Things have definitely changed over the last 20 years in the real estate business. A large part of this change seems to revolve around the real estate agent. At one time, people would ask their agent, “How much is my house worth?” or “How much do you think I could get for it?” More and more, we see the realtor’s role developing into an almost auctioneer-like job, creating bidding wars and placing huge amounts of risk on the buyer. Listen today as Advisors Rob McClelland and Mike Connon look at how the real estate market has developed and changed over the years and where it may be heading.
Transcription
Rob (00:00):
Hello, this is Rob and Mike from The McClellan Financial Group of Assante Capital Management. And this is Think Smart with TMFG. Mike, you and I have been talking a lot about housing and we know there is a major housing boom going on. This is our probably third podcast on housing. You recently made a very interesting observation, and that is the role that the real estate agent is playing in this housing boom. They’ve changed their tactics and I thought it might be interesting to explore this and let the audience know what’s really going on out there with real estate agents and why they’ve changed their game.
Mike (00:45):
Well, let’s talk about how things used to work. We’ve all bought and sold houses in the past 15, 20 years ago. The real estate agent would come in and you meet with your real estate agent. And what was your first discussion?
Rob (00:55):
What do you think my house is worth?
Mike (00:57):
Yeah.
Rob (00:57):
And how quickly can I sell it?
Mike (00:59):
That’s the main discussion, right? And they would give you a price and they would come up with an idea. Let’s say at that time, your house was worth $500,000 and they’d tell you that your house was probably worth about $500,000. What would we try to ask for that house?
Rob (01:13):
I’d probably ask for a little more, 550,000.
Mike (01:15):
Yeah. And say, if things go, you’ll settle down and maybe I’ll end up with my $500,000 and you’ll probably end up coming around 470 or 480, but that used to be the expertise in the real estate agent. They could come in and that’s what you’re paying them for to go and tell you what your house was worth.
Rob (01:30):
You always wanted to make sure it was listed properly. Right. They might fluff it up a bit, put some new flowers in the garden and even inside the house, and they may have you take a piece of furniture or two out, but that was about the extent of it. They were pretty well compensated at a 6% commission.
Mike (01:50):
They got paid well, and they had to advertise. I think even at one point there wasn’t really MLS available or anything like that so they had to go and advertise it all over the place and create buyers. It was what they did. That was part of the commission.
Rob (02:05):
How long would it take to sell a house?
Mike (02:07):
Usually about six months. Probably that was in the bad markets, but usually I remember selling a townhouse and I expected to wait two to three months to get it sold.
Rob (02:17):
It certainly wasn’t days. It was more like months. Not even weeks, it was months.
Mike (02:24):
It was a stressful piece of time too, because remember you had to go home and get your house ready every time when someone’s coming to see it. Every week you’d be at work, I got to run and get the house cleaned up because someone’s going to come view it.
Rob (02:32):
Exactly, exactly. No dishes in the sink.
Mike (02:35):
They’d also help negotiate all terms of the sales. So once that sale happened, they’d work on closing time periods, inspections, all the details to get this stuff to close right.
Rob (02:46):
So things have changed in that regards. We’re now seeing housing prices going through the roof. From what we’ve seen, the real estate agent is playing a role in that and they’ve changed. There’s a reason they changed. They were under fee pressure. We started to see the competition come in and people were offering where they would do it for … it went down to 5% initially, and then it went to 4%. Now, we’re even seeing 1% commission on the sale of your house. So what have agents done to change the game?
Mike (03:19):
So what they’ve done is now when you go meet with an agent, the discussion will be more about what everything’s sold in the area, what the houses are worth on your block and get that idea. They’ll set a price below what they’d expect to … Everyone knows what your house is worth, but what they’d do is they’ll set a price below that. Now what they’re doing is they’re going to create interest in your house and try to create a bidding war to get well above it. It’s almost like an auction if you set a minimum bid, that’s why you set that price and they auction up the price to a higher amount.
Mike (03:51):
They try to work with the offers, but they try to make sure you have a firm offer so there’s nothing that can go wrong. Most houses I see going on right now have no conditions attached to them. Otherwise, you can’t buy it. They’ll look at the offers. The only person that’s going to get an offer, that’s going to go through, has to be well above asking. I’m seeing one’s trading two- $300,000 above asking and with no conditions. So that’s what they’ve made it a real easy transaction where all the risk is now on the buyer rather than the seller. So they’ve been able to really negotiate things that way.
Mike (04:19):
I guess when you go into details on why this happened, as you said, fee pressure was coming in much because there was this FSBO, which was for sale by owner. When we had this FSBO happening, that was really starting to dig into real estate commissions. At that time, the real estate companies thought, how can we beat this because that’s going to really take away our margins if people could do this. The reality is people used to think you needed a real estate agent to sell your property. You need a lawyer. Even if you have a real estate agent, you still have to pay a lawyer.
Rob (04:48):
You still need a lawyer, yeah.
Mike (04:49):
The lawyer is the only crucial part to do in the transaction. The real estate … is just the one who sort of sets the two buyer and sellers together. So as that was starting to be competition, the real estate agencies got together and they said, “How can we do this?” And they said, the one thing that they can’t do by selling themselves is they can’t put a lower price and they can’t create enough an audience to guarantee they’re going to get the market value on the house.
Mike (05:13):
So what real estate companies now offer is the ability to end up in an auction-type environment and provide enough interested buyers to get the actual price that the house is worth. So they’ve really knocked out that whole section of the marketplace. You can’t go and list your house for $200,000 below what’s worth and hope enough people show up to bid it up to that price anymore by yourself. So real estate has cemented their position in that transaction.
Rob (05:39):
Do you think that’s played a role in driving up prices?
Mike (05:42):
Oh, of course. Yeah. It’s at a heavy role in driving a price.
Rob (05:46):
You made an interesting point that before it used to be the seller that had all the stress, “Am I going to get the money? How quickly am I going to get it? Is the closing date going to work? Because often the reason you’re selling is because you may have purchased a new place and you need to be out by August 1st or whatever the date is and the last thing you want is to have your sale closing in November and you have to be out in August, because that just creates all kinds of issues. “Where am I going to live? Can I move into my new place and how am I going to do this financing and so on?” And you’re scared by the banks. The banks love it because they see it as a huge opportunity for them to make a little extra money.
Rob (06:27):
But now it’s switched. Now the seller’s sitting there and they’re reviewing 40 offers and they can pick and choose what they want because they’ve undervalued the house. Now there’s a risk, right?
Mike (06:40):
Yeah.
Rob (06:41):
The risk is the market drops and no one wants to buy their house, but that doesn’t seem to be happening.
Mike (06:47):
The biggest stress I’ve seen in real estate in the last few years has been people trying to buy houses and losing them. They keep on bidding. They don’t know how much to bid over asking. It seems funny. I bid 100,000 over asking and I lost it, with no conditions. So they don’t know how high they go. If they start throwing stupid numbers, they don’t know if they’re being stupid and paying way too much for it. It’s a very stressful thing to buy a house right now. Selling’s a piece of cake, you just put it up and you sit back and take your best offer.
Rob (07:11):
The other problem today is because interest rates are so low, if the agent says, “Well, what’s another 100,000 at 2%. It’s $2,000. You don’t want to lose this house because of $2,000.” “No, it’s 100,000.” “No, no, no. It’s 2000. That’s your only cost. 100,000’s just the debt.”
Mike (07:29):
It’s like lease payments on cars. Isn’t it? How much more you going to pay per month?
Mike (07:33):
I guess the one interesting thing is when we watched this, this strategy back when we started this industry back in the ’80s and ’90s, there was a similar thing that was going on in the Vancouver stock exchange. We used to call them boiler rooms and you’d watch all these shady advisors. I won’t call them advisors, stockbrokers, shady stockbrokers at the time and they’d go and create bidding wars between clients on a stock. They could have bid against each other and pick the price up to way more than that stock was ever worth just by having two people bid against it. Luckily, the financial industry finally tried to shut that down and make sure it doesn’t happen anymore because so many people were losing money on it. But there doesn’t seem to be the same restrictions or people looking at the real estate market to say, “Listen, guys, you got to slow this down. People are paying a bit too much for houses and they don’t know what they’re doing.” But there seems to be no real legislation to stop it. Is there?
Rob (08:23):
The government doesn’t seem to want to jump into any of this stuff too quickly. Yet it’s huge business in this country, huge revenue source for the government, and I guess they probably don’t want to cut off their revenue source completely. This land transfer tax, they make a lot of money on land transfer tax. So they don’t want the transfers to slow down either, the buys and the sells. They’ve got a vested interest in this. But they do need to step in and this is kind of ridiculous because people are overpaying. Whenever you see housing go up this much, something’s wrong, the market’s broken.
Mike (09:02):
And the other thing that no one’s acknowledging is these are leveraged investments that people are doing too. And sometimes leverage at 90%. That’s a lot of leverage. I know in our industry you could never leverage anything that way.
Rob (09:12):
No.
Mike (09:12):
It’s ridiculous the amount that leverage that goes on and that they can bid a price up on something like that with this high leverage adds tons of risks that I don’t think people realize.
Rob (09:22):
So are we expecting a change? Probably not. Are we happy with what’s going on? Probably not. I’m happy I’m not trying to buy a new house right now. I guess if I was in a position to sell a house, I’d probably be a little happier because prices are up.
Mike (09:36):
Yeah. Remember, I was listening one podcast and they said that the majority of most people in Canada’s net worth is in their home. Right? And for any politician to run on a platform that’s going to reduce the value of that home, it would be impossible for them to get elected in any political position. So when you watch what goes on between the politics, everyone’s trying to support that rise in value of the house because that’s where most people’s money is. So that’s probably how it’s going to continue until something finally stops it.
Rob (10:07):
Something will one day. That brings us to the end of another week. This is Rob and Mike with Think Smart with TMFG.
Assante Capital Management (10:44):
You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and The Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services, Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Limited.
