Why are homes selling for so much higher than the list price?

A real estate agent responds:

First of all, it’s not your imagination: home prices really are higher these days! While Canada’s largest cities, such as the Vancouver and Toronto real estate markets, are notorious for their steep cost of living, the truth is that affordability has dramatically deteriorated across the country over the last few years.

The latest stats from the Canadian Real Estate Association reported the second-hottest August ever for sales, while the number of new listings brought to market is at an all-time low, with just 2.2 months of inventory. This is a classic supply-and-demand imbalance that has led to a long-term sellers’ market, and we’re seeing that play out in terms of both listing and offer strategies.

To help buyers gain a competitive edge, let’s take a look at the factors contributing to today’s market conditions.

The pandemic buying boom

Many, myself included, expected COVID-19 to be the event that would finally cool home prices, but it actually had the exact opposite effect.

With people spending more time at home, and as remote working continues to become the norm, demand for that extra office space or backyard has boomed. While a smaller home may not have been a big deal pre-COVID, living in lockdown really magnified the need for space and sparked a change in priorities for many people. The result? A lot of people picked now as the time to move.

Combined with low interest rates and the ability to move farther from business cores, we’ve really seen a ripple effect in what we call “secondary markets,” meaning communities outside of the city centres. These surrounding areas have appreciated extremely fast. As someone who invests outside of the GTA, I used to see houses in the $400,000 to $500,000 range. Now, it seems the average house anywhere in the region is going for a million bucks. 

Sold data, not list prices, shows the true pricing trends 

It’s important to note that the price growth we’ve seen over the past year really is unprecedented—more than double or triple typical year-over-year increases in some markets.

This has created a big disconnect for buyers in terms of expectations, which can be extremely frustrating. Today’s buyer may see many listings online that appear to be within their budget ($899,000 for a semi-detached house in Leslieville, for example). They think, “I’ve got a good job, a high household income and a budget of $1 million. This is feasible.” And just a few years ago, it would have been. But now, it’s a reality check, because that house is going to sell for between $1.4 and $1.5 million.

The fact is, it’s become much less common for properties to be marketed with traditional pricing methods; for first-time buyers especially, it’s almost like you have to ignore the list price altogether because it doesn’t necessarily mean a whole lot. Instead, we need to be looking primarily at comparable sold prices to provide guidance on pricing.

Anytime I’m meeting with a buyer, I am setting this expectation from the get-go. In our initial consultation, I will share sold data for the areas they’re looking at, so they can understand what properties are actually selling for versus what they’re listed at; once they’ve seen the numbers from the past three to six months, it gives them a much better picture of what’s affordable within their budget.

This is especially important if they’ve been sending me listings at the top of their budget (for example, looking at homes priced at $999,000 when they have $1 million to spend). You don’t want your clients to have any surprises along the way. This is why sitting down and discussing the process, and setting expectations, before jumping in is so important.

Sellers are letting the market decide their home’s value

It’s also important to understand the sellers’ perspective: they don’t want to put a ceiling on their potential sale price. As we’re experiencing really heavy sellers’ markets, even the listing agent may not know exactly what the house will ultimately sell for. Instead, they leave it to the market to dictate the value of the home, and lack of supply can really play a large part here.

For example, let’s say the comparable sold data indicates local semi-detached houses are selling in the $1.3- to $1.4-million range. But if there’s nothing else available at that point in time, you may get two potential buyers who really want to get into that neighbourhood. They may have been through a couple of offer nights and have missed out, and they say, “This is the one, this is the house we’ll live in for the next 10 years.” And while they may feel they’re overpaying, they’re comfortable with putting down $1.45 million; that extra $50,000 in a mortgage translates to just an extra $100 per month. They’re willing to go all in, but then that sets a new “highest price” for the neighbourhood, and new expectations for the next seller as to what their base price will be. That can drive things up pretty quickly.

Listing low is a strategy to get more prospective buyers

A lot of the time, agents may list properties at artificially low prices because it draws a lot more attention to the property; you’re going to get a hundred showings rather than 60. And while many of those people may not have the budget for the home, that traffic translates to a higher volume of offers. Because we’re in a blind bidding system—where potential buyers submit bids without knowing the counter-offers—the people who are very seriously pursuing the home are going to put in a more aggressive offer if there are 15 others, rather than five. The idea is that they’re going to drive up the price as high as possible for the sellers. As well, a lower price could attract more traffic to an open house, where selling agents can meet new clients.

What can buyers do in a sellers’ market?

Work with a seasoned agent: I cannot overstate how important it is to work with an agent who is deeply knowledgeable and has the experience to guide you through competitive offer situations. For example, the Toronto Regional Real Estate Board has more than 62,000 realtor members, and many may only transact a home or two a year. You definitely want to be working with someone who can guide and educate you, run you through the proper comparable sales, and eliminate the fear around bidding wars by letting clients know they’re still in control. It’s a valid worry for clients that they’ll feel pressured to overpay, but ultimately, the choice over what you’re putting down is yours, and you need to be comfortable with the number that you’re moving forward with.

Try making a bully offer: Bully offers—making a pre-emptive, strong offer ahead of the official offer night—can be an effective way to avoid competition. You need to have done all your due diligence ahead of time, such as reviewing the home inspection if the sellers have prepared it before you view the property, and sorting out your financing. Ideally, you want to be in a position to put an offer together for a property the day it comes out on the market. This can incentivize the sellers to work with your offer—but in today’s market scenario, where inventory is very tight, many listing agents may not allow pre-emptive offers, as they’d rather the market determine the selling price.

Set your own ceiling: You can’t worry about what other people are going to do; if the comparables support a sale price of $1 million, and someone is willing to go as high as $1.2 million, there’s likely a specific reason they’re willing to pay more—the property means something to them, or it’s close to family or perhaps in a school district they’d really like to get into. You can’t control that, so you have to stick with a strategy and maximum budget you’re comfortable with. 

Ultimately, knowledge is power in a competitive real estate market. Having the historical data, as well as a thorough understanding of the factors driving price growth in your desired neighbourhood, can help you manage your budget expectations and navigate situations with multiple bids. 

This response was provided by Zoocasa Realty real estate broker Carlos Moniz.

Agent Insights is written by agents from Zoocasa Realty, a MoneySense content partner. Zoocasa is a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View real estate listings on zoocasa.com or download our free iOS app.

About Zoocasa

Zoocasa is an award-winning consumer real estate search portal. It uses data and technology to deliver an intelligent, end-to-end real estate experience.