allowed to know about yours.)
So …how are you supposed to decide what to offer?
HOW TO DECIDE ON OFFER DETAILS
Your agent can ask as many questions as you like to the listing agent. It’s up to them whether they can answer or not. The seller may have authorized the agent to tell you how much they want for the house, what their ideal closing date is, or some other thing that is important enough to them to make your offer the most appealing one.
Price is usually the number one thing on a seller’s mind. It’s important that you figure out how much you are willing to offer for this particular property. (Never offer more than you can afford, even if it means that someone else’s offer beats yours.)
Closing date is often a real issue as well. The more flexible you are able to be on your closing date, the better. Some buyers even leave the closing date blank, to be filled in by the sellers. If you are able to do this, you may increase your chances of an accepted offer.
The final consideration is an important one: Conditions. Typical conditions are financing, inspection, and sometimes the sale of a property.
The reality right now is that many conditional offers are rejected, even in favour of lower offers without conditions. Sellers often function on the “bird in the hand…” principle, not being willing to forgo a firm offer to risk having a conditional one fall apart. Your best shot at acceptance in a multiple offer situation, especially one with many competing offers, is to include few or no conditions at all.
THEN HOW DO YOU PROTECT YOURSELF?
Let’s take the three most common conditions and see what alternatives you have to protect your own interests when you can’t include them in an offer.
The smaller your down payment, the more you likely need a condition on financing. There are two components to financial approval – your own financial status, and the appraised value of the property you wish to buy.
By this point in the process, you are fully approved based on your application to the lender. The reason you ask for a week to get final approval on financing is because the bank will only lend up to a certain percentage of the value of a property. If the appraised value of the house is lower than you agree to pay for it, you must come up with the difference.
You win a bidding war and buy a house for $500 000. Your down payment is $25,000, or 5%. You know the bank will approve a loan for $475,000, based on your income and credit score.
However, the bank appraiser says that the house is only worth $492,000. That means that the maximum mortgage they will give you is $467,400. You will need another $7600 to close the deal for the agreed-upon purchase price of $500,000.
How do you protect yourself in a case like this?
Research is key. Know the comparable sales in the area so that you can be confident that you do not overpay. Talk to your lender or mortgage broker about the reality of the market, and the need to make a firm offer. They can often tell you when it is safe(r) for you to remove your financing condition.
Some buyers line up a plan “B” – enlisting the help of a family member who is willing to help them fund any shortfall. This “Bank of Mom and Dad” is probably right up there with the Big Six Banks in Canada in popularity. If you have this option, it might be worth considering – you would be far from alone!
A home inspector is almost always an excellent investment. A qualified one will can tell you what defects the house has, the ideal timeline for repairs, and can often provide an estimated budget for the items he recommends. You can sometimes uncover hidden issues that might be very costly to remedy.
The problem these days is that buyers often cannot have an inspection. Most accepted offers are firm, without this condition. What’s a buyer to do?
First of all, be sure you spend enough time in the house to take a proper look around. Check the electrical panel, look at plumbing, be alert to signs of structural damage or instability. If anything looks strange, ask questions.
If you’re really lucky, the seller will provide a pre-listing inspection for your consideration. Although you don’t have the same accountability from the inspector you would have from one you hire yourself, you can get a really good idea about the condition of the home. This could help you make a buying decision.
Whatever happens, always include clauses in your offer that require the seller to warrant that all the chattels and fixtures in the house are in good working order. You may even specify which components you want mentioned. If the basement is your concern, you can add a statement about that. Ask the seller to warrant that, to the best of their knowledge, the basement is structurally sound, dry, etc. If they are aware of a problem that you have not yet learned of, this compels them to disclose it (or face potential legal action later).
Depending on how much you are willing to go over asking price on the property, you may also decide to request a pre-offer inspection. This means having (and paying for) your inspection before even making an offer. Of course, you would only do this if you were quite confident that you can afford to make an offer that the seller will accept.
Finally, if you have specific concerns, you could book a showing with a trusted contractor. This is not a thorough inspection, but it may be enough to give you the confidence you need to make an offer on the property.
** We have also had several clients decide to hire an inspector after taking possession of their new home. They felt that it would give them an understanding of the house and help them to prioritize needed repairs.
Sale of Property
This one is a bit of a throwback to a different time. Under different market conditions, buyers would make their purchase conditional on being able to sell their own property. You might be understandably nervous to commit to buying a place without knowing what will happen to your own home.
The truth of current market conditions includes good news and bad news:
- The bad news is that sellers will almost never accept a condition on sale of a property.
- The good news is that you probably don’t need the condition anyway.
As with any other part of this fast-moving market, research and an understanding of the details is key. Make sure you know what your home is worth, how fast the market is moving in your area, and how quickly your agent feels your place will sell.
Before you make firm offers on another property, get your ducks in a row. Talk to your lender to make sure you qualify for a bridge loan. If you have to take possession of the new house before the old one is sold, this can be your solution. Ensure that you can afford to sell at market value and still have enough to buy the property you want. Do the math, and then do it again. Make sure you budget for closing costs.
With research done, you can decide whether you would be more comfortable buying first or selling first.
Whew. That is a lot to of information to process! But there’s more…
Next up: What to Expect On Offer Day!