What is a bidding war, and what is the best way to prepare for one?
Imagine walking into a perfect property for sale. Immaculate finishes, amazing location, spectacular design, all bundled into one perfect listing. Your heart is set, you know that “this is the one,” and you decide to put in an offer. However, you know that with everything being this perfect for you, it will be perfect for someone else too, and you begin to prepare yourself for an inevitable bidding war.
What is a Bidding War?
Real estate reality television shows have portrayed the dreaded bidding war as a flurry of back-and-forth phone calls between the selling agent and all of the buying agents. Heated discussions about the price to beat and agreement conditions to waive hours on end until the one buyer stands victorious overall.
Except, in reality, it is much tamer. In Ontario, a “bidding war” is a more aggressive name for “multiple offers.” When a seller has listed their property and they receive more than one offer, they are in a situation where they can make the buyers enter a bidding war.
Seller’s Best Scenario Highest Selling Price
This is the best-case scenario for any seller. More competition means higher demand, which can translate at the end of the day to a greater selling price and/or fewer conditions. This is because the buyers realize that not only do they have to satisfy the seller, they have to appear better than every other buyer. Sometimes, there may only be one. Other times, there may be more than 30.
Offer Review Date
A common strategy when the seller and their agent can predict that a bidding war will occur for their property will be to withhold reviewing any offers until a specific time and date. This will likely cause buyers to put their best offer forward from the get-go, unknowing what everyone else has offered.
Contrary to popular belief, this will not always cause the buyer with the deepest pockets to win. Sometimes, buyers will only offer what they think the property is worth. Other times, buyers will offer less with more favourable terms for the seller. Due to the nature of bidding wars, there is a delicate line between winning the bid and exceeding the budget.
Ways to Win a Bidding War
Going back to that perfect property, take a moment and remember that this process is essentially a blind auction. You write down your bid on a piece of paper, submit it, and hope for the best. The seller’s agent can not disclose the highest offer, only how many people are in the running. So here are some ways how to gain an edge over the competition.
Strike While the Iron is Hot, the infamous Bully Offer
A “bully offer” would be the real estate equivalent of buying a painting from an auction catalogue prior to the actual auction. When a seller is only going to review offers on a specific day and time, they may be willing to entertain any pre-emptive, aka “bully” offers.
If a buyer makes a bully offer, they typically offer more than the seller’s asking for. However, less than what a bidding war could potentially raise the price up to. The buyer also gives the seller a minimal amount of time to respond to the offer, hoping that the seller is enticed by the favourable terms and is pressured into accepting the offer.
This does not always mean that this is the best way to approach a bidding war. While the buyer does create a situation where they push out the competition, there may not have been any other interested parties to begin with. The buyer could easily overpay for an unappealing property. On the other hand, the seller, in accepting a bully offer, potentially loses out on even more profit from the upcoming bidding war.
Keep in mind, however, that this move has been viewed as so unethical to the point that in 2019, the Ontario Real Estate Association (OREA) president stated that “the government should use its current review of the act that governs Real Estate Agents in the province to bar the practice.”
Climbing out from the Jaws of Defeat with the Escalation Clauses
Just because an offer begins near the bottom does not mean it is trapped there forever. “Escalation Clauses” are designed to increase an offer price to assist in defeating competing offers. When included in an offer, they can increase the offer price by increments automatically using a predetermined set amount when faced with other offers. Buyers can also limit growth to these increments to ensure they do not exceed their budget.
This is useful when a buyer and their agent predict that there will be a bidding war, but the final price will not reach their maximum budget. Escalation clauses ensure that a buyer only pays a set amount over the second-highest offer. The seller may also benefit, as they are receiving slightly more than what was originally on the table.
Like with everything, however, there are downfalls. Any offer with an included escalation clause cannot be revoked during the irrevocable period, and if accepted, it is legal and binding. An offer with an uncapped escalation clause could cause the offer price to soar beyond any reasonable amount. Additionally, an escalation clause with a limit could outright lose to any offer with an initial amount higher than the limit. Sellers must also be cautious, as the property would need to be remarketed if the buyer cannot afford the escalated amount.
Although this move also causes complications in many real estate transactions due to its complexity for all parties involved, it is within the legal and ethical guidelines that real estate agents are bound to when done correctly. The Real Estate Council of Ontario (RECO) stated in 2017 that “[they do] not endorse the use of escalation clauses.” However, they “[have] no authority to prohibit their use.”
Best Foot Forward
When stuck in a bidding war, the most common method for a buyer is to simply place their best offer. A straightforward offer is easy to understand by all parties and clearly defines the parameters. Buyers can better estimate the mortgage they need and any extra closing costs (legal, taxes, etc.). Sellers may also appreciate that the offer is simple and shows a serious interest in the property.
However, this also means that the simplicity causes these offers to be defeated easily. Due to the limit of the offer, any competing offer that initially begins at a higher amount has a higher chance of being accepted.
Who Can Help Me Through a Bidding War?
The team at BuyRealty.ca has the expertise and experience to handle every kind of real estate transaction. We can ensure that your offer stands out beyond monetary value with the right conditions. Our members have performed thousands of transactions and can help you navigate and remain composed through tough decisions. We also make sure that every transaction is unique and specialized to fit your specific wants and needs. We can protect your best interests while ensuring you get the best possible deal.
Click here to learn more about BuyRealty.ca and the members that realize their buyers’ potential.
Sources
https://www.cbc.ca/news/canada/toronto/orea-urges-ontario-to-end-bully-offers-1.5088577
https://www.reco.on.ca/professionals-news/need-know-using-escalation-clause/
