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Real estate bidding wars

November 6, 2018

Real estate bidding wars have become the new normal, well relatively new.  Realtors’ practices have changed and evolved over the years.  It used to be that a house would be priced close to the expected final sale price and if the Realtor had done his or her homework the deal would usually close within 10% of the asking price.  They used to call that “priced right”.

With the advent of long term (over a decade) low interest mortgage money things have changed quite considerably.  Low interest rates have meant more people than ever before are now buying homes, with mortgage payments being cheaper than rent.  While in the old days Realtors would be happy to see competing bids drive the price up to sometimes 5-10% over asking they now actively set the stage for bidding wars.

It is not unusual to see Realtors advertise a property for $100,000 or more off the expected sale price.  This is done to encourage prospective purchasers to look more closely and consider pitching an offer.  The Realtor warns they expect competing bids and they anticipate the property selling for considerably more than asking.

While this practice seems a little manipulative, it is, it isn’t unethical since the Realtor’s job is to sell the property for the highest possible price.  Not only that but the Realtor’s, commission, income is contingent on getting a better deal for the seller.  If you are a seller you will be thankful that your property sold for more than you expected, and that has certainly been the case for the last half decade.

There are several problems with this approach to selling, not from the seller’s point of view nor from the Realtors but from a broader economic perspective.  If you are selling your house and planning to move down, to something less expensive, then you’ll be happy to walk away with a nest egg.  If you are planning to move up in the market, to a bigger house, what you gained on the swings you will lose on the roundabouts.

Among the winners of course are the Realtors, with commissions in 5% range if your Realtor sells two houses (yours and the one you purchase) at the Canadian average price of $496,500, assuming an average of 5%, the commissions would total $49,650 not bad for a few weeks (in today’s market) work.  In fact, on an hourly basis those commissions would be the envy of a high-priced Toronto lawyer.

The last point is a segue into a conversation about the profession itself, Realtors undergo a very short training programme, in 1986 when I took the three segments of the OREA programme it was a five-week course.  These days I understand the Association has added an articling phase to ensure that the new sales people are being supervised by a broker.

In any event several types of Realtor have emerged, there are those who are serious professionals and those who augment other incomes with occasional home sales.  We have seen firefighters, teachers and people from many other occupational backgrounds become Realtors.  One must wonder if they weren’t there, if there might be less pressure to maintain such a high commission level.  Two other types of Realtor have emerged, sales agents and listing agents.

Although most Realtors will work in both roles many prefer one aspect or the other.  Once a Realtor has listed a property they will be entitled to a share in the commission regardless of who sells it.  In the end the commission you pay may be split by four ways, on a variant scale, the listing broker and listing agent typically share half of the commission and the sales person and sales broker share the other half.

It is easy to see how the bidding war may benefit the real estate industry, but what is the impact on the broader economy?  First, encouraging the bidding war drives up the cost of housing to unaffordable levels, something that some economists have identified as highly problematic.   In fact, Canada is home to one of the four riskiest real estate markets in the world.  And long term, as interest rates correct to historical norms many homeowners will find themselves unable to refinance their homes.

Home ownership is no panacea, it is expensive, certainly in terms of the payment of commissions and conveyance costs, including 5% to the Realtor, 4% to CMHC, legal fees and mortgage brokerage fees.  At the end of the exercise few first-time home buyers own anything more than a pile of debt.  Bidding wars make their situation even more strained.