What is a Real Estate Bidding War?
By Christopher Brown | 5 minute read
Entering the Canadian housing market for the first time can be an eye-opening experience. The market for homes in some neighbourhoods is fast-paced, eliciting bids from multiple buyers at once. It can be a lot to handle for novices and real estate veterans alike.
Making an Offer
Making an offer on a home is intimidating and exhilarating. Though your realtor will be there to ensure the accuracy of your paperwork and consult you on your bidding strategy, there remains a lot of uncertainty.
Putting in an offer is about much more than drawing up the necessary paperwork. You’ll need to factor in current market conditions in the immediate neighbourhood, and bid high or low accordingly. You’ll also need to come prepared to provide a down payment as well as secure financing. It’s prudent to get pre-approved for a mortgage well before you even begin the homebuying process.
Once you’ve settled on the price and have the paperwork drawn up, your realtor will submit it to the necessary parties and notify you of the success or failure of your offer. You should be prepared to negotiate and establish firm boundaries on those negotiations ahead of time.
Before we dive into bidding wars, it’s important to differentiate them from multiple offer situations. The term “multiple offers” is used to describe any real estate asset that has received two or more written offers to purchase the property. In the case of multiple offers, each offer is presented to the seller leaving them to choose between accepting one, rejecting all of them, or submitting a counteroffer.
The term “bidding war” is used to describe a situation involving multiple buyers competing for the same property by incrementally outbidding each other. This happens a lot in fast-paced Canadian real estate markets and has the potential to drive up the property’s asking price.
Bidding wars start when a seller uses the leverage of a multiple offer situation to encourage potential buyers to compete with one another. Bidding wars can happen incredibly fast, with incremental increases flying in from all sides until only the highest bidder remains.
Bidding wars are a legal way for a seller to get the most money from their property. Some can even see homes selling for much higher than the initial asking price.
Bully offers also bare mentioning. You may encounter a few of them if you remain active in your real estate hunt for long enough.
Most sellers opt to hold all offers until a specified date and time to cultivate a multiple offer situation or even a bidding war. This deferred review date gives the seller’s realtor enough time to generate a buzz around the place.
When someone submits a bully offer, they do so by pre-empting that established date with an aggressive offer that’s significantly over the asking price and giving the seller a hard deadline. The goal of the bully offer is to use the pressure tactic to entice the seller to sell the property before any other offers are reviewed.
Purchasing a home in a bidding war isn’t just about outbidding other parties. Sellers may attach special conditions to the sale of their home for a variety of reasons.
Special conditions attached to a real estate deal can include who pays what closing fees, or what fixtures, appliances, and pieces of furniture come packaged with the sale of the home. Sellers may insist you waive your right to a home inspection, while buyers can add that the purchase of the property is contingent on the sale of their current home.
Avoiding Emotional Decisions
There are a lot of ways emotion can factor into your decision about buying a property. Allowing yourself to become emotionally attached to a property or neighbourhood may blind you to a home’s deficiencies or cause you to make an offer on a home that is well outside of your budget.
Here are some tips for keeping emotions out of the homebuying process.
Establish your limits.
Understand your budget by figuring out what you can afford, and then set a firm price cap. Avoid temptation and only view properties you can afford.
That obviously means a bigger profit if you sell. You may also qualify for a home equity line of credit, known as a HELOC, which allows you to access up to 80% of your home’s value. This is handy if you want funds available to pay for repairs or upgrades, without the high interest rate of a credit card.
The homebuying process is complex and can be confusing, so rely on your realtor for their expertise, experience and perspective. Talking it over with a friend you trust may also bring greater clarity.
See as many houses as you can.
The more familiar you become with the bidding process, the more rational you’re likely to be. It’s also easier to walk away from a bidding war when you have five more places to visit that day.
Take your time.
Don’t let friends or family rush you, and don’t rush yourself. The homebuying process is a marathon, not a sprint.
How to Know What a Home is Worth
The market value of a property is based on what a buyer is willing to pay. So how do you determine what a property is worth? You can start by better understanding the factors that influence its value like size, age, condition, location, updates and upgrades, and comparable sales prices of similar homes in the neighbourhood. Other factors to consider are economic indicators – including interest rates – and whether you’re buying in a buyer’s or seller’s market.
- Multiple offers are when a property receives two or more offers, while a bidding war involves multiple buyers and rapidly increasing offers.
- Emotions can cloud your judgment and cause you to overlook things or make impulsive decisions. Take your time, seek advice, and be realistic about what you can afford.
- Finding the right home can be a long journey. Be patient, avoid becoming emotionally attached to a property or neighbourhood, and trust that if you stick with the process for long enough, the right home will come along.
John Peloza, CFA
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