The Toronto-area real estate market is looking like early 2017 redux in more ways than one: Intense competition occasionally leads buyers to offer huge amounts above the asking price of a property, then the deal goes south in the messy aftermath.
One problem arises when financial institutions require an appraisal of the property’s value before they sign off on a mortgage. When buyers who feel a desperation to buy get carried away, they may find the appraised value falls short of their stunning offer price.
According to the latest data, sales in the Greater Toronto Area soared 45.6 per cent in February compared with February, 2019, which marked a 10-year low, the Toronto Real Estate Board says. Sales have still not matched the record set in sizzling 2017, according to TREB.
Last month’s roaring sales came as new listings rose by a much smaller 7.9 per cent last month compared with the same month last year.
The average price in the Greater Toronto Area (GTA) stood at $910,290 at the end of February, which marks a 16.7 per cent increase from February, 2019.
Last week the Bank of Canada also cut a key interest rate by 50 basis points to 1.25 per cent in response to the risks to Canada’s economic growth posed by the coronavirus.
Beata Caranci, chief economist at Toronto-Dominion Bank, expects the central bank to cut again in April.
She says the easing policy will keep mortgage rates, sovereign bond yields and corporate borrowings costs at extraordinarily low levels.
Even without an outbreak of the virus in a large, urban centre, economic activity will be whittled away as consumers become more cautious about travelling and attending activities, Ms. Caranci says.
In the short term, a high-octane market can result in buyers offering exorbitant amounts in order to beat out the competition in a bidding war.
Thien Nguyen of TrilliumWest Real Estate Brokerage recently sold a townhouse in Maple, Ont. for $945,000, or a $225,100 premium to the asking price of $719,900.
Mr. Nguyen says he made sure that the bidder who submitted the highest offer had the financial clout to close the deal. He has made a practice of asking the buyer’s agent in any deal if they have a preapproved mortgage.
“That’s a huge aspect for us.”
In this case the buyer was well-financed and provided a solid deposit, he says.
But sometimes buyers – even with preapproved mortgages – can still run into trouble if the appraiser values a house below the sale price.
Financial institutions are concerned that they’re not lending more than the property is worth. So if a buyer signs an agreement for $1-million, for example, and the appraisal comes in at $900,000, the buyer may have to come up with $100,000 to close the gap.
Buyers who stretched to make a down payment end up scrambling to find the added capital – sometimes without success. He has heard of some instances in recent weeks.
“Some deals have fallen apart,” Mr. Nguyen says.
Mr. Nguyen says the parties on both sides of the deal typically want it to go through, if possible. But the upside of competition is that the seller’s agent has a list of rival bidders who may be willing to step up.
“They can go to the next person in line and see if they have capital.”
Duncan Fremlin, a real estate agent with Re/Max Hallmark Realty Ltd., works mainly in the Riverdale and Leslieville areas of Toronto. He has not seen any deals scuttled by a failure to appraise so far in 2020 but he has seen in the past.
“It’s very disturbing when it happens.”
Mr. Fremlin explains to buyers and sellers that there are significant differences between an appraisal and an evaluation.
In Ontario, appraisers are trained to produce detailed and unbiased reports. Their governing body, the Appraisal Institute of Ontario, oversees their work.
The banks and the judiciary only recognize appraisals from members of the institute, Mr. Fremlin says.
Evaluations, which are carried out by real estate agents, are not policed or regulated by any real estate association, Mr. Fremlin says.
“Even though we are in the business of pricing properties, we’re not recognized by the banks or the courts,” he says. “What’s missing from our qualifications is ‘unbiased.’”
Those institutions are concerned that a real estate agent might be influenced by an obvious conflict of interest, he points out.
Despite that fact, evaluations may be more accurate in some aspects, he explains.
Appraisers pay close attention to such factors as the condition of a house, how many bedrooms it has and the state of the plumbing. But they don’t take into consideration whether or not it has parking or if it’s the right address for parents who want to send their children to a well-regarded public school.
In the family-friendly neighbourhood of Riverdale, for example, Jackman Avenue Junior Public School is coveted by many parents. On Browning Avenue, some properties are within the boundary and some are outside of it.
“An appraiser wouldn’t know that,” he says. “They’re not going to be aware of nuances. There are advantages that we have that they don’t have.”
Mr. Fremlin points out that experienced agents will also guide their clients. If a buyer pays way above the asking price for a property, for example, the agent should make sure there’s evidence to justify that price.
Mr. Fremlin relied on his education as a property tax assessor when he started out in the real estate business 33 years ago. Even after so many years in the field, evaluating a property is a precarious endeavour, he says, because there are so many variables.
Mr. Fremlin says the shortage of listings in Toronto continues. Properties in Riverdale are selling quickly, for the most part.
As warm weather returns, more homeowners will put out a “for sale” sign.
“The sellers think that their gardens will sell the house.”
He doesn’t expect homeowners to rush to sell as they hear about the high prices that some properties are drawing.
“If people sell to cash out, that’s the wrong reason,” he says. “It’s not a stock.”