A nice (location, aspect, zoning, position in block), yet suboptimal (size) Killarney development site was listed last week and I wanted to purchase it. So did the other builders who specialize in small multifamily projects, some of whom I know as I monitor their projects and we chat occasionally.
The listing agent was trying to get a bidding war going by withholding offers until Sunday night. This is a trick (not going to legitimize it here by calling it a strategy) used by the realtors to get more money from the builders. The listing agent gets to know who the offers are coming from and for what amount. The bidders have zero information and take real risks of overpaying based on false information or rumours. I found out Monday morning that this is exactly what happened.
I felt the asking price was too much, basically $100,000 more than I recently purchased a comparable lot for (even an arguably better and larger lot). My investing partner was willing to pay up to the $530000 level for the lot so we put that bid in just before the deadline. Unfortunately another builder found out our offer had come in so late and guessed wrongly it was high. He raised his bid to $575000 from $550000 (a number high enough for the sellers to agree), basically he was now competing against himself to buy the property.
Obviously the sellers were happy that our near market price offer came in and they leveraged that into getting an extra $25000 over the market value. This experience has taught me a lot about these phony bidding situation, such as not to get involved, or if you must get involved, find out the other sellers and coordinate offers with them. The realtors are controlling land sales too much and any tactic to undermine that control would be an improvement to the process. Next time I'm going to make some phone calls and see if we can save some money. All the builder competition does is shrink already small margins on potentially risky projects. Adding additional offers that are below asking price will likely drive up the neighbourhood land value and this could harm future deals for everyone.
In the highly speculative market we have now, land prices are way up but the new builds are selling slowly and at a discount. The builder valuations were estimated when the project was planned (sometimes years earlier) but these prices are not being realized. It makes no sense to overpay for land now with the expectation that market optimism related to the Trump election and pipeline approvals will improve the market for new homes in 2018. This optimism could easily dissipate and the pipeline work may not bring meaningful benefits for the Calgary housing market. This could create a nasty scenario where those builders overpaying for land now are squeezed if the market drops again as it did in all of 2015-16 where builders were working on land purchased at the 2014 peak.
The good news is the City is finally making some more supply available through the rezoning process. The key to getting a reasonable deal on land now may be to work on those new areas that have yet to see any multi family building. This is where I will be focussed.
This is the sale notice. By the time this came out I had already called another builder and told him what I had bid and why. His reply was ' I bought it '. He wasn't particularly pleased that my lower offer had compelled him to overpay.