In real estate, we’re prone to hyperbole.

Consider it an occupational hazard, but we rarely encounter real estate agents that don’t focus overwhelmingly on the positive aspects of the home when they describe a listing.

It is, of course, a listing agent’s job to sell the home.  If you were a seller and your agent was focusing on the negatives, you’d rightly be a little irritated.  At the same time, one reason that the public in general looks at real estate agents with scepticism is because of the hyperbole in marketing material.

• That house is indeed “steps to the beach” but if you counted the steps, it would probably be around 2,000 steps to the beach.
• The condo with “CN Tower views” does indeed have a window where you can see the CN Tower, as long as you don’t mind stepping up on the toilet in order to look to the left.
• The “backyard oasis retreat” may have some plants and a water feature, but the multiplex overlooking it makes it feel less like a retreat and more like a public park.

One of the biggest dangers in listing a home for sale is that the seller or their agent (or both!) begin to believe their own marketing and start to willfully ignore less positive aspects of a home.  We say that is dangerous, because having a unrealistic view of the appeal and value of a property often results in over pricing the home and an eventual sale price that is considerably less than what they could have received if they priced it properly from the beginning.

In our years working in real estate, we’ve identified the three most common blind spots that sellers and listing agents have when it comes to properties they’re trying to sell.  Let’s take a look!

Blindspot #1 – It doesn’t tick all the boxes.

We’ll start with what we feel is the most important blind spot that sellers can have with their homes, when they don’t understand that their home doesn’t tick all the boxes.

Every type of home has a specific checklist of things that, if the home has them, means it ticks all the boxes.  For freehold homes the short list includes things like:

• More than one bathroom
• A finished basement
• Private parking
• Three or more bedrooms

For condo apartments, the list includes things like:

• A balcony
• A parking spot
• A locker
• A useable den

We can of course add lots more desirable features for any property type onto a longer list, but there is always a short list of things that the majority of buyers want in a home.

When a home is lacking one or more of the items on this short checklist, it absolutely impacts the appeal and therefore value of the home.  We often see sellers and their agents who are willfully dismissing the fact that the property doesn’t tick all the crucial boxes and using comparables that are properties that have everything on the list.

If your home is missing something that the majority of buyers want, then that needs to be acknowledged in the value of the home.  Dismissing the fact that the house doesn’t have a finished basement or that condo doesn’t have a balcony and pretending it still is appealing as homes that tick all the boxes is a terrible idea.

Blindspot #2 – Not exactly the ideal version.

The second most common blind spot has to do with the fact that a home having an attribute doesn’t mean it’s necessarily the best version of that attribute.

If a seller thinks they should command the same interest and price for their condo as the one that just sold last week, the question is are they actually similar?  Consider two condo units that, at first glance, seem very similar.  Both are two-bedroom, one washroom condos with a balcony.  Unit #1 is 972 sf, with a larger living room, two good sized bedrooms and a 400sf terrace.  Unit #2 is 716 sf, with a combined living and dining room, one normal bedroom and one small bedroom, and a 80sf balcony.  While both are technically similar, the level of their appeal to buyers is quite different.

Apart from quantitative differences like square footage, sellers also often tend to overlook the difference in design, layout and quality of finishes.  You can have a $1,000 stainless steel fridge or a $10,000 stainless steel fridge, and there are tremendous differences in how a home shows and feels based on the interior design, the way the home is laid out and how much money was put into the finishes.

When listing agents or sellers fail to consider the quality of the home and it’s appeal (or lack thereof) and simply compare against another home that is technically similar, it can result in significant mispricing of a home.

Blindspot #3 – That was then, this is now.

The final biggest blind spot has to do with failing to understand that the times have changed.  Whether it is a shifting market where the price a similar property received a month or two ago is no longer relevant (whether in terms of a higher or lower price), or failing to realize that the renovations done a few years ago no longer appeal to most buyers, it is crucial to acknowledge the passing of time.

There is a saying in real estate – sellers live in the past and buyers live in the future.  At its heart, this means that for a seller, they look to what neighbours received when they sold and what a home is worth now, whereas buyers are concerned about what it will be worth next year or when they eventually sell.

We often see real estate listings where the renovations, while of a good quality, were done years ago and now appear out of date.  When a seller is focused on how much they spent ten years ago on that kitchen, and doesn’t want to admit that no new renovations would use the same design, it creates a blind spot with unreasonable expectations for the current value for that renovation.

In our conversations with listing agents where the price seems out of line with the market, we often find the listing agent is relying on older sales that no longer reflect the current conditions.  Sometimes it means a buyer can get a bargain, as the listing agent doesn’t understand that the market has continued to go up since that sale.  In other cases, the agent is advising their seller client to expect the same price as a neighbour got before the market shifted and prices lowered, and it does not bode well for a successful sale.

Whether you’re a buyer or a seller, avoiding blind spots is incredibly important if you are going to get the best result.  We know how to work with our clients to make sure we see things clearly and we’d love to help you move forward.  Get in touch with us to discuss next steps!

The more important a decision is, the more we wish we could see what the different outcomes would look like for each choice.

Buying or selling real estate is a monumental decision and as a result, we have conversations with clients that involve a lot of “what ifs”.

We recently had a conversation like that with an investor client who was considering whether she wanted to buy an income property that was currently being built, or one that we could take possession of quite quickly.

It can be hard to know which is the better option, and while your available finances play a big part, we like to go over what it would look like from both a cash flow perspective as well as overall equity growth standpoint.

So, let’s take a journey into the real estate multiverse.

In one universe, you buy a new build condo from plans that will be ready in a couple of years, and in another, you buy an existing condo from the seller and close in a couple of months.

Let’s see how the two different choices play out.

Welcome to New Build Universe.

In the New Build Universe, we find you a development you like the look of in a growing town near a bigger city and we sign the paperwork to buy a two bedroom unit for $500,000 plus HST of $65,000.

The tentative occupancy date (when they will try to have the project done) is two years from now and the outside occupancy date (when they really have to have it done) is four years from now.

You pay $5,000 today, $10K a month from now, $20K three months from now, another $20K six months from now and a final $25K in a year.  A total of $80K in deposits, plus the $65K HST brings the total investment to $145K.

You go about your life for two years and are disappointed but not particularly surprised when the building isn’t done by the tentative occupancy date.  A year after that, it is done and you sign the mortgage for $420K, pay the legal fees and land transfer tax and get the keys.

We find you a tenant who is happy to be moving into a brand new, modern building and sign a two year lease with her for $2,450 per month.

We apply for and eventually receive a rebate of around $24K in HST, reducing our effective purchase price from $565K down to about $541,000 and your total investment down to $121,000

In the New Build Universe, the condo cost you $541,000 after you take into account your HST rebate.  You didn’t rent out the unit until three years had passed and the building was completed.  Your rental rate of $2,450 is the prevailing market rent for a newly constructed two bedroom unit in that town.

You signed a mortgage pre-approval document with a lender three years ago for 3.49%.  That was high at the time but lenders who guarantee a rate out for three or four years build in a buffer in case rates rise.  Rates have indeed risen since three years ago, so you happily keep that mortgage for $420,000 at an interest rate of 3.49% for a two year term.

Your mortgage payment is about $2,050 per month.    Maintenance fees and property tax cost you about $600 per month, bringing your total costs to $2,650 per month.  Your rental income of $2,450 doesn’t quite cover this but the $200 out of pocket per month is made up for by the principal repayments you are making with your mortgage.

You pay down about $22K in principal over the two years and pay $4,800 ($200 per month) to cover the difference between rent and your expenses.  Let’s round that up to $5K.

Five years after you bought the unit (and two years after you started renting it out), your mortgage is about $398,000 and you’ve had out of pocket expenses of about $5,000.

Welcome to Resale Universe.

Let’s check the numbers of the Resale Universe.

In this world, we find you a two bedroom unit in the same smaller town near a bigger city.  After a bit of a search, you like the look of one we see that’s in a nice area, the building is about five years old, and we buy it for you for $500,000, with a $50K deposit, provided the following day.

The closing date is set for two months from today.  On that day, you sign the documents with your lawyer, pay the legal fees and land transfer tax.

You pay an additional downpayment of $30K, to bring your total downpayment to $80K, leaving you with a mortgage of $420K.

We find you a tenant who likes the unit even though it isn’t brand new.  Rental rates back then were about $2,200 for a two bedroom unit in that town.

Three years pass.  The tenant who moved in stays for two years, then moves out.  You have vacancy of a month before you find a new tenant at $2,250 per month and he is still there at that rental rate.

The condo cost you $500,000, with no HST payable on resale properties.

The best mortgage rate you could find when you bought today was about 2.99%.  Rates were predicted to rise and given what happened, you feel pretty happy that you signed a 5 year term for the mortgage of $420,000 at a monthly cost of just under $2,000.

Maintenance fees are higher in this 5 year old building than a new build.  New builds have low maintenance fees initially but they often rise significantly as the new condo corporation and its board figure out what they need to have the building run as they would like.  For your condo in this 5 year old building, the maintenance fees for your unit are $600, plus another $200 for property taxes, totalling $800 per month.

Your initial rental income is $2,200 and your mortgage, maintenance fees and property tax cost you $2,800 per month.  You are out of pocket about $600 per month, but you know you are paying down significant principal and can handle having to supplement the rental income each month.  Your rental rate goes up after two years, but so do maintenance fees, so the $600 per month stays constant.  The one month you had the unit vacant meant you had to pay the $2,200 yourself.

You pay down about $61,000 in principal over the five years you own the unit.  Your mortgage is about $359,000 and you have had out of pocket expenses of about $38,000.  That’s a significant amount but you’re pleased with the principal repayment your tenant has mostly paid for with their rent.

Which universe turned out better for you?

Five years after the decision to buy an investment condo, whether you bought a new build or resale unit has had a significant impact on the financial result.

With the new build, your HST costs resulted in a $41,000 extra investment you had to find.  The lack of rental income and therefore not paying down the mortgage for the three years it took to complete the building means you have paid significantly less principal down on the unit.  You also have a higher mortgage interest rate than you could have got three years earlier.

With the resale unit, your investment is less but the lower rental rate an older unit receives meant you had significant out of pocket expenses over the five years of renting the unit out.  The principal repayment over the period of $61,000 was more than these expenses though, and you have about $39K more equity in the resale unit than you do in the new build unit.

From a pure cashflow perspective, the Resale Universe is the better choice in this scenario.  You own an older unit that commands lower rent, but you’ve got close to $40K more equity in the property than you would have in the new build unit.

Anything else we need to consider?

The issue of what the two units are worth after five years is the final critical factor as to which reality we’d like to have created.  In all likelihood, the new build will be worth more than the resale unit.  The new build is two years old after our five year time period has passed and the resale building is now 10 years old.

We find that many investors focus solely on the appreciation that a new build sees rather than considering what happens during the building phase.

In our two different realities above, a low down payment meant out of pocket expenses for both units.  While the numbers don’t seem very good as a result, the fact that resales make their owner money immediately (via principal repayment through the mortgage payment) would remain the same with higher downpayments and positive cashflows.

The HST cost and lack of principal repayment during the building phase means that we need to see a considerable appreciation in the new build unit value for it to be as good or better than the resale purchase.  In this case, we’d have to see units sell for about $40K higher in the new(ish) build after five years, versus the 10 year old building.

If you’ve enjoyed this glimpse into two alternate realities and you’d like to work with an agent who can help you think through your real estate decisions, don’t hesitate to get in touch.  You know, in one reality, you just emailed us!

There is a lot that goes into determining the value of a particular property but an important part of the equation is comparing it against other properties.  If you’ve ever seen someone make a mistake when choosing a comparable and then watched the negative consequences that occurred as a result, you understand how picking the right thing to compare is crucial.

Our team has done thousands of real estate valuations and it all begins with choosing the right comparables.  Here’s our three rules that must be followed in order to choose the best comparables and come up with the most accurate valuation.

#1 – It does or it doesn’t.

When we look at a property and its comparable properties, we look closely at the attributes of the properties.  There are a number of important elements to every type of property and they will play a huge role in the level of demand for the property and therefore the value we can ascribe.

For freehold homes, the characteristics that need to be considered are:

• Parking
• Garage
• Separate basement entrance
• Finished basement
• 3 bedrooms
• 2 bathrooms
• Central AC
• Usable backyard

These are all binary (0 or 1, yes or no, it does or it doesn’t) attributes of the property that are important to the majority of buyers.  A home that has all of the above attributes appeals to most buyers and, as importantly, doesn’t lead certain buyers to avoid it.

Whenever a property or comparable property is lacking in one of these binary aspects, it impacts the demand and therefore the price.  No parking?  Some buyers won’t even have it show up on their search.  Only 2 bedrooms?  Some buyers won’t even consider it.  No separate basement entrance?  Investors looking for properties with basement apartment potential won’t be in the mix.

For condo apartments, the binary attributes are:

• Parking
• Balcony
• Pets permitted in building
• Ensuite laundry

When you compare a unit against other units, these are attributes that dramatically influence the number of interested buyers.  Lots of buyers want an outdoor space and won’t consider a unit without a balcony of some sort.  For buyers with pets, moving to a building that doesn’t permit their furry family member is not an option.

#2 – It’s not all subjective.

While there are some attributes that a property either has or doesn’t have, there are a number of other objective aspects about a property.  These aspects vary between properties but they are not subjective.

Examples include square footage of the house or condo, lot dimensions (width and depth of the property) for a house, MPAC assessed value, maintenance fees for a condo (and what utilities are included), exposure (direction the house faces or the condo unit faces), non-residential neighbours (commercial or industrial units, cemeteries, utilities buildings) number of parking spots and property taxes.

Certain characteristics of a property that you would think are objective are actually relatively subjective when there is no agreed upon standard.  A den in a condo can be a full room with a proper door and closets or it can be an indent in the wall where you could put a bench.  The number of bedrooms seems like it would be an objective fact, but some “bedrooms” are too small for all but a twin bed and many buyers would consider it to not be an actual bedroom.

Even within objective aspects such as square footage, elements such as layout play a big part in the value a buyer ascribes to the objective aspect.  A 1200 sf, three store townhouse with 400 sf eaten up by stairwells and landings can “feel” smaller than a 900 sf, single level condo apartment.  Regardless, we can try to use objective facts to compare otherwise different properties and limit the subjective aspect to a more general discussion.

#3 – Looks matter.

Finally, the design, finishes and level of upkeep can dramatically impact the value of a property.  Yes, looks do, in fact, matter.

While this is most often seen in condo buildings where you can view identical units on different floors and find one appealing and the other a disaster, freehold homes often have similar layouts to each other as well.  Just like with condo units, one house can feel airy and bright while another house with a similar layout can feel drab and uninviting.

The appeal of a property is definitely more on the subjective side of the equation, as one person’s disaster is another person’s dream.  In a broad sense, however, we can say that how a property feels and looks has a significant impact on the number of interested buyers.

A property that has ticked all of the boxes in terms of must-have, binary factors, as well as has nice finishes and has been kept in good shape is likely to attract the most buyers.  There are a significant number of buyers who only want to buy move-in ready properties.  As the required work to update or upgrade a property becomes less cosmetic and more significant, the number of interested buyers decreases.

As importantly, the more work that needs to be done, the more the level of uncertainty about the costs rise.  The reason flippers and contractors are often the winners in a multiple offer situation is not simply because they have more money.  It’s because such knowledgeable buyers understand the actual likely cost of the work and aren’t putting in a safety buffer that a more typical buyer might feel is necessary.

The work of comparing a particular property (whether for sale or to make an offer) involves taking these three considerations into account and then crunching numbers.  While it is most definitely not a strict formula, the output we need to give our client is without a doubt a number.  In most cases, it is a fairly tight range with a price that would be great to get as well as either a price we shouldn’t go below (when selling) or above (when buying).

If you are looking to buy or sell real estate, you owe it to yourself to work with someone who takes pricing extremely seriously.  Please don’t hesitate to get in touch with us and we’ll move you forward.