I'm going to say something you're probably not going to like. The real estate market is smarter than you. I hate saying it and I like hearing it even less because it also means It's smarter than me too.
So let's put that in context.
We all know someone who talks like they know it all – and thinks they can beat the market. Here are a few items worth noting:
ONE: Market Value: The market dictates sales prices. The point is when a seller and buyer agree to exchange a house for a certain amount of money it's called market value.
Homes that are overpriced don’t sell or tend to stay on the market until the market dynamics warrant the asking price. Underpriced homes typically receive multiple offers. That’s the market doing what it does best, set prices.
Situation Example: Multiple Offers
- A house is listed at $1M and the seller set's an ‘offer date’ in 5 days, in the hopes of getting several buyers making offers at the same time.
- The seller then receives 5 offers.
- 1 or 2 of the offers is usually slightly below or at the list price.
- 1 or 2 of the buyer's love's the home and offer above list price.
- Usually, people end up assembling around 1 or 2 numbers (more often than not it matches similar recently sold's near them). For the sake of the example, let’s say 2 offers are in the ballpark of $1.1M and 2 in the region of $1.12M.
- The home sells for $1.3M
Here is how the market played that out: While most buyers in this situation felt the house was worth roughly 1.1M'ish, the laws of the market drove that price higher and the seller was lucky to find a buyer who was willing to pay more. Good for the seller, not so good for the buyers whose offers didn’t get accepted. Classic, supply, and demand.
Situation: The Overpriced Listing
- A house is listed for $1M
- In the first couple of days, the seller receives an offer of $950K which is tossed out.
- A week after they receive yet another offer – this time at $945K.
- At the end of the month, an offer at $955K comes in.
If three purchasers are making bids in the same region, like it or not, that’s likely how much that house is worth. Motivated sellers will listen to what the bidders are saying and eventually accept a lower price, while some others will decide to take their house off the market and wait for prices to go up.
Here is how the market played that out: There was little interest at 1M so buyers refused to meet the seller at their asking price. Only when the price is lowered to what the buyers are prepared to pay, will the home finally sell.
Situation: Subjective Selection
So often sellers try to justify overpricing their home by selecting the comparables that support a higher price and ignore the comparables of a lower price. Obviously, we see buyers doing the opposite– by focusing on only the lower priced comparables and making low-ball offers.
The fact: Both parties are wrong. The most recent, most similar sales are the most relevant.
Now you might be thinking, how does the market adjust to this? The sellers home stays on the market and nearly always sells for less than list. And the buyer? Makes offer after offer, losing out on good properties, while continuing to pay rent and watching prices rise.
Lesson: Timing the Real Estate Market: Nobody I've ever met has a crystal ball that can predict the market every time. But if you meet them please, please introduce me.
Here are two situations we see happen over and over:
Situation: Waiting to Buy Until the Market Crashes
Buyers decide to postpone pulling the trigger ‘until the next real estate crash’ so they can buy a house “for cheap”. There are 3 issues with this reasoning:
Issue ONE: How will you know when ‘the bottom’ is hit? The thing about ‘the bottom’ is that we only know it was the bottom once things turn around and we aren’t at the bottom anymore.
Issue TWO: If it was that easy to time the market, wouldn’t everyone be millionaires?
Issue THREE: While you wait for the market crash, house prices in BC continue to rise.
Situation: Selling and Renting Until the Market Crashes and Re-buying When it Recovers
Here's another one, sellers who want to sell while the market is high and lock in their gains. The idea is usually to rent in the meantime, wait for the next crash, and get back into the property market when things begin to recover.
The problem? Most of the sellers who've used this strategy in the last 5 years are now priced out of the market. The $500k they sold their detached house for in 2011 now only buys them a smallish condo – and to re-buy their same house, it would cost them $800k. Ouch.
Timing the market is a pretty dangerous game to play with your primary residence and your retirement money.
The real estate market is a funny thing – we don’t control it as buyers, as sellers or as real estate agents. But we can learn from it if we're not too stubborn.
A market is a place where buyers and sellers meet to exchange something
The law of supply and demand is the relationship between supply, demand, and price. Specifically:
Increased demand results in increased prices;
Decreased demand results in decreased prices;
Decreased supply increases prices.
Increased supply decreases prices;
I hope that helps, be great!