Let the buyer beware indeed!

In consequence, though, the real estate industry has steadily accepted a public responsibility to reduce the odds against the buyer and to permit -- and, on the whole, encourage -- the inclusion in any offer of such conditions as Home Inspection and Mortgage Approval before a deal becomes firm and the buyer has no right to cancel it.

More than this, too, the concept of Buyer Agency has increasingly emerged.  I'm prepared to argue that its ultimate version -- exclusive buyer agency -- is the best way to ensure your treatment as a client, but I do agree that your interests will be better served by a Buyer Agent as opposed to a property's Listing Agent or anyone who's acting as a sub-agent (both of whom are committed to looking after the seller instead of any prospective buyer).

The essential difference lies in ensuring value for a buyer's money, which invariably means an offer below the asking price or, at the least, no more than the actual (and largely provable) property's current market value.

However, however ...

The point I want to make in this latest issue of my newsletter is that determining the "right price" is no longer as easy as it's been until quite recently.

Allow me to explain, as follows.

 

Value is a relative factor.  It's a reflection of what else your money could buy and, when it comes to real estate, the key is a Comparative Market Analysis (C.M.A):  how does the price of a property compare with similar current listings and recent sales?   The calculation isn't an altogether exact science, but it does indicate that someone asking for $200,000 should be in line with what the existing competition wants and close enough to the prices paid for similar properties in the past few months or so.

The theory has long stood the test of time and, often enough, allows buyers and sellers to negotiate a settlement that isn't too unfair to either side of a transaction.  In effect, it helps to bridge the difference between the prices that sellers and their listing agents want (i.e. what I'm given to calling the most money for the house) and the amounts that buyers and their buyer agents prefer to pay (i.e. what I'm fond of turning around into the most house for the money).

So far, so good -- and it's an approach that I've yet to find wanting.   Other factors enter into the equation (e.g. the varying degree of each party's motivation), but the supporting rationale is an objective and reasoned one that rarely gets people unduly upset.

Ah, but all of a sudden a new factor has started to have an effect, at least as far as many potential buyers are concerned -- never mind what the CMA suggests today's price ought to be;  the question is what will the value be tomorrow?

 

Without doubt, the market has become slanted in favour of its buyers.  At the same time, however, wholehearted recognition -- let alone acceptance -- of this fact has yet to show in current market prices.  Most sellers are holding firm on what they believe their places are worth, and listing agents aren't too readily discouraging this belief, even if they're aware of the shortage of showings and offers.  Like the buying public -- although in a quite different sense -- they reckon they can simply wait out the market.  The general conviction is that recovery is only a matter of time and that, by exercising sufficient patience, they'll eventually get what they're asking for.

Yes? No?

Well, as I also said last month, I'm far from certain about the answer.

 

In the Niagara Region, house price movements have been (may I say?) less unreasonable than in such areas as Toronto, where bidding wars and spiralling prices became a norm that seemed to defy commonsense.  Thus, we've avoided the likelihood of a bubble about to burst and simply seen steady but limited price rises.

In contrast, Wall Street's judgement that prices would never go down (which led to the mistake of sub-prime lending) has increasingly created problems on Main Street, not only in the U.S.A. but in an alarming number of countries beyond America's borders.  One outstanding example can be found in California, which has seen house values drop dramatically by 50% -- yes, by half -- from what they were a mere two years ago.  In turn, mutterings are being heard in Vancouver and, though not as vociferously, in the Greater Toronto Area.

I don't foresee any similar collapse in our own communities, but I do suspect that a softer market -- which has by now unquestionably come into existence -- is likely to be accompanied by softer prices.  What people could get -- and paid -- two years ago is, at best, what selling prices are today and, at worst, less than they're likely to be tomorrow.

I do realize that few listing agents (not to mention their seller clients) are going to welcome this opinion and never mind quickly agree with it.   However, my instincts tell me that numerous current asking prices are some ten percent higher (or perhaps more) than they ought to be.

For a lot of sakes, I'm hoping that I'm wrong (save for my buyer clients, of course!), but I have difficulty in thinking that today's buyers will overlook the chance that the value is going to drop as soon as the transaction is completed.

This isn't quite the same as losing a few thousand dollars as soon as you drive a new car off the lot but, ironically, the future of the auto industry is too close to home to be ignored.  Heaven forfend, needless to say, but a significant cut back in GM wages (and, alas, maybe pensions, too) is bound to add to a downward pressure on house prices hereabouts.

 

All told, my advice to any prospective buyer nowadays favours an offer that's a good ten percent less than a CMA suggests.   It may not get accepted, but it will make the point that the market seems to be headed downwards, at least for this year and the next.  In fact, it could well be three years from now before prices return to their 2006 level.

In a way, this approach is in keeping with my commitment to look after a client's best interests -- and these do NOT mean paying less than a property is going to be worth.  My buyer may have to settle for something closer to the asking price, but he/she and I do know that we've given things the sort of try that the present situation calls for.

In fact, I can't help thinking that there's some danger in paying an asking price right now.  Indeed, I'm prepared to argue that, as a buyer, you can do worse than protect yourself against a risk that I supect is more likely to surface than not.