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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

March 31, 2021 | Blindly

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Ride with me to a medium-sized city east of Toronto. My sidekick and I have something to share.

He’s a lawyer. A real estate guy, handling deals for a decade now. After reading yesterday’s post about blind auctions and the effect they have on property values, he offers this experience.

  • Single family ranch home in a small town market 2 hours outside the GTA.
  • List Price  $396,000
  • 42  viewings on the weekend, offers held until Tuesday
  •  12 offers
  • One (winning offer) at $504,000 no conditions
  • One offer at $465,000 with typical financing, inspection, etc  conditions
  • The 10 other offers? … all between $425,000  and $450,000

Why did this home sell for almost 30% more than the vendors asked? Was it purposefully underpriced by a manipulative realtor? Here’s what our legal beagle thinks…

The information asymmetry effect was pretty clear as the vast majority of the buyers valued the home in a relatively narrow range and the two outliers (especially the winning bidder) unnecessary paid significantly more than what the rest of the market was willing. I am sure the “winner” would love to know what the other 92% of bidders thought the house was worth.  This of course this will lead to the inevitable knock on effects as the house down the street will have this inflated price as the comparable resetting everyone’s expectation of what everyone else thinks the value is inaccurately higher – snowball meet hillside.

Over and again this story is playing out. In a multiple-offer situation and blind auction there is zero transparency. No goalposts. The only known is the asking price. Prospective buyers must guess wildly, muster up their best offer, throw caution to the wind, eschew conditions, gamble and bid. They may never know the final selling price, the competition faced, nor the reasons an offer was selected and are usually denied a chance to alter their submission. All cards are in the hands of the vendor and their agent. It is a repugnant system designed to inflate prices, reward greedy sellers and grant absolute power to the listing realtor.

Agents argue holding back offers until a certain date and time allows a property to be viewed by more interested buyers. But in essence the hold-back has but one objective: to create that blind auction. Maximize value for the seller. Harness emotion, desperation, FOMO and competition to jack values to a new crescendo. Plus generate more commission.

Well, things gotta change.

And the Covid real estate crisis is surely bringing that reform closer.

Steve is a commercial real estate agent with three decades of experience. “Although sometimes I think of switching over to the cesspool that is residential real estate,” he says, “I cannot bring myself to make the switch.” One reason is the blind auction. It irks him, too.

The process is beyond ridiculous. The entire process should be transparent. However, RECO (the regulatory body in Ontario)and as you called it the “Residential Real Estate Industrial Complex”, will not have it.  The regulator is useless and residential agents are like an unorganized union that is more militant than the teachers union. Love your Blog –  hate Adele and Drake!

It’s notable that in a landmark report this week, economists at BMO are calling for immediate action to douse the flames of real estate, and also share disgust at the bidding process. “Implement an offer system that eliminates blind bidding in real estate transactions,” says the bank. “This would keep the sale price from settling well above the price of the next willing buyer, and keeps the comparable more appropriate for the next property to list in that location. While this won’t cool the market on its own, it would limit the ballooning that we’re now seeing in a very tight market.”

There’s more. The BeeMo guys are the latest bankers to push politicians into facing a growing accommodation quagmire. “We believe policymakers need to act immediately, in some form, to address the home price situation before the market is left exposed to more severe consequences down the road. As it stands now, prices are going parabolic across a number of markets and the price strength appears to be feeding on itself.”

The action needed today is one that immediately breaks market psychology and the belief that prices will only rise further. That would dampen the speculation and fear-of-missing-out that those expectations are creating.

Besides trashing blind auctions, the bankers are suggesting… (a) The central bank should raise rates, or at least stop saying the cost of money will stay low. (b) A spec tax – a special capital gains tax on the sale of residential real estate purchased from today forward, with the rate falling to zero over five years of holding the asset. (c) Allow all capital gains on non-principal residences to be taxed at the full marginal income tax rate – potentially doubling the hit. (d)  Implement a national non-resident buyers tax similar to those currently imposed in B.C. and parts of Ontario. (e) Make it harder to get a mortgage. Increase debt service ratios. (f) Tighten the rules for borrowing against a property to buy another property. (g) End the exemption of principal residences from capital gains taxes.

Well, blog dogs, there you have it. Lawyers, agents, bankers – and us – we all have eyes. We see the damage being done by the few to the many. If our leaders do not act, maybe a coup?

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March 31st, 2021

Posted In: The Greater Fool

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