Defensive Home Buying
Back in January 2017, the difference between the average detached home in the Greater Toronto Area and a condominium was $625,000. Today the difference is around $420,000. A significant change showing that the intricacies that exist within a market should not be underestimated. Having an understanding of the level of risk for your purchase is an important part to a defensive home buying strategy and should help you make better decisions when Buying.
For instance, if you had bought a condo in the 416 in January 2017, according to TREBS HPI index, you should be up 30%; while if you bought a detached home in Richmond Hill, you can expect to be down 15%. We could break that down even further by neighbourhoods within Toronto or by luxury vs. entry level purchases. The point is that there are a number of sub markets and trends that are occurring that may not follow similar narratives. The reason you might want to give these sub markets consideration is because they can cost or make you a lot of money. Given our example above, the condo buyer would be up around $150,000, where the Richmond Hill Detached Home purchaser is down close to $200,000.
Pundits that group an entire industry or city as un-investable are not giving consideration to the new purchasing conditions created as a result of government regulation or socio and economic changes. Buyers that take a media headline at its word could be putting a lot more at risk than they realize.
It’s clear now that choosing the condo in Toronto over a house in Richmond Hill was a better investment option in 2017, but was it obvious back then? You can’t expect a Realtor to have a crystal ball, but much like a financial advisor they should help you assess the level of risk associated with your investment. Highlighting the rental rate in comparison to the sale price for a bungalow in Richmond Hill could have signalled to Buyers that this was a high risk speculative investment. One that might not payout the way it was in recent years. Flagging these risks in addition to the potential opportunity is part of “selling” real estate.
I know when I am working with Buyers, I certainly don’t feel like a salesperson (or – as my brother likes to put it – a glorified house tour guide). The property usually sells itself to the Buyer, so I’m there to help ensure you have factored in all the pros and cons of a property when making the decision, and to help make sure things come to terms in a legally executable form.
My role has always felt more like an advisor than salesperson. I think it’s time Realtors embrace this advisory role more. Buyers should have a good understanding of what market conditions are like when purchasing, and what they might look like when they are ready to sell. Having an understanding of what rental rates are in the area and what’s happening in surrounding communities is a good first step in understanding risk levels.
Further understanding the amount of inventory being built and how it may get absorbed in the market, will be another great step towards defensive home buying. A Realtor should help highlight how interest rates changes and regulations might impact the market and identify what segments are likely to be more susceptible to economic changes.
This should be in addition to the traditional Buyer Agent activities: Taking steps to ensure Buyers are fully informed of properties worth considering for purchase, minimizing scheduling and administrative burdens and negotiating on behalf of their client. In order to accomplish this successfully a Buying agent needs to step out of the role of neighbourhood expert and really should play more of an advisor role.
So next time you ask your Realtor how the market is doing, be more specific. Ask how 1 bedroom low rise condos in downtown are doing or ask how luxury homes are selling in the Scarborough Bluffs because the two answers are likely to be quite different. Therefore the risk level with either purchase is also likely to be quite different.
