6 tips for buying a home in uncertain times
Early 2018 has seen a softening in the real estate markets in Vancouver and Toronto, interest rates have been rising, the government has added taxes and rules, the U.S. may tear up NAFTA, and the list goes on. Does that mean it is a bad time to buy?
First of all, no one can time the market (just ask the folks who predicted a Vancouver real estate crash in 2008) so trying to do so is unwise. You can, however, be defensive in your purchase to reduce your risk in uncertain times.
Buy in Late Summer, not Spring
Target Slow Buyer Days
Buy an Existing Home
Stress Test Yourself
Look for 1% commission listings
Look for Expired and Stale Dated Listings
Buy in Late Summer, not Spring
Every spring, as the cherry blossoms begin to bloom, FOR SALE signs begin multiplying across Canada. An interesting aspect of the Vancouver market is that even though most people buy in the Spring, even more properties are for sale in late summer. This isn’t always the case so you need to ask your real estate agent about current market conditions.
In the summers there have been up to 40% more properties for sale.
Essentially, you need to think of the home from the seller’s perspective if you’re going to find a deal. You want to be buying when the seller sees competing sellers on the same street.
Target Slow Buyer Days
A friend once told me he bought his home for a great price because he and his wife were the only ones at the open house on Super Bowl Sunday. This is the idea. If you would rather not be at an open house, then it’s probably the best time to go to one. You then make a time limited offer that forces the seller to make a decision before they can collect more offers.
Some potentially helpful days are: Super Bowl Sunday, the time between Christmas Eve and New Years Day (or December in general), Canada Day, when the home team is playing in the Stanley Cup Finals, when Team Canada is playing in the Olympics. There may be other opportunities, but you have to think of days when other buyers will be scarce and your offer will likely be the only one that buyers receive.
Buy an Existing Home
Everyone wants a brand new “move-in-ready” home, but the best opportunities come from existing homes, particularly if they need some updating. Assuming two homes both meet your home buying requirements, there are distinct benefits to buying an existing home.
Benefits of existing homes:
We have all heard that “a car loses half its value as soon as you drive it off the lot” and homes are similar. All things being equal, a 10 year old home is worth less than a new home. The land component of your home doesn’t lose value from wear and tear, but the building does. By buying an existing home, you’re getting an “age discount”!
There is more price transparency when buying existing homes. People feel better paying a high price when everyone else has paid the same or more. Your agent can provide you with the prices of recent sales of similar properties. With pre-sales, developers are not required to publish the sales prices of other homes in the development, so you won’t know if you paid the same price as your neighbour unless you ask them after you’ve moved in.
With existing homes you are not sharing risk with a developer. Pre-sales are priced to reflect projected future value, and you are a silent partner taking on some risk as a consumer. If prices are down at the time of completion, you may find that your home is worth less than the price you paid for it. This happened to many pre-sale buyers when the market dipped in 2008, and has happened to Toronto buyers in 2017 and 2018. Pre-sales are offered because they allow the developer to lock-in the sale prices at levels that ensure they can cover their project costs. If there was no risk and prices could be guaranteed to rise, then developers would always wait until construction is complete before selling any homes. Even though the developer misses out on some profit by pre-selling, the practice protects them against losing money if prices are lower when the project completes. For this reason, pre-sales in B.C. used to sell at a discount to existing homes.
You don’t pay sales tax (5% in B.C.) on new construction, so you’ve already saved 5% on day one. On a $500,000 home that’s $25,000 in your pocket!
Renovating over time, you can pick out your own dream cabinetry and appliances, and create a home that reflects your personal style. You can also create your own budget and prioritize spending in areas of the home that are important to you personally.
Stress Test Yourself
The banks will stress test you to make sure that you’re unlikely to default on your mortgage, but they’re not testing to make sure you won’t make yourself miserable with debt up to your ears.
In the past 20 years, mortgage rates as high as 7% have been considered low. Although those rates seem unlikely, they are not impossible. We recommend that you test yourself at the current rate plus 2% and at 7%. Let’s call them the most likely and the worst case scenario.
Below, we have illustrated a personal stress test and you can see the worst case scenario will cost an additional $10,000 annually.
| Current Rate | Most Likely | Worst Case | |
|---|---|---|---|
| Loan Amount | $400,000 | $400,000 | $400,000 |
| Mortgage Interest Rate* | 3.25% | 5.25% | 7.00% |
| Life of Loan (Years) | 25 | 25 | 25 |
| Monthly Payment | $1,945 | $2,384 | $2,802 |
| Total Annual Payments | $23,336 | $28,604 | $33,620 |
* Assumes a fixed 5-year compound semi-annually mortgage rate.
For some people, the worst case scenario could be devastating, for others it would mean sacrificing childcare and vacations. Of course, for some homeowners it would only mean giving up shopping at Whole Foods.
Look for 1% Commission listings
While agents are required to show their clients all listings, they are not paid as much by discount real estate agents. Less principled agents may avoid showing clients those listings. Ask your agent to take you to see 1% or discount commission homes, and you may find less competition, and thus a better deal. To make sure your agent is equitably compensated, your agent can ask the seller to sign a Fee Agreement prior to presenting your offer to buy. With this agreement, the seller pays them an agreed commission out of the proceeds of the sale of the home.
Look for Expired and Stale Dated Listings - They Exist!
Ask your agent to search for homes in your target areas that:
Have recently expired.
Have recently been cancelled by the seller.
Have been cancelled and re-listed several times.
Have been on the market for a longer-than-average number of days.
These are likely indicators of a home being priced incorrectly, although other factors can also come into play. In the current market, these homes can be a great opportunity for buyers to make an offer with a lower threat of competition.
Summary
There is a lot of uncertainty in Canadian real estate markets these days. You could try to time the market, but nobody knows the best time to buy. So if you are looking for a place to call your own then take advantage of these tips to reduce your risk.
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