Updated: May 1, 2021
What's the underlying issue in the Real Estate Market?
Sure, prices are out of control. People continue to say the ‘bubble’ is going to burst, it’s a ‘seller’s market’...but is that solely a function of the high prices? Obviously when homes are selling for a ton of money, it favours those doing the selling vs. those doing the buying - but there is another factor that has been plaguing Ontario real estate for a few years now - the good news is that this an issue that can actually be addressed.
In the absence of increased supply, policy changes, or regulatory intervention, pricing is not something that is controllable. Ultimately the consumers are going to pay more for a home in a market with limited supply, with competition, with low interest rates - it is in fact another perfect storm we find ourselves in. With larger immigration numbers on the horizon when the borders start to re-open, the demand does not have a clear end in sight. So what can be controlled?
While we can’t control the policy, or the emotions of the people making the decisions about what to pay, we can have an impact on the way they do it. The process itself is something that lends itself to some of the stresses that buyers (and often sellers) face, specifically the lack of transparency.
This need for transparency was the catalyst for the creation of a real estate specific auction platform - and this was entirely the reason that On The Block was born. Although not a new concept, auctions are not commonplace in the province. Since creating the platform in 2017, we have run many open and transparent auctions across Ontario, and with each auction, we are bringing a process that comes with many useful and valuable questions.
It is easy to follow (and to make) assumptions based on auctions in other jurisdictions, auctions for other industries, or just an overall opinion of what ‘transparent’ means to all the stakeholders involved. The more conversations we have with all of the stakeholders (buyers, sellers, regulators, and the real estate community), the more we have found that the need for clarity about the process is necessary.
Truth be told, I’ve written this piece twice...the first attempt looked like a massive FAQ (frequently asked questions), addressing the technical and logistical questions that we often see - but that’s not what is at issue here. We do have all of the answers to those questions (most of them addressed directly on our actual platform and through webinars, and the one on one talks we love to have with interested people), but what is more important is the FATs (frequently assumed theories) that we continue to see in opinion pieces, articles, and on message boards. Many have real merit, and many more are another version of opaque - the kind where lack of information allows people to blindly fill in the blanks. I’d like to use this opportunity to create a little more transparency based on fact so that this conversation can happen in a more informed manner.
There are a broad range of assumptions and opinions stated as fact that we continue to see - and let me be clear, I am not here to say anyone is wrong. What I am here to say is that there is not an absolute truth to any approach to real estate - the concepts of ‘best’, ‘worst’, ‘impossible’, ‘always’ and ‘never’ just don’t hold water in an industry as volatile as ours. It’s not to say we aren’t governed by laws and rules like any other industry, but we have never been believers in the ‘can’t’ mentality. It was for that reason that we ventured down the path to see why in fact transparency would be so bad for real estate, and if it was in fact possible to give it a (legal) try.
The short answer, proven through practice, is that transparency is not the enemy, and it can be done in a way that actually leaves people feeling better about the whole process. Again, nothing I say is in absolute terms. I can’t stress enough that auctions and open bidding are not for every property and every client, but I submit that neither is closed bidding.
As with any new concept (I use ‘new’ very loosely as we are constantly reminded that auctions are older than organized real estate itself), there can be a fear of different, a reluctance to adopt, and a natural tendency to look for the challenges rather than the opportunities. Rest assured, that is exactly the way we built the platform - we were (and continue to be) our biggest critics - which leads me to the first two (inherently contradictory) assumptions:
'This is not good for sellers'
'This is not good for buyers'
Well the easiest refutation for this is simply that the implication of each statement (obviously delivered by different stakeholders) is that one group believes the open bidding approach is good for buyers, and the other believes it is good for sellers. I could give the argument a full stop there, because clearly there are two camps who believe the process benefits the other, but that wouldn’t be fun, so let’s dive in.
Those who say the process isn’t good for sellers are generally in the real estate community and proponents of blind bidding. The argument made is that blind offers are what help to drive very high one-off bids you wouldn’t otherwise see with transparency. Consequently, sellers miss out on a big number because nobody will have to risk that crazy high number. Fair assumption - especially for those who have lived in the wild west of offer dates and experienced the madness that can come from them in the form of big prices. How can it be then, that there are an equal number of people saying the transparent process is only benefitting the same sellers we just established are missing out?
Well this other group must be crazy...by definition, a benefit to a seller has to be to a buyer’s detriment...but not so fast, things go a bit topsy turvy in real estate, and let’s not forget how much buyers have loved to absolutely hate the blind bidding process - so much so that they will avoid offer dates, or mistrust the system so much that they won’t actually put forward their highest offer. In some cases, buyers see the sale price the morning after a blind offer date and say ‘if I knew that’s what I had to pay, I would have paid it’...in fact that comment not only ticks off the buyer, but makes their realtor feel like garbage, and ultimately leaves the seller without the biggest number that could have been out there.
Buyers LOVE the transparency. As I’ve established, affordability is something they want, but as long as lots of people are vying for the same limited product, the laws of economics will drive the prices up regardless of how transparent the process is. What is even more fascinating is that the transparency keeps all the bidders in the game until the very end - until just one is left standing. Often that means that those people who wouldn’t even participate in a blind offer date, are now confidently coming to the table and going as high as they are comfortable going. In the auctions we have run, the ultimate sale price has been at or higher than every blind bidding comparable nearby - and the participants (notice I didn’t just say the buyers, but everyone who bids) are actually more comfortable and accepting of it all, because they know exactly what they were up against, and have every opportunity to put their best foot forward.
The product of this phenomenon is not that the process is ‘bad for sellers’ or ‘bad for buyers’, but in fact it is ‘fair to both sides’ and brings out the highest price that the open market will produce. Is it possible the winning bidder would have gone higher? Sure...but isn’t that also possible in a blind situation? Is it also possible that competing bidders don’t drive up the action as much in an offer date? Absolutely, simply knowing that there are those who are now participating who otherwise wouldn’t have (and that they are comfortably showing their cards), means more activity, and a maximization of a fair sales price.
Again, this is not absolute. Auctions (and to a certain degree, blind bidding wars) are predicated on competition. If only one person is interested in a property, the action would be quite clearly limited and an auction is not the way to go - but in a hot sellers market, wow this can get wild. So the buyers have a process they can trust, but wait a second, doesn’t this now compromise the value of the realtor? Glad you asked, cue the next assumption.
'The auction process is designed to get rid of realtors'
Now it’s interesting, this is the one statement we hear the most often, but the only statement that has never actually been made directly to us. Fortunately, there are a world of reasons why this statement is actually the only assumption that is unequivocally false without exception.
I am a realtor, my wife and partner is a realtor, this entire venture of ours was built on the back of the frustrations of not just the consumer, but our own colleagues. I’ve seen a lot of realtors asking eachother what they feel the true value proposition of a real estate professional is, especially in the world of improving technology and information. Thankfully, the overwhelming response is one of industry knowledge, and the ability to deconstruct and interpret information in a way that provides useful advice and direction to our clients. With consumers having the ability to source basic listing information (including in some cases, the sale prices), simply acting as a conduit to information is not the value we add - it has to be our ability to add value to that information.
It stands to reason then, that shielding information from the realtor in effect makes their job harder to do. The blind bidding wars may give a seller’s realtor the feeling of an upper hand, but it most certainly has created anxiety for the buyers’ agents, because they cannot provide the certainty or clear advice they’d like, not knowing what they are up against. Even as a seller’s agent, the complex nature of multiple offers from an organizational, and valuation of different variables perspective can be stressful. In any case, the benefit to realtors is that they can focus on the value proposition they can control rather than taking educated guesses that could ultimately leave them looking like they have given bad advice.
Value aside, the real question is why this isn’t going to eliminate the need for realtors. Well, for it to be successful, it requires realtors. The listings are not exclusive, they are built to be viewed by realtors and their clients, and without the adoption and acceptance of the realtor community - open bidding goes nowhere. Basically, if there are no bids, open bidding doesn’t really amount to anything. This is designed as a choice sellers can make in their listing, but as an alternative to give buyers and their realtors a less frustrating way to buy, not an excuse for people to work without representation.
On the seller side, this is not a service that allows people to list on their own (a for sale by owner or ‘FSBO’). It requires a brokerage be involved, for the same reasons that any listing should be represented by a professional - effective marketing, maximum exposure, and the type of presentation that would lend itself to interest from lots of people. It’s not a gimmick, it’s not meant to be a cute different way to do things, it is a viable and pragmatic approach to give sellers a comfortable and fair way to maximize their sale price. I touched on the fact that some people believe the process is going to drive prices up, and some believe it will limit what could be even higher prices, but this leads to another assumption we hear a lot.
'This fairness is actually putting buyers in an even more dangerous situation'
I get it, I really do - and I can’t dispute that the emotion of an open bid situation can drive people past the limits they had previously set for themselves. Sometimes just seeing that it is only another thousand dollars to be in the lead can drive someone to do that. Let me submit a couple of reasons why I can’t agree that this is ‘worse’ than the current situation.
First, to think that there isn’t emotion that drives people in a blind situation is simply not true. If you have worked with buyers (or been a buyer yourself) in a blind offer situation, all the coaching in the world won’t take away the emotion. Notwithstanding situations where you’ve lost out on multiple occasions, the ‘breaking point’ can lead people to the very offers that go beyond where they should have been - both in property value, and in reasonable personal financial risk. As professionals, the realtor must be there to appropriately advise in these situations, but the same rings true in an open situation, another reason why every auction that we have run has been won by a buyer represented by a realtor.
Secondly, in a blind situation, everyone is effectively negotiating with themselves until they are told to go home. When a listing agent says ‘you need to come up a bit’, what does that mean? When a listing agent says ‘there are 6 offers’, how can that be evaluated? When a listing agent says ‘you’re in the top two’, what does emotion do then? It’s the same feeling of being so close yet with no real context - in some cases, you’re already in the lead but you improve anyway. You go in with your hard maximum, but a blind offer date doesn’t cut you off like running out of chips at the casino, if you say ‘hit me’, you’ll get another card.
In the open approach, you can definitely keep improving, and you can also move beyond where you thought you’d go (just like an offer situation), but you can also set a maximum and leave it. This isn’t a discussion of the technical nature of the process, but in our platform, if you have a maximum, you can literally ‘set it and forget it’. Even prior to the auction opening, just like eBay or other online auction sites, the maximum price can be entered confidentially and each bidder is protected up to their maximum, automatically outbidding anyone who bids below their maximum. It means those people may not have to pay their max, but they will certainly not lose out if the bidding stays within their limits. A lot can happen at the last minute though in an auction, and that also ties to another assumption we hear.
'It will just sell to the person who gets in last, I’ve been on eBay, you won’t win unless you are quick at the end'
If there is one super cool part of the auction platform we run, it’s the ‘sniper protection’ which is a fancy James Bond way of saying, this isn’t going to end if someone bids in the final minutes. There is a feature built in that ensures that if a bid comes in during the final three minutes of the auction, the clock extends by three minutes to allow anyone else the opportunity to improve. It means no last second bid will ever win and it achieves another rare benefit to both the buyers and the sellers.
For the buyers, never will we see a situation where someone feels they didn’t have every opportunity to purchase the property within their comfort level. Anyone who wants to bid higher is given the chance to do so, and that clock will continue to extend until all but one have given up.
For sellers, this ensures that no stone is left unturned. Everyone who wants to improve is allowed to do so, continuously, for as long as it takes to get the seller their best possible price. There are no games, no ‘sending people back’, no making people guess, it’s in everyone’s face and clear as day - here’s what you need to be in the lead, your call.
What about the elephant in the room, the fact that this approach has not really been attempted due to the regulations outlined in the Code of Ethics in the Real Estate and Business Brokers Act, 2002 (“REBBA”). In plain (legal) english, the Act states:
“If a brokerage that has a seller as a client receives a competing written offer, the brokerage shall disclose the number of competing written offers to every person who is making one of the competing offers, but shall not disclose the substance of the competing offers.
O. Reg. 580/05, s. 26 (1).”
Basically, that rule is saying that realtors cannot share the details of competing offers with all the competing parties. All that has been allowed is the disclosure of the ‘number’ of offers. With that said, an auction would surely contravene this rule as its very premise is the disclosure. So clearly this leads to one of the most commonly made assumptions we receive:
'You can’t do this. It’s illegal.'
If this auction was being run by our brokerage, with our listing agents at the helm, you would be right. In fact, when we started down the path of discovery, it was less about the mechanics of the auction, but completely focused on how it can work within the existing rules. At no point was it even considered that this would be a ‘forgiveness before permission’ approach, and over a year was taken in deep research and discussion to ensure everything was being done with the green light from regulators.
To be even more certain, additional measures were discussed with RECO (the Real Estate Council of Ontario - regulatory body that oversees this Code of Ethics), and subsequently implemented to their satisfaction. Every step has been taken to ensure that our approach works within the rules, we wouldn’t have it any other way.
The secret sauce was simply not accepting that there is one way to do things. As we’ve been constantly reminded, many have tried to bring open bidding to real estate without success. We have been told why it won’t work, why it isn’t allowed. We have been told that this isn’t a new concept (we agree), and that lots of people had already thought of it (which is great...we don’t need to be pioneers). There is a popular opinion that if something doesn’t work the first time, or is too difficult to see through, it is better to fall back on the tried and tested approach - we don’t subscribe to that popular opinion. Sometimes hearing you can’t do something only motivates you to try harder.
As I will continue to mention - this is not the grand solution to the real estate industry’s problems. It isn’t fixing prices, it isn’t the method that should be adopted by the masses, and there are many cases where it simply isn’t a good idea to implement. What it absolutely is though, is a extensively thought out, tried, tested, and proven alternative for real estate in Ontario.
Let me say that again, it’s a proven alternative, a choice that people should be allowed to make. When we started the journey of building this approach, we came at it with many of the same assumptions I’ve mentioned...but rather than dismiss it, we set out to see how and when it could work in our frustrating market, and how we could actually address those challenges with solutions. We believe we have done that.
As a company that has received greater than 100 inquiries for auction listings in the Ontario market, we have only actually gone forward with less than 20% of those - we’ve done so because this isn’t meant to throw auctions out everywhere, but rather to ensure it is an approach used only for those properties that make sense. Our brokerage has only employed the auction approach for about 10% of our listings, but it is an amazing option to be able to explore with everyone we speak to. When it is appropriate, we take conversations further, but we certainly don’t force the concept down anyone’s throat - if anything we are the reason that more aren’t being done, for this concept to grow, we need to cultivate it in situations where it will be successful.
I’m not trying to convert anyone to ‘auctionists’, my goal is not to convince anyone that this is the way that real estate must shift. In fact, I don’t believe any shift in practice needs to happen at all, we are all out there trying to serve our clients to the best of our ability by using the best tools at our disposal. What I do believe though, is that there has to be a shift in the absolute dismissal that people have towards new ideas without asking more questions.
There are a whole lot of models in real estate (and every industry) that are challenging the accepted norms. I don’t love all of them, I don’t use or recommend many of them, but I also don’t reject them as real options that the consumer might have. This is not a disruption, it’s an alternative. The auction model functions in countless thriving real estate environments, albeit with different tweaks. We look at this not as a fix, because nothing is broken. We look at this as a real attempt to give the realtors and consumers on both sides of the transaction something that they have been asking for.
The assumptions can be put to rest everyone, you can come out and ask the real questions. Everything that has gone into this process has been the product of challenging the concept and learning more. If there is one thing we have learned with certainty, it is that there is not a right answer to everything, there is no fix-all, but there is also a time where theories and ‘what ifs’ must be put to the test.
When it comes to open auctions in Ontario, it’s not a theory anymore - the proof of concept has already occurred, and we’re excited about it.
Daniel is the CEO and co-founder On The Block, an innovative real estate brokerage and auction house focused on bringing transparency to the industry. On The Block has changed the way people in Ontario buy and sell real estate and put power back in the hands of the consumer. He has worked as Vice President of Sales as well as Chief Financial Officer of the Toronto Argonauts Football Club, he is a designated Chartered Accountant, a registered Realtor and and most importantly a proud husband and father of four. Learn more at getontheblock.com and otbauctions.com
Broker / Co-Founder
M : 416-888-2493
SOURCE: On The Block Auctions