The Art of The Bidding War

With 66.15% of all freehold houses selling at our above asking in May 2015, it's clear that bidding wars have become a way of life for many folks in Toronto's downtown core, at least for the time being. Bidding wars often make life better for sellers, but a little tougher for buyers. But buyers, do not despair! It is possible to buy a house that is not purchased in a bidding war. Yes, it does happen. Not all of the time, but often enough. If, however, you are one of those buyers who is consistently drawn to those homes that receive more than one offer, then here's what you need to do:

1. KNOW THY LIMIT 

This is an obvious one, but it needs to be emphasized. Don't make an offer without knowing exactly where your limits lie with your lending institution. Make sure you talk to a mortgage broker or bank and know what you can afford. Have a pre-approval ready before you jump in. Don't  get caught up in the rush of winning and buy something without knowing your mortgage parameters and price limits.

2. CONDITIONAL OFFERS RARELY SELL IN MULTIPLE OFFER SITUATIONS

If you need to have a condition on working out your financing or on doing a home or termite inspection with your offer to purchase, then put that into the offer. However, if there is a number of offers, the chances of landing your dream home would be slim or even slimmer than slim. If the seller has a choice of many offers, he or she will likely gravitate to the one that will be "clean". In other words,  the seller will choose the offer that cannot fall through on a home inspection or any other condition like financing, insurance, or you selling your current home. Sellers will rarely choose an offer that could potentially fall apart on a condition when they have several offers. If the deal falls through because a buyer is not happy with one of his or her conditions, the seller has to go back to the market after waiting several days for the conditions to be waived or fulfilled. If the offer is "clean", the deal is firm and done that night. Ideally, if you know you're going to be in competition, it is a good idea to have your financing ironed out before you offer, and do your home and/or termite inspections in advance so you have a good sense of what you are buying.

3. THE OTHER OFFERS

You won't know the price that the other buyers have bid on the same property as you. Real estate salespeople cannot disclose the contents of the other offers. So, if you are among eight people bidding on the same property, and you end up having the best offer according the the seller, you're first feeling will be overwhelming happiness followed by your next feeling, the anxiety that you may have offered too much. Don't worry. It's all natural. Those who didn't win, often wonder if they could have offered a little more. At the end of the day, you should be comfortable with the price you offer whether you win or lose.

4. THE TOUGH GAME

The toughest multiple offer situations are not when there are ten offers on the same house, but when there is only one other offer. Yes, your chances of winning are better with only one other offer on the table, but with several offers, there usually is a pattern. When there are ten offers, you know there will often be a few lowballs, a few decent offers and a few that are exceptional. So, the price will likely land at the high end of the spectrum of market value (or more). If there is one other offer, it could be anything. A lowball offer, a way-over-asking offer. It's hard to tell. A stronger pattern often kicks with the more offers that are put forward.

5. IT USUALLY COMES DOWN TO PRICE

Most often, the top price takes the property for sale in the end, but not always. Sometimes it comes down to the sellers, and if they simply like the buyers. Perhaps they identify with them on some level or feel their house needs to be given to the right person, in their minds. Maybe the buyers are going to start a family like the sellers did. Maybe the buyers are their cousin Al's good friend. Maybe the buyer wrote a corny letter to say how they will love the new property as much as they can, more than any other buyer. Don't laugh. This has happened and sadly worked! Of course, it's not always emotional. Perhaps, the top buyer selects a more convenient closing date, the offer is clean, or they put more money down on a deposit that makes the seller feel more secure about the transaction. Price is not always the deciding factor, but it often is.

6. BE AWARE OF THE SHORTFALL

A shorftall does happen in this day and age thanks to your friends at the bank. Instead of trying to explain it, let me give you an example of how a shortfall works. Let's say you buy a property for $600,000. The bank agrees to give you a mortgage, but decides to send out an appraiser to assess what he or she thinks your property is worth, regardless of what you paid for it. The appraiser crunches some numbers and does their calculation, and determines the property is worth $550,000. This means the bank will only cover for a mortgage based on  the $550,000 price tag the appraiser determined. You would need to cover the $50,000 difference, or the shortfall ($600,000 - $550,000) on your own. Now, appraisers have been known for not always coming in at a reasonable price in my experience. I have seen two different appraiser appraise the same property a week apart with $100,000 difference in worth. They like to think of their appraisals as a kind of science, but there is more subjectivity than you think. Sometimes, if the bank is doing an appraisal, and you think the appraiser is off, you could order  another one. No promise it will be higher, but it may be worth a shot. If you have less than 20% as a down payment, CHMC or Genworth does the appraisal.

With that said, hopefully this advice will make you feel better prepared for multiple offers on the same property. Remember, you don't need to buy a house in a bidding war. It is possible to do it without competing with others. However, if you are ready to put on your helmets and pull out your swords to smite the competition, just make sure you are ready for battle and you understand the rules of the battlefield.