Dec. 27, 2017

All About Bidding Wars


Bidding War

  

Bidding War BarHere is everything you need to know to win one. 

 

Bidding wars for Real Estate have become an almost unavoidable reality in Victoria over the past few years, much to the chagrin of buyers and the delight sellers in what has become known as the strongest Real Estate market in the history of Victoria. 

It all started when Vancouver buyers brought their Asian currency export dollars into Victoria along with market dynamics that have been the norm in Vancouver for well over a decade.  Until 2014 a spread between the asking price of a home and a final sale price of more than $25,000 above was almost unheard of while spreads exceeding $200,000 were already the norm in Vancouver. 

Since 2015 bidding wars have almost become the norm in Victoria with the number of bidding wars with sale prices exceeding the asking price by more than $100,000 rising astronomically.  Even spreads of $200,000, $300,000 or even $400,000 have since been registered in Victoria. 

Your first line of offense when entering this stressful arena is your buyer’s agent.  You want to select someone not too timid who is well versed in the complex dynamics of bidding war politics, and with plenty of industry experience and a track record of winning multiple offer competitions.  Ask for a bidding war transaction resume and a description of the tactics employed to win them.

Your buyer’s agent will research and analyze recent sales of comparable properties to determine what your property of interest is likely to sell for.  He will take current and most recent market activity into account.  In a rising market your home may sell for 5% more than an identical property sold for a month ago.  An experience and competent buyer’s agent will have a cutting-edge awareness of current market condition and provide you with accurate valuation advise.

The next step will be to gauge the level of interest by the market in the competition property.  Your agent will find out how many times a day the property has been shown by other Realtors or independent clients, if anyone has ordered a building inspection report, or in the case of strata properties, if anyone has requested to receive copies of the strata documentation package that will including things like things like strata bylaws, rules, financial statement, depreciation reports, minutes of meetings, etc. 

Building inspection orders and strata information requests are an indication of very serious interest by other competing parties, and a sign that competing parties are planning on presenting an unconditional offer.  In today’s market the wining bid will, in most cases, be an unconditional offer, so any research respecting the suitability of the property will be done in advance by serious prospects.

For this reason, the agent representing the seller should have a complete set of strata documents available for all prospective bidders before commencing the marketing process.  I typically also advise my sellers to order and make available to prospective buyers, a building inspection report from a reputable inspector in conjunction to insure a maximum number of bids. 

Many buyers are reluctant to incur the expense associated with ordering such a report in a competitive situation for obvious reasons.   When the seller order this report the related costs are only incurred once.   

Sellers typically achieve optimal results by ordering such a report; the concern by some that this could lead to the seller being liable for defects not discovered in the report are, in my opinion, completely unfounded.

As Realtors we are obligated to recommend a building inspection report for every purchase, or risk being liable for any defects found after the fact, unless we have our clients sign a waiver that they are prepared to take the risk notwithstanding our advice.  The truth of the matter is that these reports are really a bit overrated due to the costs to rectify the defects uncovered by them rarely exceeding the price of the report.  

This holds especially true for strata property where any costs associated with maintenance and repair of the exterior and building envelope is the responsibility of the strata and where minutes of meetings, the Depreciation Report and various other studies reveal much about the condition of the building.

Even in the single-family home category, newer homes hardly ever harbour any surprises with modern building code regulations and oversight and with seller disclosure requirement and latent defect legislative provisions.  Older homes should be examined more carefully, but a good Realtor can often tell if a building inspection report may be warranted or not. 

I’m told by building inspectors in Victoria that their business has dropped off dramatically in the past two years regardless of the increase in sales activity as a direct result of buyers forgoing them in bidding wars and offer competitions.  

As the offer deadline approaches your buyer’s agent will keep in constant contact with the seller’s representative to monitor the number of offers expected by the deadline, how many are expected to be unconditional, and to get as much information as possible about the competition.  It is surprising how much information can sometimes be gleaned from the seller’s agent by asking the right questions in a strategic and tactical manner about the other offers. 

Typically, it’s easy enough to find out if competing offers are unconditional, if they meet the seller’s preferred dates, and if they are above or below the asking price, etc., though some agents are very tight lipped about everything under the mistaken impression that they are obligated to maintain absolute secrecy. 

It is not illegal or unethical at all for the seller’s agent to reveal information about any offer to other parties, providing it is in their client’s best interest.    

The final offer should incorporate all the intelligence gathered on marketing process and it’s results, be unconditional if possible, bear a large non-refundable deposit, typically in the $20,00 to $50,000 range for properties under $500,000 and $50,000 to $100,000 if the asking price is greater, and incorporate the sellers preferred dates for possession and completion of the sale. 

The price is a factor of the competition you are facing as well as the most recent comparable sales data, and will most likely exceed your expectations, so be ready to pay a bit more than you initially expect. 

Your agent should investigate with the seller’s representative if a “referential offer” would be considered by the seller.   This is an offer where the price in your offer is relative to what your competition is offering that will contain the relevant clauses to reflect this, and provide that you will pay a fixed amount above the price of your highest competitor.   I have found this to be a highly effective strategy providing the premium above the nearest competing offer is large enough.  It should be at least $5000.00 to $10,000 for offers under $500,000 and $10,000 to $20,000 above as a general guideline. 

Agents and lawyers sometimes advise their seller clients against accepting such an offer citing litigation risk, but I believe this is unwarranted and rather a function of laziness on the part of seller representatives, as a properly structured, presented and managed referential offer can easily yield superior results for the seller in a bidding war without any risk of litigation whatsoever. 

Winning a multiple offer competition is both rewarding and exhilarating while being on the loosing side is not only extremely disappointing but also rather exhausting and discouraging and not something you want to go through multiple times.   For these reasons the right agent and the right tactics and strategies are ever so important to greatly improve your odds.   

Happy bidding.  

Posted in Bidding Wars
Aug. 16, 2017

What's Happening in Victoria?

Victoria Real Estate Market

Understanding the Victoria Real Estate Market.       

The key to understanding current Real Estate market forces rests on an examination of the dynamics impacting the global Real Estate market in the 2000 to 2007 timeframes that were responsible for  precipitating previously unprecedented double digit price increases almost every year, and to compare this economic environment to the factors in play today.  

Most important to consider is that lending standards, interest rates and mortgage underwriting criteria became most favorable to home buying within a very short timeframe soon after the collapse of the 2001 tech bubble.   Consumer lending was also greatly expanded along with many other monetary expansion measures designed to prevent a recession or even depression level economic event that was sure to follow the correction in the stock market. 

Fractional reserve lending standards were eviscerated by clever new bank instruments like Collateralized Debt Obligations, (CDO's) and Credit Default Swaps (CDS's), and other credit derivatives that permitted banks to repeatedly sell loans to third parties in order to create new debt and turning existing debt into new cash reserves to start the fractional reserve cycle over again, virtually without limitations. 

The ensuing liquidity bubble then finally came to an end when consumer debt expansion had reached a saturation point whereby the origination of new debt could no longer keep pace with repayment of the gross aggregate existing private and public debt that is constantly being repaid, inclusive of principle and interest, causing a contraction in the M1 money supply and consequently a monetary recession.

The book Manias, Panics, and Crashes, by the late Charles Kindleberger, illustrates this concept in detail.

http://www.economist.com/node/1923462

Once this inflection point had been reached an exponential decline in M1 money supply was sure to follow causing critical liquidity shortages that quickly spread throughout the financial markets and general economy, and that would have no doubt culminated in a wide spread collapse of the global financial system had the US government and other governments and central banks around the world not intervened with a massive financial bailouts that are indirectly the cause of the current stock market and Real Estate bubbles. 

Bailout funds provided to investment banks, various other financial institutions and corporations around the world and other such mechanisms of the quantitative easing program spear headed by Ben Bernanke in 2008, then of the US federal Reserve and Hank Paulson secretary of the treasury of the US government at the time, provided the necessary liquidity to subsidize the various failing investments around the world that were the result of the new abuses of the fractional reserve lending system by the banks originating these new and now failing debt instruments, which according to Charles Faber had a notional value, that is original value of 1.3 Quadrillion in US dollars, that is 1300 Trillion dollars.  Quite a sum.

These new bailout funds were then immediately invested into the financial markets via stocks, commodities, government bonds where they could turn a profit until needed to subsidize the failing loans and derivative instruments on the books of these various institutions causing what became known as the "stealth bull market" that is still in play today.

These stock market gains soon found their way into the Real Estate sector where they quickly lead to dramatic price escalations with investors looking to diversity funds away from the increasingly diminishing  dividend returns of stock market investments and risks associated with artificially inflated commodity investments like the risk demonstrated by the recent collapse of the energy sector.   Of even greater significance is the role China plays in all this as a prime beneficiary of quantitative easement with it's vast holdings of failing credit derivative instruments from the reinvestment of a vast foreign exchange surplus connected with consumer debt explosion bubble of the previous decade. 

These funds are being funneled into the hands of a small upper class in China who have been exporting their holdings in vast quantities into safe Western jurisdictions where they are being invested into commercial and residential Real Estate. 

As a result all major North America cities have experienced Real Estate price escalations due to safe heaven migration of funds from China; a trend that is now beginning to slow in consequence of changes to Chinese currency export regulations with effects seen in Vancouver and elsewhere in the form of a slowing Real Estate market long before the Property Transfer surcharge on foreign investment came into effect in that jurisdiction. 

To some extent major Real Estate markets in North America are now tied to the continued strength of the Chinese economy and ever tightening Chinese regulations on currency exports. 

In addition to all this excess liquidity we continue to see an influx of retirement and lifestyle based migration into Victoria from the rest of Canada, and more recently, following the election of Donald Trump, a growing trend of US citizens looking to escape their new political reality by coming to Canada.  (Trump Refugees).  

Typically, only those Americans with existing status in Canada who actually buy Real Estate here with the rest typically giving up when they find out about Canadian tax laws on foreign ownership of Real Estate or discover how difficult it is immigrate from the US into Canada and that they can otherwise only stay for six months at a time. 

History has shown that the Victoria Real Estate market is generally impacted negatively by only two things; either a dramatic rise in interest rates, or a significant correction in the stock market.  In addition to this I think it’s fair to assume that a collapse of the Chinese economy and currency export limitations will also have a big impact in the future.  

In the immediate term the two recent smaller rises in the prime rate, change to mortgage underwriting criteria, as well as the change in regional government to the NDP, the uncertainties in US politics and geopolitical instabilities appear to have put a damper on our local market.  Prices are not coming down by any stretch of the imagination but they appear to have stopped going up, at least for now. 

Victoria has always been a desirable destination with a stable Real Estate market and the most diverse economy in the country so until some geopolitical event or monetary policy inflection points brings about another stock market crash or dramatic rise in interest rates we can expect continued stability in the housing market.

 

Posted in Market Updates