March 17, 2015
Though stressful, bidding wars are a seller’s dream. After all, when multiple buyers try to outbid each other for a property, it likely means more cash in the seller’s jeans. It’s a dream that has become reality for some homeowners as competition for available homes, particularly in certain neighbourhoods in the GTA and in other parts of the province where supply is limited, has resulted in some properties selling for $100,000 or more over the asking price.
If you find yourself in a competing offer situation – commonly referred to as a bidding war – and you’re willing to participate, understanding how they work and having a game plan will help you avoid a nightmare scenario.
First thing you need to know is this isn’t like an auction – you’re not going to have the advantage of knowing where the leading bid stands so you can respond accordingly. The only information that must be shared amongst buyers in a competing offer scenario is the number of offers that have been submitted to the seller, whether any of the buyers are represented by the same brokerage that is listing the property and whether the listing brokerage has a commission agreement with the seller that may give its buyers an advantage. You won’t know the substance of the offers you’re up against; only the seller and their real estate representative see those details. If you choose to participate, you basically need to make your best offer and hope for the best.
The seller can accept your offer, reject it, or make a counter-offer. Some will send back a select number of offers to be “improved”, looking for a higher offer, but this is not always the case. That means the first offer you put in may be the only one you get to make.
It’s important to point out that sellers are under no legal obligation to choose the highest priced offer. Other factors will play a role depending on their situation, such as the size of the deposit, closing date and other conditions attached to an offer. For example, they may accept a lower value offer with an earlier closing date because they already bought their new home and can’t afford to carry both mortgages at once.
In the heat of a bidding war, you might be tempted to waive or strike out some conditions (for example, making an offer conditional on financing, home inspection, insurance, etc.) in order to make your offer more appealing to the seller. Think very carefully before doing this because conditions protect you as the buyer. If you choose to waive or withdraw them, you’re taking a significant gamble. An accepted unconditional offer is a firm and binding legal contract. That means you’ll be on the hook if you end up having trouble securing a mortgage, or you find the home needs costly repairs once you take possession.
I mentioned earlier about having a game plan to guide how you approach a competing offer situation. It starts with crunching the numbers at the outset of your search to determine how much you can afford. Set a price limit and stick to it. That way, if you find yourself in one of these situations, you’ll know what you can comfortably afford. Don’t let emotion or competitive spirit drive your offer price above that mark. When you’re setting your budget, remember to factor in the extra costs that come with buying a home (for example, legal fees, land transfer tax, utility hook-ups, etc.).
Finally, work with your real estate professional to get a sense of the price ranges of the neighbourhood. How much have homes similar to what you’re looking for sold for in the past? What are similar properties listed for now? Researching the value of homes in the neighbourhood may take some of the surprise out of the process by giving you an idea of what your target home may sell for.
Joseph Richer is Registrar of the Real Estate Council of Ontario (RECO). He is in charge of the administration and enforcement of all rules that govern real estate professionals in Ontario. You can find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at http://www.youtube.com/RECOhelps.