Home buyers routinely go for stressful and inefficient plays in the strange game that is Toronto real estate - here's what to do instead.
Recently, I tweeted about bidding wars and what agents and clients alike need to know.
To be honest, I could do without bidding wars as an agent. They are stressful on either side - both for buyers and sellers.
When I am acting as a listing agent representing clients, I’m under pressure to get them a great selling price while mitigating risk by advising them that the highest price isn’t always the best offer. Sometimes a buyer’s agent will include clauses to their agreement that exposes the seller to risk. At the same time, I must meet my obligations to be fair and ethical to all buyers. For example, not telling other buyers what one buyer bid in order to coax higher offers from other competing buyers.
When I am a buyer agent, I need to advise my clients on the value of their desired home so they don’t overpay. But more importantly, I need to help deal with the emotional and mental stress the process causes buyers.
All of this tension is heightened by the fact that buyers are negotiating in the dark since bidding wars are conducted as ‘blind auctions’ in Canada. This means that the listing agent (i.e., the agent representing sellers) is not allowed to share with the agent representing buyers the details of any of the other offers, other than how many offers they have received — a number which they are obligated to disclose honestly.
Buyers need to figure out what to offer to be competitive without outrageously overpaying, as they do not know what the other ‘highest’ offer might be.
The offer night itself, when each buyer submits their offer to the seller's agent who then must present and review them with the sellers, creates another stressful affair. Depending on the popularity of the home and how the selling agent or their clients review offers, the process could take either 2 or 6 hours. Cue lots of anxious waiting.
Now, in spite of how common bidding wars are in the Toronto real estate market, particularly in certain segments like single family homes, and how much home buyers have to learn about them, many home buyers still lose out 8 to 10 times bidding on homes before they win one.
Why is this?
Of course, the sheer demand for Toronto homes, particularly in particular sectors like single family homes in good school districts, is a major factor.
But I think there is also another key reason — that while many of us as home buyers might understand the basic rules and strategies behind bidding wars, we still don’t go in with a strong plan for how to win a bid.
To better play the game as a buyer, we need to understand how pricing strategy works from the seller's perspective. Developing a better understanding of a seller's pricing strategy can help inform buyer’s strategies.
Option 1: Price the Home For What Sellers Want to Receive
This is when a seller prices a home at, or just above, what they want to receive and waits. This is usually done when the market is moving slower, either because demand is lower and/or more homes are available on the market.
Option 2: Price the Home For Less Than the Sellers Want – Expecting to Get Multiple Offers
List at a low price, set offer date. Low prices bring traffic, usually lots of it. Some serious buyers and many who “hope” they can buy at or near list price.
Particularly when homes are in high demand or low in supply, listing low brings plenty of buyers to view the home. This is basically a numbers game - get 50 people into the home, have a higher chance of multiple offers and maybe selling it for more than it’s worth.
Pricing low is looked at by many as “playing games”, or “sleazy realtor trick.” It’s a bit of both in that it’s a gamble.
What if you get no offers or low offers on your offer night? Sellers then have to scramble to go to Plan B for a home that now looks like it might have something wrong with it because it didn’t sell right away at its first price (including the potential that the sellers are just ‘too greedy’).
The Selling Gambler’s Hope
So why have sellers been pursuing option number two as they have for at least the last 10 years in Toronto?
The main reason is the seller’s hope. Who doesn’t want to win the lottery? When you see everyone on your street doing it, you also want to have people throwing money at you.
And there is also the fear of missing out in another way — when everyone is underpricing their homes in your neighbourhood, and you price higher, buyers may think you are the greedy one asking too much. So you go with the flow — especially when your neighbour received 16 offers last week.
The Buying Gambler’s Hope
On the other side, is the gambler’s hope — of the buyer.
Almost every home buyer I speak to hopes to be the one to win a highly coveted home for a deal, a price that their would-be neighbours will envy.
Now, I don’t fault either hopeful sellers or buyers — I’ve been both plenty of times before entering my career as a real estate agent.
But hope is what results in much of the inefficiency and frustration we see in bidding wars today.
A Better Way to Play
Now for the real deal...The truth about bidding wars.
When we get into a real bidding war situation, many of the offers we receive are not anywhere near what the home actually ends up selling for.
50%-60% of the offers are not even close to the actual value of the home. 20%-30% of the offers are closer but not quite there and 10%-20% are offers at, or just above, the home's value.
So, what may look like a war between a large number of people may actually be between only a few buyers who have actually offered an acceptable offer.
In order to be part of that small group whose offer is actually considered, here are some tips:
- Understanding the true value of the home regardless of what it is priced at. A very detailed Comparative Market Analysis (CMA) from your agent is key.
- Discuss the market, in particular the neighbourhood, to understand if it's slowing down or speeding up - for example, how many offers did the last couple homes receive?
- Having a deposit ready and in hand can give a buyer a small advantage and at the very least show that you are prepared. An organized agent & buyer are attractive to a seller.
- In a market like today’s, it’s easy to get emotional and make mistakes. Discussing the process before, during, and after is a good way to help when losing a bidding war. This can help you understand why you lost and make it easier to put it behind you. Control what you can control and let the process play out.
- A few buyers get lucky and win on their first try. Others need to try a few more times to win. Buy what you can afford, be realistic with what you can buy and plan to stay a while.
Overall, stay positive, communicative, and realistic about your offers and prospects and an unsuccessful bidding war doesn't have to end in disappointment - just useful lessons learned, on your way to eventual success.
Gus Papaioannou is a Sales Representative with Realosophy Realty, a Toronto real estate brokerage which uses data analysis to advise residential real estate buyers, sellers and investors. A lifelong Torontonian & entrepreneur in the hospitality and retail sectors for over 15 years, Gus has first-hand knowledge of Toronto's trendiest neighbourhoods.
