The Wars

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Is it ethical to list a house for drastically less than it’s worth in order to pump desire and break hearts? Especially when available homes are few and many buyers desperate? Is it cruel to purposefully ignite a bidding war in which almost all will lose? Or is screwing out the last possible dollar the highest duty of a vendor’s agent?

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The questions are floating around again in the country’s biggest market after the house below (middle peak) sold in Toronto’s Junction district – a place most people wouldn’t choose to live if houses weren’t normally in the modest $600,000 – $700,000 range.

PERTH 1

The row house at 325 Perth was renovated a decade ago, but shows well. The lot’s just 18 feet wide, the bedrooms small, there’s one parking spot and the geriatric basement has a little suite. But beautiful or spacious, it ain’t. Here’s the back and interior.

PERTH 2

PERTH 4

The owner, a real estate agent, listed it for $639,900. Immediately a well-read real estate-pumping blog called it ‘a good catch.’ Mike Gryspeerdt, the agent-owner knew it. Once his house became a media story, he admitted he knew it would sell for $100,000 more than the list price. So, this was not an example of a property mispricing. It was no mistake. It was never intended to be a bargain in a city where detached houses are scarce and rare. It was a strategy.

It worked. Four hundred people came to the open house last weekend. They shut down the street and queued on the sidewalk. Once inside, nobody could spend time digging into the mechanicals or the structure. Clearly this was a high-octane, competitive race to secure a house for less than it was ‘worth.’

On Tuesday night, when offers and certified cheques were accepted at 7 pm, 32 of them littered the kitchen table. Two hours later Gryspeerdt accepted $848,625. That was a third more than he has asked and a hundred thousand more than fair market value. The auction has worked perfectly.

After bucking allegations of conflict-of-interest in listing and selling his own home, and despite admitting he deliberately mispriced the property, he lamented this to a reporter: “I’m genuinely, 100% shocked by this. I did not expect this to happen — nor did I want this to happen. I’m not comfortable with this at all.” But he still cashed the deposit cheque.

In seeking balance for this post I asked a very experienced and respected Toronto agent, George Klump (no relation to the CREA economist), for comments on the morality of sparking bidding wars which inflate prices and repulse buyers.

“The listing agents’ ethical duty is to the seller, it is their job to obtain the best possible result for their client. The agent has to take many things into consideration; has the seller already bought; is this typically a time of year when buyers are as active as other times; will there likely be more inventory coming to market soon, etc. When selling in hot areas like the Junction, prices are continuously changing upward so it is hard to establish exactly what a house is worth but the biggest mistake a seller can make is overshooting that upward movement and pricing too high – people will think you aren’t in touch with reality and the house will sit on the market at a great inconvenience to the seller and will likely need to be discounted before it actually sells.

“Adapting a strategy of pricing below market and setting an offer date has a lot of benefits for the seller as it creates excitement amongst buyers which in turn can lead to the price being bid up beyond what current market conditions might indicate because buyers get emotional and it makes sure the property is sold quickly, which can be very comforting to those sellers that bought their next home before selling their current home. Adopting this strategy is not without risk for the seller, as sometimes the offer date comes and there is only 1 offer and you are stuck at a low price with no leverage to push it up. This can happen for a variety of reasons; perhaps a couple of similar properties came on the market at the same time and diluted the pool current buyers; the demand for the neighbourhood was over-estimated; there was extreme weather that kept buyers away; or even world events such as 911 after which there was virtually no activity in the Toronto housing market for a few weeks. If this happens and you reject the offer and raise your price, it is usually viewed poorly by potential buyers.

“The ethical question should lie more with the potential buyers’ agent.  Although it is up to the buyer to decide what they are willing to pay, their agent should caution them about not letting their emotions rule and base their offer on facts and their specific needs. Their agent should provide them with a price range of what similar properties have sold for and should also warn them of the pitfalls of paying too much.  Those pitfalls can have severe consequences. If the buyer needs a mortgage and they paid well over the asking price, the bank’s appraisal may come in much lower and the financing will be based on the lower price which will mean the buyer has to come up with a much bigger down payment than they may be able to afford. The length of time the seller plans to live in the home should also be addressed, if there is a chance they may have to resell in the next 1-5 years there is a real risk of not recouping your initial investment including fees, taxes etc. but if the plan is to be there for the next 20 years paying a little more than you should doesn’t matter as much.

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“That being said it is very frustrating for buyers when looking in these “hot pockets”. If you can afford up to $700,000 and you are looking at houses priced at $639,000 and they sell north of $800,000 it is very disheartening. Work with an agent that knows the market and can show you properties that likely will sell in your price range. Also, while this happens in certain prime areas in the city, most homes in Toronto still sell at or below the asking price.”

Are there lessons here?

Of course. If you want to sell your home, at least in a demand area, this is the moment. And if you seek top dollar (and no friends) now you know how. If you decide to create a frenzied, emotion-laden auction, then don’t talk to reporters afterwards. If you see a property with an unbelievable price, assume it’s a fake. If you’re moronic enough to enter a bidding war, never do it alone.

And if you lose, relax. You won.

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avatarGarth Turner - The Greater Fool posted Thursday, January 23rd, 2014.

1 Comment for “The Wars”

  1. What this article describes happens inside a real estate environment. Who created that environment? Who turned Canada’s vast open spaces into tiny enclaves of crowded humanity, where traffic congestion, road rage, and line-ups are the norm? Was it extremely bad government planning? Was it a plot to enrich developers and other friends of the government? Does it make any sense for Toronto to eventually be turned into a city as crowded as the tiny island of Hong Kong (but without Hong Kong’s prosperity)? Maybe eventually becoming more like Lima, Peru (but with high rise slums instead of shanty towns)?

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