As of the start of June, 2022, most real estate markets in the GTA are shifting away from the strong seller’s market we’ve seen for the past two years. In many areas, we’re in a balanced market and in a few we’re actually seeing the beginnings of a buyer’s market.
As the market is shifting, establishing actual value for a home is critically important. We often say that buyers live in the future and sellers live in the past, in that buyers think about what a home is going to be worth, and sellers focus on what nearby home have sold for recently. Buyers are very worried right now as there is lots of media focus on the possibility of a housing correction or even crash. If you can’t provide a good argument for why the home is worth what we’re asking now, they will sit on the sidelines and wait to see what comes next.
Within our team we follow an extremely detailed valuation process and we thought I’d share the two crucial elements we look at in order to build a story around our price – and why buyers should pay it.
One half of the buying story is always built around logic. While you may think that in the frenzy we’ve seen in the past few years that logic is not a factor in pricing, it really has always remained a key component.
While buyers have paid significant premiums on homes, there has always been an element of logic to their thinking. If a home for sale is down the street from a similar home that had a smaller backyard and one less bedroom, paying more for it makes sense. If everyone is saying prices keep going up, paying a significant amount more still makes sense. After all, it’s a better home, and it will be worth more soon.
When we consider how much a property is worth (whether we’re selling it or considering buying it), we look at the numbers from a few different perspectives.
- How has the market in which the home is located changed over time and where was the home situated with the market at the time it was purchased? As an example, if a home sold for $750,000 in 2015, at a time when the average sale price was $825,000 for that home type in that area, the home was “valued” at 10% lower than the average. If the average now is $1.2M, and if we assume the same discount applies, the market would value the home at 10% less than that, or $1.08M.
- When we look at recent, comparable sales, what price per sf did those homes realize on their sale? If a house sold for $950,000 and had square footage of 1,780 sf, it sold for about $534 per sf. If the home we’re selling or considering buying has and extra 300 sf, that would mean it would sell for about $160,000 more based on the price per sf.
- While they are often very out of date, we can also use MPAC assessed values as a proxy for the worth of a home when comparing one against another. MPAC uses over 150 factors to determine the assessed value of a home, and if we know a neighbour with a number of small differences sold for $1M and were assessed at $700K, we can determine the estimated value of another home that was assessed at $840K (which is 20% higher) to be worth $1.2M.
We use this sort of review in order to gather a number of different estimated values. While any one approach can be prone to inaccuracy due to sample size, market variations and other factors, by looking at a home from a number of different perspectives, we get a very clear sense of what it is worth. This is, by design, more accurate than simply taking a recent sale and saying it’s maybe a bit more or less based on perceived attributes or deficiencies.
When we work for sellers, we use this work to justify our price. “We’re worth X because we’re X% bigger and the average price per sf for homes like ours is X. Also, we’re assessed at X dollars more than that recent sale, which means we should sell for X dollar more.”
When we work for buyers, we use this work to make sure we know what is actually a fair price for the home. We won’t overpay, because we know the numbers on the comparable properties that the listing agent tells us. Sometimes, we do our work and realize this is a great opportunity for our buyers, as the seller and their agent failed to realize that they’ve underpriced the home because they didn’t do the review we did.
When you have some logic for why a home is worth a particular price, it can make a huge difference in the eyes of some buyers. Many people prefer to have a logical rationale for their decision, even if that logic merely helps support their emotional reaction to the home. That leads us to the next element of a successful pricing strategy.
While a logical case for why a home is worth a particular price can be very impactful, it is often said that logic makes you think, but emotion makes you act.
Even when it comes to investment properties where one would think it is all about the numbers, investors consider how the purchase makes them feel. We’ve had a number of investors who declined to buy a property that had great numbers due to the feeling that it would be a big headache to own and oversee. Emotion is a crucial component to both the decision to buy or sell, as well as to the price that is worth paying.
When we consider how much a property is worth (whether we’re selling it or considering buying it), we look at the feeling of the home from a few different perspectives.
- Does the home have intrinsic values that will resonate with buyers, now or in the future? For example, a condo with views of the city skyline will hold value and be more valuable than a condo with views of the parking garage or garbage collection area. An another example would be a house that is facing a pond, which is going to be more appealing than a home that faces another row of homes.
- How does the home fit with the type of people who most want to live in the area? For freehold properties, a home that is designed and has a lay out that is suitable for a young single person will be worth less than a more typical, family home, if the area is popular with families due to a desirable school district. On the condo side, a hip, urban loft that is located within a dated building will always have trouble commanding as high a price due to that disconnect.
- What work would need to be done to alleviate concerns or deficiencies within the home? Many sellers discount the impact that such issues have on desirability in the minds of buyers and tend to think of them only in logical, cost terms. In reality, it isn’t simply the cost to renovate or repair the issue, but the time, the energy, the risk and uncertainty that goes into addressing the issue.
When we work with sellers, we prepare homes for sale in ways that increase the emotional appeal to the type of buyer we are targeting. We highlight the best, intrinsic aspects of the home, we style and stage the home to reflect what buyers will want to see and we either do the work to address deficiencies or we have detailed estimates and workups for the cost and time to do so. When we combine all of these aspects, we have a home that feels right for the buyer, which means the logical case we have built for the price is accepted or even exceeded.
When we work with buyers, we look past the glitz of a staged property to search for any fundamental issues with the property that will limit appreciation over time. We identify ways in which the home could be changed in order to reflect how our buyers live and we look into what it would actually cost in time and resources to fix any existing issues.
When you combine a logical review with an understanding of emotional factors, there is a clear and compelling case that can be made for the value for any specific home. Whether it is on the selling side or the buying side, when your agent does this work you end up with the best result for you in the transaction. If that sounds appealing, don’t hesitate to get in touch!