Escalating Prices in an Aggressive Market
02.22.2021 | Buying
Sellers are excited to see their home sell for more than asking in SouthWestern Ontario – in some cases, hundreds of thousands over asking price. It’s an incredibly lucrative time to be selling your house and it’s more important than ever for purchasers, even before buying a home, to work with the right agent in order to successfully navigate this market.
This is the current market snapshot:
We are in a stable market now, with low interest rates, lots of buyers and very low inventory for house listings. To get a better handle on what this means to buyers and sellers, I spoke with the Managing partner at Connolly Capital Mortgage Solutions, Matthew O’Neil about Mississauga real estate.
How are homes appraising?
Buyers are purchasing homes that can range as high as hundreds of thousands of dollars over the expected sale price, but what does the bank think these houses are worth? How a bank values a home matters to buyers, as it affects the size of the mortgage that the bank will be prepared to loan. If houses sell high but are appraised low, buyers may have to come up with more of the purchase price. With the rapid increase in prices, my first question to Matthew is how are the homes appraising? Matthew says that currently the appraisals have been consistent with the increased home prices, however, he has a real concern that the appraisers will not continue to be as aggressive as home prices climb ever higher due to buyer demand.
How does an appraisal work?
Banks hire appraisers to tell them the value of a home. Primarily, appraisers base their prices on comparable past home sales in the neighbourhood. What happens if there is no other comparable price in the community? Appraisers will expand their “postal code search” seeking direct comparables in a wider geographic area to support the purchase price. Appraisers are aware of the current market and the increase in purchase prices.
A real life example of a potential situation.
How these matters play out is demonstrated by a current file Matthew is working on.
A client purchased a townhome near Streetsville in January for $750,000, with no financing conditions, confident that financing is secured. The buyer has the means to pay 20% of the purchase price ($150,000) and the bank had pre-approved a mortgage of up to $600,000. Meaning the $750,000 purchase price is funded, right? Not necessarily.. The last comparable sale is from November when the same type of unit sold for $640,000. If the bank’s appraiser reports that the unit is worth $700,000 the bank will only advance the client a mortgage on a home worth $700,000 (i.e. $560,000, being 80% of $700,000). It turns out, the client doesn’t have all of the funds required to close! There will be a considerable shortfall between the mortgage the bank is willing to offer and the purchase price the buyer has agreed to pay. The buyer cannot use a line of credit or get another loan for the purchase price shortfall, as that would add to their debt load and thereby lowering their mortgage approved by the bank. The only thing that can be done for the buyer is a financial gift from family or friend. If they cannot raise this money then the buyer and seller will be in a very serious situation come closing day because the buyer won’t have the funds to close. And the seller may not learn of the situation until the 11th hour. Matthew says that solving this problem would be fairly simple with a government-imposed mandatory three business day finance condition on all home purchases to permit buyers – even pre-approved buyers – time to ensure that the money is really there. But until that happens, I take preventative measures as a Seller’s agent.
Helping sellers close on their homes.
What happens to the seller if they have purchased a new property and need the funds from the sale of the current home to close that deal, but their current home does not close?
This is where an experienced agent and careful planning can greatly assist – I have a variety of strategies that I routinely engage to ensure that sellers have greater confidence that closing will occur as and when expected and be especially cautious of buyers that are maxing out. – getting more than asking only counts if the deal actually closes.
If you’d like to have a conversation about how to secure buying a home or selling your house, please just ask me or speak to your mortgage specialist. I’m so pleased to have worked closely with Matthew O’Neil at Connolly Capital – who has helped many of my clients secure their home purchase. You may find him at connollycapital.ca or give him a call at 905-491-3805.
Pleased to talk to you any time. Call me at 416-903-3557.
Want to Learn More about the Current Market?
Send me a message here or call me at 416-903-3557 to start the conversation.