Real estate and the market in general has always fascinated me. I am always floating through realtor.ca to see what is on the market and for how much. Hey, you never know when something interesting will come up. Afterall, that is how I ended up in my place – completely unexpected and ended up being a great investment. But lately, what is so fascinating about the real estate market is the wide variance in listing prices between homes.
As I sit here on the couch, I open up realtor.ca and go through the new listings. When I am looking through the different listings, I’m looking at a few different things – where update have been done and where they haven’t, calculating how much work would be needed to make it better and what the property has to offer (like number of baths and beds). And then I look at the listing price…
Each time I was shocked by the listing price of a home, three questions kept coming up:
- How is a house with 2 beds and 1 bath listed for the same a house with 3 beds and 2 bath?
- How is a house that needs a full (gut job) renovation listed for the same as a house that has had some renovations done already?
- How is a house that is “fully renovated” not listed for more in comparison to other homes in the neighborhood?
So now I’m curious…
I am the kind of person that needs to understand why something is the way it is. And when it doesn’t make sense, I look into it until it does make sense. So now I’m looking at these listing a little closer. And the best I can tell, there are 3 factors that could answer the questions above.
**Disclaimer** I am not a realtor. These finding are only my opinion, based on the knowledge I have as a designer and based on personal, outsider, observations over the last few years.
1 – A shift in office structures
In March 2020, Canada saw something happen that I don’t think anyone thought would EVER happen. The country closed all retailers, restaurants and office buildings. This led to a new office structure which saw people working from home instead of going into “the office”.
Before this, when looking for a home, you would look for a home in proximity to your office. For many people, this meant a smaller home in the center of the city. But now with working from home, location in relation to the office wasn’t a concern. Plus, with all entertainment closed/cancelled for the foreseeable future, the appeal of being downtown was fading. However, having space for a home office or having space for the kids to play became the new “must have”.
This led to more people selling their downtown home and moving outside the city. Outside of the city, they were able to find larger homes, more bedrooms, and more space for the kids to play. Plus, at the time, the property value in the city was so much greater than the property value in the suburbs and in rural cities. These homeowners now had a lot of money to put towards a new, bigger, home with even some saving leftover.
Many people speculate that these home buyers caused home sales in rural communities to increase so drastically, seeing home sales in these areas like never before. Which leads me to #2.
2 – Recent sales in the neighborhood
This has always been the case. What your neighbors sell for will automatically increase (or decrease) your home’s value. And it seems that thanks to #1, each home in the neighborhood is selling for more and more.
If any of you have bought a home between the summer-fall of 2020, you might have run into a situation where the home doesn’t appraise for the value you offered the seller. For those of you that don’t know, when this happens, it will cause problems with securing a mortgage.
An appraiser will look at the current condition of the home and what other, comparable, homes in the area sold for in order to determine if the sale is, in a sense, a safe investment. When a market is as hot as it is right now, where these are homes selling for sometimes $100,000 over asking, having multiple homes sell in a neighborhood helps the appraiser value it. And this is where #3 comes into play.
3 – Builder-Basic finishes (renovation)
For the most part, homes in rural and even suburb areas are older homes. Homes built in the 1980 or later and on large properties because that’s how they did it then. And many of these homes have never been renovated, yet. In the last 12 months or so, more of these homes have popped up on the market listed as “fully renovated”. In my perspective, I think this has a lot to do with #2. You have record high home prices but to get the most for your property, you must appraise higher. And true to even before the pandemic, renovations will increase your homes’ value.
When I’m flipping through any listing, I finding myself looking at finishes and layout. I’m making a mental tally of what I would change or need to add (like a second bathroom) and what that change will cost. And when I’m coming up with $50-100k to fix a FULLY RENOVATED home that will likely sell for $600-800,000 (one that would have been $450,000 in 2019), that doesn’t seem like a good investment to me.
As I mentioned above, one of the things I was struggling to understand is how there is such a drastic swing on home prices – from number of bedrooms/bathrooms to cosmetic finishes. And looking through these homes, it comes down to the finishes. Whether the home has finishes from the 1980’s or they have finishes from 2021. If these finishes are “builder-basic”, that will affect the homes’ value.
Builder-basic: a term to describe base model interior finishes of a home. These are cheaper, basic, finishes instead of an upgrade, more expensive finish. An example would be laminate floors vs. hardwood floors (a higher quality floor).
When a buyer walks through a home, just like I was doing flipping through the online listing, they will be taking note of any renovations they will need to do to make the home to their needs. When looking for a quick flip, keeping the renovations simple and cost efficient is the right thing to do but understand that what you can get for the home will also follow suite. I have seen several homes in my area that were listed for an obscene amount (in my opinion) given what they offered. And sure enough, they sat on the market and the sellers ended up dropping the price a couple times. And then they still sold for under asking. This says A LOT when the market is as hot as it is right now.
If you are renovating to sell, speak to a realtor first. They should be able to tell you what buyers in your area are looking for in a home – what they value (open concept, high end finishes etc.). You want to be sure that you are getting more out of your home than what you put in. Understanding your market will ensure you do that.
In my Opinion…
The Canadian real estate market has been crazy the last few years and, so far, doesn’t look like it will be slowing down. Despite the above, there is still one thing that I can’t understand – how homes are selling with multiple offers over asking. Sometimes $100,000+ over asking. I have 2 theories:
- Listing agents are listing lower to get attention. So when they say, “sold for $120k over asking”, is sounds good to the next person looking to list. Even if it truly sold for a real market value.
- Buyer aren’t understanding the true value of these homes and the market value is being artificially inflated.
I hope that there isn’t an unethical reason. Buyers, it is up to you to be educated on your purchase – large or small. Anyone out there that is looking for a home now, please do your research.
I am one of those people right now and I have to say, I’m not 100% confident in the opinion of a Realtor right now. You listen to commercials and all a realtor is talk about is how much over asking they sold for – not what/how they got someone their next home. And when you know their job is based on sale commission…
I have walked away from a realtor before because I didn’t feel like she was hearing me; felt pressured into looking at a higher price point, for less in return (few bedrooms/baths and more renovations). This might be something the CREA needs to revisit. Especially as more new Realtor are entering the workforce.
But again, just my opinion…