Rocket Science!

Business

8 minute read

September 22, 2021

Many of you have seen my now-infamous video of comparing pre-construction condo sales to buying pre-sale jeans.

I always find that when I’m having trouble getting a point across, whether that’s because those on the receiving end are dense, or because the subject matter is complicated, I am more successful coming up with an analogy or a metaphor.

In my pre-construction jeans video, I acted out a sketch where somebody goes to buy jeans, only to find that they’re not buying jeans then and there, but rather jeans to be made in the future, but they can’t try them on, can’t touch or see the jeans, and there’s no guarantee as to the quality of the jeans, when the jeans will be ready, or if the jeans will ever be made.  Oh, and the pre-sale jeans cost more than actual tangible jeans that are right in front of you.

We don’t buy jeans like this.  So why do people buy condos like this?

I’m selling an entire portfolio of condos down on Abell Street and Lisgar Street, and we’ve separated some parking spaces and some lockers from the units, deciding to sell this parking space with that unit, or that one unit doesn’t need three lockers, so we’ll sell two of those along with two other units.

The confusion this has caused is just astounding.

Imagine a real estate agent who sees a condo listing on MLS, sees that there’s one parking space and one locker, but then finds two lockers deeded with the unit in Land Registry.  When I tell this agent, “We’re only selling one locker,” his head explodes.

Boom.

Brains everywhere.

Impossible to comprehend!

“But…..but…..there are two lockers with this unit,” he says.

“We are selling one locker,” I explain.

“But…….Land Registry shows two lockers,” he replies.  “This unit should come with two lockers.”

This went on for a full minute.  And I realized that I needed to use a metaphor to get through to him, ergo….

“…Okay, so I have THREE apples in my hands.  Three of them.  I extend my right hand and offer you ONE apple.  That means I have two apples left.  I am keeping those two apples.  I am offering you ONE apple.”

He understood.

Sometimes in this business, situations are made out to be rocket science when they are anything but.

Case in point: how we price houses and condos for sale.  It’s been this way for quite some time, and you would think that the market participants are used to it.  But whether it’s the buyers just entering the fray or the agents who have supposedly been doing this for decades, many market participants still come up empty when trying to figure it all out.

Let’s say there’s a condo for sale for $439,900 with an “offer date” set for next Tuesday.

Let’s say the exact same model sold last week for $525,000 and two weeks ago for $522,550.

What do you think this condo is worth?  What do you think it could, would, should sell for?

This is not rocket science, and yet the market and its participants continue to make it out to be.

Let me tell you a story about a recent listing that is not meant to shame or demean anybody involved, but simply meant to demonstrate my point.  It is through this story that you, the reader, may not only gain knowledge about the market but also understand how many participants remain frustrated and ultimately unsuccessful in their endeavors.

Sound fair?

Clients of mine were looking to upsize to a 2-bed, 2-bath condo with more space so they could both work from home, after amazingly spending nine years in the 1-bed, 1-bath condo that I sold them (one of them, now with a partner…) back in 2012.

As is usually the case in this market, we did our research on what the existing condo could sell for, then ventured out to look for that upsize condo.  I would estimate that 95% of my clients buy first, then sell their existing property.

We eventually found a gorgeous condo townhouse that would triple their existing space and pulled the trigger immediately.

The two most recent comparable sales for their existing condo were $630,000 in May, on a $639,000 list price, on the market for 7 days, and $636,000 on a $534,900 list price in July.

So it would seem like we have a price range, no?

Both of these units were on very high floors with great views and ours was on a lower floor facing a different direction.  But we did what we always do: we cleaned, painted, fixed a few things here and there, then emptied the condo, staged it with our only stager, photographed it with our only photographer, and put a fantastic look on the place!

When it came to pricing, we could have done just about anything.

Try it really low at $499,900, with an offer date, to get the foot traffic through?

List at $599,900 to ensure we set a “floor,” but still hold back offers?

$529,900, $549,900, $514,900, $569,900…

We debated at least six or seven prices at great length, but ultimately we settled on $529,900.

I recognize that a large percentage of the buyer pool, or real estate onlookers for that matter, don’t like the way that real estate is priced and sold, so hearing me talk “strategy” might rub you the wrong way.  That’s fair.  But it is what it is, and this is how the market has worked since 2003-04 when I got into the business, so be it.

We listed the property for sale at $529,900 and showings began to take place.

The best time for an agent to bring a pre-emptive offer is usually the first night of the listing, since it’s when the seller is the most anxious, the fewest showings have been booked, and if the listing is going to be a huge success, the seller usually doesn’t know it yet.

But I didn’t recieve a pre-emptive offer on the first night.  Or the second.  Or the third.

In fact, it wasn’t until Saturday that an agent called me and said, “I’m going to be sending you a pre-emptive offer,” and I told her I would look at it.

That’s what I always say.  “I’ll look at it.”  Too many buyer agents get excited and hear, “Sounds good, I’m happy to work with it,” and automatically take that to mean that their offer will be accepted.  I simply tell agents, “I’ll have a look when I receive it,” or something to that effect.

Soon after, the email hit my inbox.

There was a nice note about the buyer and how she intended to use the space, and the agent added, “We hope you will accept our offer and we look forward to hearing from you.”

Given that we were listed at $529,900 and the two most recent comparable sales were for $630,000 and $636,000, what would you expect this offer to be?

At $636,000, we’d accept.  Maybe even $630,000, given we hadn’t received nearly as many showings as we expected.

But the offer wasn’t even in that stratosphere.

In fact, it was off by about six-figures.

The offer was for $540,000.

What’s more is that it was conditional on a lawyer’s review of the condominium’s status certificate, and the buyer had not submitted a deposit cheque with the offer.

If I’m going to forego my scheduled “offer date” and accept a pre-emptive offer, 98% of the time, I will insist on a bank draft or certified cheque.  Reason being, if you move your offer night, and you accept an offer, but the buyer doesn’t show up the next day with the deposit, then you’ve screwed up your entire listing.  You can never gain that momentum back again.  The only time I would accept a pre-emptive offer without a deposit is if it’s an agent that I know extremely well and have worked with before.

If I’m going to forego my scheduled “offer date” and accept a pre-emptive offer, 0.00% of the time would I do so if that offer was conditional.  I touched on this in Monday’s blog.  It defies logic how a buyer agent can’t understand this.  I’m most certainly going to sell unconditionally on offer night, so why blow up my listing and offer process for a conditional offer?

But most importantly, if I’m going to forego my scheduled “offer date” and accept a pre-emptive offer, it has to be for a price that makes sense.

$540,000 made no sense.  Less than zero, if that’s a possibility, and not just a book by Bret Easton Ellis…

I called the agent and she sounded very chipper.  Like, so happy it almost made me want to be overbearingly-nice when I told her what came next.

“Jenny,” I started, “I appreicate the offer, the pre-emptive strategy and the aggressiveness, and the efforts on your part, but you’re off a ways on price,” I told her.

“How much?” Jenny asked.

Ordinarily, I wouldn’t answer.  But anybody who submits a conditional pre-emptive offer with no deposit, at this price, isn’t going to be a player on offer night.

“About six-figures,” I told her.

She laughed.

“Oh, come on now,” she said.

“Have you looked at the comparable sales?” I asked her, as though the question was rhetorical.

Amazingly, the question may not have been rhetorical, because her non-answer, blame-deflecting response told me it was possible she may have taken five seconds to log into MLS and type in the property address.

“Well……you priced this at $529,900, David!” she said.

I see.  It was my fault.

As with everything else in life, there’s no self-reflection anymore.  No sense of self-responsibility.

“Jenny, I could have priced this at $1.00.  It’s the Toronto condo market.  $529,900, $549,900, $499,900, it doesn’t change the value of the property; the range of values in which this condo could or should sell.  But that range is not in the area of $540,000.”

She began to debate me a little, but I headed her off at the pass.

“Jenny, aside from the price, your offer is conditional,” I said.

“Yes, but only for two days,” she pleaded, as though it mattered in the slightest.  “Two days, David.  It’s not ten business days,” she added, as though anybody makes an offer conditional on review of the status certificate for ten business days.

“There’s really no such thing as a conditional bully offer,” I told her.

“But David,” she continued to plead, “There are a LOT of problem buildings in downtown Toronto!  A lot of status certificates aren’t cutting the mustard and lawyers are rejecting them!”

Whether or not this is true, or a slight overreaction, or a sales pitch, I still had to set her straight.

“That may be true, Jenny.  But that’s why the listings reads ‘status certificate available, email listing agent for copy,’ and why you could have the lawyer review the status and then submit an unconditional offer that stands a chance of being reviewed before the offer date.”

I didn’t think that was unreasonable.

I want to climb into the minds of some agents.  I want to look around.  I want to see how the wheel turns, and understand why they feel that a seller would forego a scheduled offer date to work with a CONDITIONAL offer.

Honestly, folks, this isn’t rocket science.

Jenny sighed and said, “Fine, do you want to send me the status certificate and I can have our lawyer review it before offer night?”

I emailed Jenny the status certificate.

That was the last time that I ever heard from her.

On offer night, we received five offers.

Four were over $600,000.

We accepted a bid of $638,000 for the condo which was fantastic, all things considered.  It was a great price compared to the two most recent sales, especially as they were on higher floors.  But considering the lower number of showings on the condo, we were all estatic.

The offer we accepted was unconditional.

And there was a bank draft in hand.

The buyer agent representing the successful buyers is somebody who I have worked with several times in the past, who has been around for probably twenty years if I had to guess.  I’m sure he too might admit that what he did wasn’t rocket science, but then again, compared to some of the other efforts, it was.

I suppose that if I look into my heart, I can see how tough the Toronto real estate market is for buyers, and that perhaps not everybody can afford to pay fair market value for properties.  But what somebody wants to pay and what the property is worth are mutually exclusive.

I’m sitting here on Tuesday night reviewing offers on two listings: one house and one condo.  In both cases, I have great bids that are clearly being submitted by agents and buyers who know what competing properties have sold for, and who happen to have a pulse on the market, and then I have really poor bids that make no absolutely no sense at all.

Pricing real estate is not rocket science.

So why do we make it out to be?

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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18 Comments

  1. Jenn

    at 9:26 am

    David, do you have an updated number of real estate agents in Toronto? Last time I heard it was like 50,000!

    1. David Fleming

      at 10:44 am

      @ Jenn

      There are approximately 62,000 agents licensed via TRREB.

  2. Kyle

    at 9:36 am

    @David

    I remember pre-pandemic, there was a lot more work involved to submit an offer, typically the Buying Agent would prepare the offer, and meet the Buyer in person to walk them through the offer, schedules, conditions waived, etc. Then the Buying Agent would often present the offer in person. These days, it’s a couple of emails and a couple docusign turns and the offer is in the Selling Agents hands.

    Does this new ease decrease the quality of offers being submitted? I imagine, since it’s so much easier now, there are people just spamming low-ball or low quality offers on various listings, hoping they can find an opportunity.

  3. Libertarian

    at 10:37 am

    David – I thought you like the Jennys of the world because they increase the number of offers you get? Isn’t this specifically the reason you under-list?

    We debated this often on here – if a property gets 15 offers, but 10 of them are garbage, do those 10 really count? Shouldn’t list prices be higher so that you get only the 5 legitimate ones?

    1. David Fleming

      at 10:46 am

      @ Libertarian

      Do I “like” these people? I think they’re the reason real estate prices are driven up, and they’re the reason why the “under list” strategy works.

      In this case, it was a bully offer. It was insane.

      Had she shown up on offer night, yeah, she’d have served as the dummy offer we need to push prices higher. But to send a bully offer with these terms and conditions was absurd.

      And for the record, I don’t “like” pushing prices up. I don’t want the market to increase forever and ever. I understand the problem with housing affordability, but at the same time, I’m being hired to achieve the highest price possible for my seller clients.

      1. Libertarian

        at 1:42 pm

        Thanks for that David.

        Yes, the bully offer was absurd. Of course there are bad agents out there.

        I know garbage offers cause people to bid more, but as others have pointed out below, it usually comes down to the comps. So aren’t these garbage offers irrelevant?

  4. Appraiser

    at 11:22 am

    Two months of US deaths via
    @CNN:

    Right now: 2,031 deaths/day
    10 days ago: 1,655 deaths/day
    20 days ago: 1,401 deaths/day
    30 days ago: 1,000 deaths/day
    40 days ago: 535 deaths/day
    50 days ago: 386 deaths/day
    60 days ago: 272 deaths/day

    1. Appraiser

      at 11:23 am

      *Covid deaths.

      1. Jennifer

        at 12:56 pm

        sorry what is the connection here to the post?

  5. Average Joe

    at 11:30 am

    So basically, you should have just listed it for $599K if you’re too busy for lowballers. At this point the buyers/buyer agents have to do all the price discovery work themselves, why not just list at $0 or $6 Billion? Better yet, seller’s agents could just post the comps they’re targeting and stop wasting buyer’s time since that’s where it always ends up.

    I suppose list price is just a way to game the MLS search engine at this point, the plan is to show up near the top of a lowest to highest filter in the sub $600K club?

    1. Egghead

      at 12:01 pm

      At this point in Toronto Real Estate, list prices are simply a marketing tool. Any buyer who doesn’t understand that is woefully underprepared to transact in the city, and any agent that doesn’t understand that is borderline committing malpractice.

      And yes, of course part of a Buyers Agents role is price discovery. I’d argue it’s the most important part of their job. If you aren’t hiring them to do that, what are you hiring them for?

      1. Average Joe

        at 2:34 pm

        “This process sucks and everyone hates it, but it’s just the way it’s always been done” is a strong signal a market should be disrupted. Real estate is just using a search engine, taking photos and using docusign. Could be an app.

        The unit would have sold for ~$638K anyway if we’re arguing comps are all that matters, so pricing at $529K or $599K or whatever barely makes any difference to the actual seller. The only reason to list at $529K is the agent gets to claim their marketing tactics generated $100K+ or 20%+ in value when in reality they may not even cover the commision.

        Maybe Jenny thought she spotted a sucker and an opportunity to generate ~$100K in value for her buyers? Not sure why agents should exist anymore if both sides just show up to pay whatever yesterdays sale was.

        1. Condodweller

          at 3:47 pm

          I totally agreed with the journalist David posted the other day who said just because the problem is complicated and there is no obvious solution doesn’t mean we shouldn’t try. I think the bigger the problem and the less obvious the solution is, the potential payoff is that much more to whoever does it.

          Fortunately for agents, the problem is multifaceted with all the legal challenges to go with the pricing issue which is compounded by the negotiation process. I’m curious how long it will take to disrupt this model because it’s not sustainable. Realistically the most value an agent such as David brings on the sell side is his contact list for prepping your unit. An app should be able to handle the pricing and negotiations. So let’s just rename agents to renovation/marketing consultant, charge a flat reasonable fee and be done with it.

          1. R

            at 7:56 pm

            100% an app is where RE buy/sell is going.

            Not only could it provide better value and match buyers and sellers, it could also streamline the purchase process, better integrate with existing social media for marketing and reach, and even potentially have an upside to financial institutions offering a complete end to end solution from qualification to mortgage product.

            An app also could much better allow potential sellers and buyers to filter what they are looking for. Just try now to find a particular style of house, say a 1960’s mid century modern ranch. All but impossible when most agents think CityPlace is Art Deco and you are relying on an MLS description that is “High-End Finishes Throughout” …

        2. Jennifer

          at 1:00 pm

          cause some clown may come in way higher in this market (e.g., low supply in houses). that is what often happens and then prices go up up up. i had a friend tell me that their agent told them dont worry pay more than what it is worth today cause in a few years or less it will be worth that anyway; you are buying future value. Where do you even begin with that…. *sigh*

  6. Condodweller

    at 1:07 pm

    When I bought my preconstruction unit the agent looked at me like I had two heads when I told him I wanted to buy a second locker. Looking at the maintenance fee schedule of the building I guess I want alone as there are lots of units with more than one lockers.

    One of the penthouses has like 25 lockers which I find ironic as you’d think they could find space in their 5,000 sqft unit to store their stuff. What I found interesting was a regular 1 bed unit with something like 10 lockers.

    BTW the was a building where the developer registered all the units with the wrong plan #s. Kudos to the first lawyer that found the problem.

    1. JK007

      at 10:34 am

      you could rent locker for 50-70$ a month extra income i guess 🙂

  7. M

    at 6:21 pm

    David- once you decided your going the underlist strategy, is there any reason you chose 529,900 instead of 549,900 or 499,900? Are there any difference between these numbers or is it a bit arbitrary? Maybe there are certain price ranges that you want to be within (because of how people search the mls) or be a certain distance away from the price you are targeting to get? Thanks!

Pick5 is a weekly series comparing and analyzing five residential properties based on price, style, location, and neighbourhood.

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