The First Time HOUSE Buyers' Guide
If you are thinking about purchasing your first house in Toronto in the near future, you’ve come to the right place, as I’m about to take you on a crash course for how real estate is bought and sold n Toronto in 2019.
This is an introductory list of what buyers should be considering going into the purchase process. I will be tackling other aspects of the buying process in subsequent posts.
1. Hire a Professional
In all seriousness, the first step in the process is to connect with a licensed, full-time Real Estate Professional, like myself. You’ll be making the biggest purchase of your life that could have major long term effects on your financial well being and so you should ensure that you have someone working for you that walks you through the process from start to finish so that there are no surprises down the road.
Establishing a game plan for what you’re looking for, how and when you’ll view properties, how the sale process works, and (the hard part!) how to actually purchase a home is key. If you’re agent hasn’t done this, and is showing you properties outside your desired area or outside your budget, you might want to re-evaluate who you’re working with. If they don’t have a plan for how to show you homes, they probably don’t have a plan for how to help you buy one either.
When I begin working with a client we go over several things:
What are the underlying reasons the clients have for the type of property they want? i.e. be close to family, school district, property with income potential, etc.
We go over their preferred areas as well as the lifestyle they’re looking to secure through home ownership. This allows me to determine if there are multiple areas that might meet their search criteria.
We talk about their budget and timeline, and then we jump into the nitty gritty like home inspections, closing costs such as land transfer tax, getting a deposit ready, the need to hire a lawyer, etc.
The purpose of this meeting is to go over everything we might encounter along the buying process, so that when the perfect home comes up the buyers can execute the plan as we drew it up without being surprised by anything unexpected.
2. Get Pre-Approved
In conjunction with hiring a Real Estate Professional, you should talk to a mortgage advisor. This can either be someone at your bank or a mortgage broker who has access to products and rates from a variety of lenders. They’ll ask some questions about income, debt etc. to “run the numbers” to establish what your affordability is under the current lending rules.
When doing this, make sure your bank does a proper pre-approval. Some mortgage specialists will say you’re pre-approved, but without the supporting documentation from a lender clearly stating that you are approved up to a max purchase price of $X until a certain day at a specific rate, it’s not a real pre-approval.
The purpose of all this is to accomplish a few things - for starters you want a lender to confirm that you’re income, credit score, debt load, etc. is acceptable and they will lend you money you had anticipated spending. They’ll also tell you how much you can borrow. In my experience the maximum amount a bank will lend someone isn’t in line with the amount they wind up spending - many of clients spend less, so make sure you’re comfortable with the payments and other costs to establish what YOUR maximum purchase price will be.
3. How are homes generally sold?
Houses in high demand Central Toronto neighbourhoods under $1.5 million are for the most part sold the same way.
Most listings will come out Monday to Thursday, and roughly 70% of these homes will have something called an offer day. An offer day is essentially the day where all interested buyers come to the table with their offer for the house and the seller looks at all of them at the same time. Buyers do not know what amount the buyers submitted. In many situations, the result of this process is that the price can get driven up in a bidding war, resulting in the highest possible sale price for the seller.
I get it. This process is terrible for buyers. You go online, find your dream home, call your agent and say, “Agent X, we found the one in Leslieville! It’s perfect for us and it’s well within our budget of $800k. It’s listed at $799,900!”
At this point your agent will have to explain that the list price is really just a marketing tool to get buyers through the door. Listing agents generally aim to maximize the number of showings so that they get multiple offers on offer day. That’s just how it’s worked in Toronto for the past 10+ years and unless the rules change (which they could), this process isn’t going to disappear anytime soon.
Reality is that a house listed at $799,900 Leslieville will likely sell for excess of $1 million with multiple offers on offer night. In no other industry is the price something is for sale at not actually the price it will sell for. It can be frustrating for buyers because there’s so little transparency. I help my clients understand what realistic selling prices are so they are not deceived by low list prices.
4. How do you set yourself up for success when the right home comes available?
My plan generally looks like this: I’ll search MLS 3-4 times during the day for properties that fit my buyers criteria. When a good match comes out, I’ll send it to them to review and try to set up a meeting to go see it as soon as possible. Even with offers supposedly being the following week, I find it’s always good to get there as quickly as you can. The reason being that if you get there within 24 hours you have more time to conduct your due diligence and you reduce the risk of the home selling to a bully offer.
At this point you might be wondering, what’s a bully offer?
A bully offer, or more politely phrased a preemptive offer, is an offer that satisfies the sellers expectations before their offer night. In certain situations having your home for sale can be a real inconvenience. The sellers might have young kids who go to bed early and make a mess within 5 minutes of them waking up, or the sellers might be older and prefer their privacy. Sometimes if you can offer a seller what they’re expecting on offer night, on the first day a home is on the market, they’ll accept it.
The idea is that certain people might value NOT having their home for sale, and if you can offer them $1 mil for a home their agent said was worth $1mil to $1.050 million on offer night, that’s enough for them to just accept it. From my experience a lot of successful bully offers result in the home selling for less than it would have on offer night.
Think about it - if you get there the first day and the home checks all your boxes, why wait? You’ve seen a handful of homes already and you have an idea of what this place is worth. If it goes to offer night there’s a good chance you might get outbid by another buyer. Might as well give it a shot and see if you can purchase it against far less competition.
By going on the first day, maybe a handful of other buyers had showings as well. By the time offer day rolls around in 6-7 more days, the total number of showings will balloon from 5 groups to upwards of 50 in many situations. My stance is if a home is the right one, I’d rather compete against 5 potential buyers than 50 to improve my odds.
5. Can I have conditions in my offer?
You can put anything in your offer that you want. However if you want it to be successful in a multiple offer situation, having conditions can be a non-starter for the seller.
When a seller goes through the trouble of prepping their home for sale, and exposing it to numerous showings over the course of the week they rarely if ever want to risk selling their home to someone who might walk away and force them to do it all over again. Knowing how buyer psychology works, once a buyer learns their offer hasn’t been accepted, they move on because the process can be very emotional.
So let’s lay out a basic situation - say a house gets a couple offers and the top two are quite close. Offer #1 is for $990,000 with the sellers preferred closing date and no conditions. Offer #2 is for $1 million, and also the preferred closing date, but it has a financing condition for 5 days so the bank can review everything.
As the listing agent in this situation I’d 100% recommend my seller take the lesser offer because it’s firm and the buyer can’t back out. $10,000 extra would be nice, but if the buyer who needs to get their financing checked doesn’t work out after 5 days, you’re back relisting the house and way more often than not that firm sale price of $990k will turn into something much less than that. A potential $10k gain can turn into a much bigger loss than that if you have to go searching for a new buyer.
The reason I say the first thing that needs to be done is to get a pre-approval is so that you know for sure the bank will lend you money to purchase a home within your budget. The reason I say go see a home as soon as possible is because you’ll have more time to do your own due diligence.
Due diligence on a 100 year old home can involve having a home inspection done, bringing in a contractor to review your renovation plans, etc. It gives you more time to wrap your head around what you’re buying and what you’re going to have to do to maintain that home over its first couple years so that you can make an intelligent offer that doesn’t stretch your budget too much.
Any conditions you might include in an offer should be done before offer day so that you can be buyer #1 in my previous example, purchasing a home for less than someone else was willing to pay because they hadn’t got themselves ready to buy a home yet.
Buying a house in Central Toronto is hard. Very hard.
You need a plan, and you need to trust the advice you’re getting from the professionals you hire to aide the process. Make sure you get a pre-approval from your lender, and make sure you’re working with an agent who knows the area where you’ll be searching and will commit to showing you homes as soon as they come on the market and who has a plan to assist you achieve your home goals.
You need to do what you can to set yourself up for in one of the most competitive real estate markets in the world, and I think a big part in doing that is sitting down with your agent on day 1 to go over everything in detail to avoid surprises down the line.