Ah, market value. That magical amount of money that a property is worth. It’s commonly stated that a property properly exposed to the market will sell for market value. But what is that really? Some people think that market value is whatever a property sells at, but that is not necessarily the case. Ask the people who’s business it is to estimate market value and they will say market value is:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: the buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale
Those guys aren’t concise. And that definition is littered with other terms that can’t be precisely nailed down. How motivated could a buyer be and still be considered “typically motivated”? What constitutes sufficient advice to be well advised? Do incentives like the government’s free money for first timers count as undue stimulus?
Perhaps even more importantly many of these factors cannot be determined based on market data. You can’t tell from sale data whether a seller was forced to sell to pay off a debt to the mafia or merely wanted to downsize. Neither can you tell whether the winning bid in a multi-offer situation was an irrational one brought about by unbridled house lust or a perfectly calculated offer that came in a few hundred above the next one.
Because a real estate market is both informationally and transactionally inefficient, the concept of market value becomes pretty fuzzy. That’s why if you ask BC Assessment, your bank’s appraiser, and Landcor about the value of a house, you’ll get three different answers.
But what about condos? Surely with a product that is fairly uniform we should see a very narrow range of market value, with sales of the same unit types selling for about the same prices and changing only with the greater market.
Let’s take a look. Here’s a 12 floor tower downtown that has, like most, a very uniform selection of units. We’ll only look at one bedroom, non-penthouse units in this complex between 700 to 800 square feet to keep the sales comparable.
Overall you do see sales roughly converging around what might be considered market value and following the changes in the market, but there are quite a number of outliers as well. For example, last May a place sold for $563/sqft when other units were selling for some 20% less. Granted it was an 11th floor unit, but historically those had a much smaller premium to mid level units in that building.
So the question is, was it an irrational buyer? If so did their agent warn them that they were paying well above norm for this building?
On the low end, there are some interesting deals as well. For example in 2011 a 6th floor unit sold for $368/sqft while the unit below it sold deep into the fall for $421/sqft (or $40,000 more). Was it because the 6th floor unit sold after only 11 days on market, while the others were exposed for an average of 54 days that year? And what did the sellers of that bargain unit think about their agent? Maybe “Our REALTOR® was great. We got a full price offer after only 11 days!”
No wonder the Toronto Real Estate Board is still fighting the war against data. Of course, it is entirely possible that in both of these cases the sellers and buyers were very well advised and decided to overrule that advice because they wanted to get out fast, or absolutely had to have just that unit and were OK paying the premium. I just hope that decision was made with eyes wide open.
In the meantime, unlike stocks that are pored over by thousands of analysts and tens of thousands of automated systems, the lack of information and abundance of emotion in the real estate market allows this variability to exist. You might find a deal, or you might get fleeced. Good idea to pay attention.