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.

Logic

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.

Emotion

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!

Deciding how much to pay for a property is an intense process.

Depending on how long the search has been going on, your financing options, the market dynamics at your price point, location and housing type, as well as your own personal situation, when you reach the stage where you’re actually putting pen to paper (or more likely these days, clicking on a digital form!) it can be very stressful to come up with the number to put down on the offer.

There’s a simple way to remove lots of the stress from the offer process – decide on your options beforehand and go in prepared.

It begins with us doing our work examining comparable sales, equalizing for differences, analyzing market data and current trends and presenting you with our purchase pricing scale.  This gives you three prices that we can use to decide on our approach going in and our reaction to what happens during the offer process.

Here’s an example of what the purchase pricing scale looks like.

Now let’s go over what each price point means and how you use the scale to get the property you want, at a price you’re comfortable with!

A Good Price

This specific price is the point at which we can say with great conviction, anything below this price is a good price.  The further below we go, the better the price, but anything up to and including this price is a good price.

When you talk with friends or family and compare prices for real estate, you’ll feel good about how much you paid.  When it comes time to sell and you realize an amazing return, you’ll feel great about how much you paid!

If you buy the property at or under this specific dollar amount, you’ve got a good price.  It’s that simple.

An Acceptable Price

The second price we identify is the point up to which we say the price is acceptable.  It’s not going to make us jump up and down necessarily, but it is most certainly acceptable.  We aren’t going to have any problems with an appraisal coming in for less and no one is going to raise their eyebrows at you if you discuss how much you paid for your home.

If you buy the property for more than the price we identified as the Good Price, but up to this price point, you’ve bought it an acceptable price.  It won’t feel like you got a bargain, but you also won’t feel like you made a hasty decision that you’ll regret.  The most likely way you’d describe it is that it was a bit more than what you’d hoped for but you’re still really happy with the purchase.

The good news is that as time passes and real estate prices grow, an Acceptable Price doesn’t take too long to become a Good Price!

A Necessary Price

The final possible price is what we’re calling a necessary price.  This is any purchase price over what we have identified as an Acceptable Price.

To be clear, this is not a bad price or you over-paying for the property.  Calling it either of those indicates that we somehow made a mistake or were taken advantage of when we bought at this price.

It’s called a necessary price because it was the price you HAD to pay to get this property.

Maybe it was because of market conditions, because of your situation, because of multiple buyers competing for the property – regardless of the reason (or reasons), this is the price you had to pay to get the home.

To be clear, calling this the necessary price doesn’t mean you’re willing to pay it.  In many cases, this may be the price beyond which you just aren’t comfortable paying as you know it will take some time to recover that via price appreciation.

Regardless of whether you decide to go to this price or not, it’s still the necessary price to be paid to buy the property.  By understanding what that price is beforehand, you are in a much more comfortable place if the offer process ends up at this point.  The decision then is whether you want to pay this price, knowing that it is beyond what “should” have been paid in other situations.

Without a doubt, buying a home is a stressful experience.  The biggest element of that stress is being forced to make a high value purchase when you aren’t ready to do so.

When you enter into an offer process with an understanding of what good, acceptable and necessary prices are for the property, you remove a lot of that stress.

Our goal remains to get you the property at the lowest possible price and by understanding the different price points in our scale, we develop an offer strategy designed to do that.  Given we can’t control the market or seller’s behaviour, this approach is helpful in making it clear whether where we end up is good, acceptable or necessary.  It relieves stress, makes decisions easier and results in a better experience.

If you are looking to buy a home, you need to work with agents who understand both how to assess property value as well as prepare you for the offer process and how to get what you want at a price you are willing to pay.  By doing so, you will never be in a situation where you get caught up and make the wrong decision.  If that sounds appealing, get in touch!