Insider secrets on bidding wars

How to dodge the bullets and win bidding wars are not for the faint of heart

Purchasing a home can be a rewarding and enjoyable experience. One aspect guaranteed to challenge everyone is a bidding war or two. The excitement is not only limited to the buyers and their agents but sellers can be stressed beyond measure too. Even at its best, multiple offers are high drama. At its worst, they are a nightmare. The upside is that at the end of most bidding wars one lucky buyer does indeed buy the property. With that cautionary preamble there are several strategies one can employ to minimize the pain and maximize the likelihood of securing the house you really want.

What is a bidding war?

You finally see the house of your dreams and submit an offer on it. Your salesperson then registers your offer. The listing agent calls their seller and arranges for the offer to be presented. If another salesperson registers an offer from their clients on the same property before the presentation of your offer to the seller, then you are into multiple offers.

Aren’t bidding wars just a witch’s brew of trouble making you overpay for the house?

They say that the true value of any article (art, jewellery, antiques) is the amount that it would sell for at auction. A Toronto Real Estate maxim is that the top marketplace value for a home is the price that it sells for in multiple offers. Some buyers fear that if they win in multiple offers they will have paid too much. This is a legitimate concern; however, it can probably be alleviated by addressing the possibility of potentially overpaying before you submit your bid. As would apply in any auction, the rule of thumb is to establish your limit and stick to it. Determine what you are willing to pay and don’t over extend. It is much easier to pay too much for a bad house than too much for a good one. Buyers understandably hate bidding wars because they can push up both house prices and buyers’ anxiety levels. Keep in mind, however, that a top price paid for a good property in multiple offers today has time and again proven itself to be a great bargain in the future. It is not uncommon for a property to sell in multiples for an amount slightly less than what a buyer who had dropped out would have been willing to pay. Be wary of the multiple offer scenario and you should be cautious but please don’t shy away from them. You may well get the house for less than you fear.

What causes a bidding war?

Toronto’s real estate market has traditionally been very strong. Multiple offers are a frequent occurrence in any marketplace where the economic reality of a small supply of desirable properties gets confronted by an insatiable demand for those properties. Good houses go up in value more quickly than do others. The downside of bidding on a good house in the Toronto area is that they often attract multiple offers. You’re not the only one wanting a good house.

I would like to understand the procedure for multiple offer presentations.

No two multiple offer presentation formats are exactly identical. Within TREB the Listing Agent is given considerable latitude as how to organize the presentation – many factors affect the chosen format. Some such factors are: How many offers are there? The method for presenting two offers can substantially differ from the manner in which 10 offers are presented. Are the presentations to the Seller in person or by fax? Although TREB does not dictate that a specific procedure must be followed there is an underlying ethical underpinning of fairness that must be adhered to. Failure by a listing agent to fairly present all offers is a very serious ethics violation.
The listing agent should identify the exact manner of the presentations: in effect, set the ground rules before the first offer is seen. Sometimes offer procedures are changed midway by insistence of a seller’s lawful direction. The reality is that the seller is offering their home for sale and can legally choose to sell to
whomsoever they want. They even can refuse to reveal any reasoning for their ultimate decision. They may opt not to accept the highest offer because they want to sell to a particular buyer. They may choose to sell to no one. There are no guarantees for buyers which sometimes lead to increased frustration levels.

Standard Toronto bidding war procedure dictates that on the first round every offer is confidentially presented to the seller usually in order of who registered first, then second, and so on. The listing salesperson usually directs the seller to be very stoic and to not say anything to one selling broker about another selling broker’s offer. The listing agent may ask to hold onto one copy of each of the selling brokers’ offers while they consider the others. Once every offer has been presented the listing salesperson usually meets privately with the sellers to analyze, compare the offers and strategize. This is when important decisions are made. The seller will be counselled about their various options by the listing sales representative.

Can the seller accept one offer before others are given any opportunity to improve?

Yes. The seller may accept one of the offers right then and there and the property is sold. Usually a seller will only do so at this juncture if one of the offers is considerably better than the others. A seller may be very tempted to accept the top offer at this point but there might be something in that offer that they want to change and if that buyer were to accept their requested change then the seller may want to sell to them. In that situation, the seller might sign back the top offer.

Can the seller sign back any offer?

Again, yes. The seller may choose at any time to sign back any offer. Of course, they can only sign back
one offer at a time so they don’t put themselves in the position of selling the property to two separate buyers.

What if two offers are close?

If this were to happen the listing agent might recommend that the seller give any contending offer an opportunity to improve their offer. If this were the chosen route then the listing agent would meet with all of the selling agents as a group and tell them that the seller had decided to give them each an opportunity to improve. No specifics about any offer would be disclosed but the listing agent might indicate whether or not several of the offers were close. They may choose to generalize and summarize the seller’s objectives (i.e. seller is looking for the most money, with a deposit of at least $X, closing around such and such date, and a firm deal). If one or more of the offers are clearly out of the running then the Listing Agent may so inform that agent and advise them that unless their buyer were to make a ‘considerable’ improvement then they would not be in contention. In this scenario, off the selling agents go to their buyers to report their insights and see if indeed they would consider making any changes to their offer. This process might continue several rounds until the seller decides to accept one of the offers.

But I want them to accept mine!

To help make your offer win you must look at the situation from the seller’s perspective and structure your bid accordingly within your established limits. Please realize that very often in multiple offers there is no clear cut winner. A seller frequently is faced with making a difficult choice between selling their house to one of two close offerees.

Consider including the following strategic ingredients into your mix.

Key Strategic Ingredient – #1 Overall Package

The big things and the little things of your package must all be in place. Your bid is part of that package but so are you. Our goal is to position you so the Seller wants to sell their home to you. Winning in multiple offers actually starts with your first visit to the property. Sellers tend to like to sell to buyers they have met. The owner’s determination of the buyer’s suitability for their home is very important.

#2 Price

Bottom line is – the highest price will likely take it, but by no means will always take it. There are other very important factors which can easily sway a seller to accept an offer which is not the highest. How much should you pay? Please read this very carefully. Consider all the homes you have looked at as well as recent comparable sales and establish what you feel is the current market value for the property. We can assist you in obtaining this information. O.K., you’ve now established what you feel is the property’s market value. Next, determine what would be the most amount of money that you could pay for the house at this time. Compare what you feel to be the market value with what you feel you could pay and come up with a figure that is the very most that you are willing to pay for the house then and there. To assist you in coming up with this figure ask yourself the following question:

“What is the figure that if the property sells beyond I/we won’t feel badly because I know that I offered the very most I possibly could?”.

That is your purchase price. Another approach that should lead to the same figure is to ask yourself “What is the dollar amount at which I feel I would be paying too much?” At what amount would you think you must stop?”

#3: Very highest price on the first round.

Now here is a key part to winning in multiple offers – go to that dollar figure NOW.
Don’t wait hoping that your lower figure might get accepted and if it is not then you will come up to your highest figure later. In multiple offers you are not guaranteed a later. Put your very best foot forward as soon as you receive confirmation that you are into a bidding war. Don’t count on getting any opportunities to improve your offer. You may, and even if you do, your best strategy will still have been to put your very best price right at the beginning. Don’t pay more than your top dollar but realize that now is indeed the time to go there.

“But I don’t want to pay too much!”

A property is worth what someone will pay for it. You need to put yourself in the position that you will have no regrets if someone else gets it because you did your very best. Many losers in multiple offers are disappointed when they hear that the property sold for an amount they were prepared to pay but didn’t because they were expecting to be given the opportunity to improve their initial bid. Avoid the possibility of that regret. Try and get the seller to accept your top dollar offer right at the beginning of the multiple offer scenario when many of the competing buyers may be making the mistake of holding something in reserve for future rounds.

#4: Deposit

This is an area which really costs you very little yet has an overwhelming impact on sellers. To understand please pretend that you were the seller and you were faced with deciding between two almost identical offers. One has a reasonable twenty-five thousand dollar deposit cheque on a purchase price of say $500,000 and the other has a certified cheque for $100,000. Which offer would you take? A big deposit speaks volumes. We don’t mean to suggest that you have to go into six figures on your deposits but the rule of thumb in multiples is the bigger the deposit the better.

“What do you mean a big deposit isn’t costly?”

When we say it doesn’t really cost you that much more it’s because your deposit will be held in the listing broker’s trust account and provided that it is in there for at least 30 days you will receive interest on that deposit. Our office puts deposit cheques into individual GICs which provide decent interest rates. Upon completion of the transaction you will receive a cheque from the listing broker for the full amount of any accrued interest, provided only that there is a clause in the offer directing the listing broker to place the deposit into an interest bearing account. It is standard for us to include interest paying clauses in all our offers. Therefore the net cost to you in providing the knock out impact of a high deposit is only the spread in the interest rate between the amount of interest that you would receive on any increased level of a high deposit which would have otherwise sat in your own investment portfolio against the amount of interest it would generate in the listing broker’s trust account.

#5: Certify deposit cheque

For even extra bidding war impact, certify the cheque. This will offer proof to the sellers (and listing agent) that you have the money and reassure them that you have the capacity to complete the transaction. Most deposit cheques in multiple offers are not certified. Consider making yours the one that is.

#6: Don’t have an extra $25k or $50k readily accessible?

Consider a two step deposit. Include a deposit of say 5% now, with a further deposit of an additional 5 or 10% down the road. You cannot be guaranteed that the offer with the biggest deposit will get the house but I can assure you that the offer with the biggest deposit will receive very serious consideration.

#7: If Buyer defaults deposit directly to Seller

There is an additional bold strategy in regard to deposits which you can consider including in your offer. This clause is aggressive and if you were to default on the completion of the transaction then it would compromise your legal position in regard to the deposit but its impact cannot be overstated. This clause states that if you were to default on closing of the transaction (you don’t come up with the money) then all of the deposit would immediately be released by the broker holding it to the seller as partial liquidated damages. Before you entertain including this clause in your bidding war offer you should be aware of what would normally happen to the deposit in case of default. If you were not to come up with the closing funds on the date agreed for completion then the deposit would normally just continue sitting in the broker’s trust account earning interest. It would not be released to anyone until the matter gets resolved either by agreement between the seller and buyer or through the courts. In case of buyer default, a buyer’s interests are better protected by the deposit sitting in a trust account and if you agreed to the insertion of this clause and then you subsequently default on the transaction you would be compromising your legal position. Not withstanding all of the cautionary explanation, if you are 100% certain of your capacity to be able to complete the transaction this clause is very, very attractive to a seller. If you don’t close, they get the deposit, immediately. A very powerful convincer.

#8: Possession

The winning bid will likely give the Seller the closing date that the Seller wants. I will help you find out what date they want. Try your very best to accommodate a seller’s requested possession date. I can give you a good amount of assurance that in multiple offers the seller almost always accepts an offer that accommodates their requested date.

#9: Flexible possession

Believe it or not, many Sellers don’t even know themselves what date they want to close! They usually however do know a time frame in which would be their ideal closing date. Smart buyers understand this and a winning bid may well give the seller the option to set their exact closing date themselves within the time frame determined by you. An attractive window of time to a seller would likely be two months. If you are not in a position to offer a flexible closing date for that long a time frame then a shorter period (say two weeks) may appear equally attractive to the seller.

#10: Few if any conditions

Again, put yourself in the Seller’s position. If you were presented with two identical offers but one was firm and binding and the other conditional upon inspection, upon financing, or upon anything, which one would you choose? We are very reticent to recommend that anyone buy a house without a home inspection but the reality of multiple offers is that a firm offer carries far more weight than a conditional one. The best way to handle an inspection condition is to eliminate the need for it by having a pre-inspection before the offer presentations. Inspectors can occasionally move very quickly and find an available appointment with very little notice.

#11: Prove your ability to close

You ideally already are pre-approved for a mortgage and therefore may not have to include a financing condition. You might consider reassuring the Seller of your financial pre-qualification by attaching a copy of your approval documentation to the offer. You also might even present a copy of documentation substantiating your ability to financially complete the transaction (ie. Bank Statement).

#12: Balance of offer clauses

Be as reasonable as you can to the Seller. The winning bid is very unlikely to be placing demands upon the Seller which the other offers aren’t.

#13: Inclusions

Don’t ask for any inclusions which the seller’s haven’t previously indicated that they are willing to include. And we mean not one item. Remember, your offer must shine relative to the others that they will be looking at. If there are some of the seller’s belongings or furniture which you don’t feel you can live without – ask to buy it after you’ve bought the house.

#14: Write a note, give a business card, maybe a family photo too.

Give your salesperson one of your business cards to present to the Seller. Sellers are always interested in their buyer’s profession. If you really want the house then HAND WRITE a personal note to the Seller about why you want the home and attach it to the offer. All else being equal, such a communiqué might make the Seller decide in your favour. You could include a family photograph if you have not been personally introduced to the Seller.

#15: Keep yourself available!

The very best place for you to be during negotiations is in your car and easily accessible to wherever the offers are being presented. Sellers might agree to your offer with a minor change. Your availability in that situation is crucial. Be nearby.

Sounds like guerilla warfare in downtown Toronto?

It’s not exactly, but to dodge the bullets and win the bidding war you must be aggressive, decisive and have the know-how. Some of the points listed may appear contrived, others even offensive, however all have proven effective. We often hear from clients that they want us to do every possible thing to get them the house at their price. It’s pretty well all covered here. Put together the best package you can. Good luck!