How to Win a Bidding War
Today we're going to talk about something on every buyer's mind in the GTA recently. How to win a bidding war in this insane housing market.
Multiple offer situations are no longer confined to the 416, we are seeing bidding wars as far north as Barrie, with multiple offers becoming almost commonplace in Newmarket, Aurora and Bradford. For you young hipsters, that's 416, 905 and 705!
With this increased competition, it takes a little extra effort and ingenuity to stand out and get your offer noticed. The tips below can help, but they aren't for everyone. Submitting offers without clauses for mortgage and inspection is risky and not something I would counsel any buyer to do. This article is an explanation of tactics and options, not advice.
The Art of War - Understanding the Battlefield
To know how to win a bidding war, you need to understand what they are and how they work. First off, you should know, I don't like the term "bidding war". It makes it sound more like the Australian way of selling property, where all the interested bidders gather with their agents on a specified day and present their offers in person. This bears no resemblance to the way offers are handled in Canada.
I like the term Multiple offers better for what happens here. It's simply a property that generates more than one interested buyer and more than one offer. The seller has all the power in this situation, supply is low (only one house) and demand is high.
Once the offers are made, the seller decides how to proceed. The seller could accept one offer, counter one offer, decline all while asking them to resubmit higher offers or outright decline them all. The only thing the seller can't do is counter more than one offer. If all buyers accepted counteroffers in that scenario, the seller would be bound to honour all counteroffers. Since the owner can only sell the property once that would be a huge problem!
How Do Multiple Offers Happen?
Multiple offers situations can come about naturally in a hot market, or on a very desirable property where demand outpaces supply. It can aslo be artificially created in a seller's market by aggressively pricing the property and "holding offers". Holding offers means the listing agent will hold onto all offers received until a specified date, usually a week after the home appears on the MLS.
The goal of this strategy is to get as many interested buyers to view the house as possible and make offers. This drives up the demand for the property and the sales price ends up being much higher than the house would have initially sold for.
The Mechanics of it All
In Ontario, the offer process is blind. By law, the listing agent must tell every buyer that has presented (or registered) an offer the number of other offers that have been registered on the property. The listing agent however is not allowed to disclose the contents or terms of any offer, just their existence.
At the point where all conditions in the offer are met, it is considered "firm". It's at this stage that the sales price is made public. The contents of all offers and counteroffers are kept confidential and on file at the listing brokerage.
After you submit your offer, the seller has control of this process completely. The price paid for the home will be decided by its market value, or what the buyers are willing to pay for it. We can look at what a seller would want and craft an offer that appeals to them. What do sellers want? A fast sale, more money and fewer headaches. If you can offer them all those things, you've got a leg up on any competitor.
To craft a winning offer, you have to be prepared. All your ducks have to be in a row before you ever view a house. Here are a few areas we have to look at to get you started.
Mortgage Pre-Approval
Get pre-approved, not just pre-qualified. What's the difference? When you're pre-qualified for a mortgage, the lender has only looked at how much you make, your expenses and your assets to see approximately how much house you could afford. These numbers can, and often do change radically when your mortgage is approved.
Pre-Approved is what you want to be. It takes a lot longer, the lender will need more documentation from you. But it is a number that is way more concrete than the pre-qualification number. The lender will ask for things like your previous tax records, pay stubs and copies of your bills. They may ask for documentation that shows you have the downpayment. A word about deposits, typically it's 5% of the purchase price (with mortgage insurance) or 20% without. You can find out more about mortgage insurance and down payment here.
This isn't a complete list by any means, and it varies from lender to lender so you want to enquire early in the process. Nothing is worse than waiting on a missing document and finding out if can take weeks to get a replacement.
If you want a quick idea of what you can afford you can check out my two mortgage calculators. For a fast idea of what you might be able to afford I have this simple calculator. For a more complete calculator with interest rate risk test, cash needed and monthly expenses sections you can use my complex calculator.
Your Deposit
This should be ready to go in your chequing account. Waiting to pull out of your RRSPs, or borrow it from your cousin Clark takes too long. The seller won't wait. The deposit should be 1%-3% of the purchase price in the form of a certified cheque or a bank draft. The deposit must be as concrete and verifiable as possible.
Should you send it with the offer, or upon acceptance? In a seller's market, I would usually say make it upon acceptance. You don't have to worry about getting the deposit refunded if it gets turned down. But when you're competing against other offers, send it with.
Here's why; say I hand you a large amount of money to consider my offer. You have to hand me back a bunch of money to turn it down. No one likes to hand over a big cheque, and psychologically that is what you're making them do. Besides, small deposits and deposits upon acceptance could be the first offers weeded out of the process if all other terms are nearly equal. You want to be the offer that wins, don't skimp on the earnest money.
Home Inspection
I still highly recommend having a home inspection done. Instead of making a home inspection conditional to the sale, we can talk about having an inspection done before the offer is submitted.
Getting an inspection done before making an offer does two things; it satisfies a clause that could otherwise complicate your offer and it shows the seller that they should take you seriously.
Crafting the Offer
The offer has to be as straightforward as possible to have a chance of winning. Clauses have to be as streamlined as they can be, hence the concentration on getting pre-approved for the mortgage and pre-inspecting the property. Two clauses could potentially be eliminated right there.
Proofread the offer with your agent or broker. Then proofread it again. Check and re-check dates and amounts. Pay special attention to the spelling of names, especially the sellers! Mistakes mean sign backs, and in a bidding war sign backs simply don't happen. They will move on to a more complete offer that doesn't require any corrections.
Not to mention mistakes make the seller wonder if your team is paying enough attention. You've done everything you can to reduce the seller's risk until this point, don't start giving them doubts now with a few typos!
Should I offer more?
Often the winner of the bidding war is the one that offers the most money. The question is, can you afford it? Is the home worth it to you? Often multiple offer situations are won by a small margin, so you might have to change your way of thinking. $10,000 might sound like a lot of money, but remember when calculated monthly that's under $50 per month difference ($510,000 at 3% over a 25 yr loan, vs $500,000 at 3% over 25 yrs. comparatively). The question becomes can you afford $50 more a month for the home you want?
So just offer more money, you get the house. Simple right? Not so fast! If you're going to require a mortgage as most people do you may find that your bank won't do the mortgage without an appraisal. The mortgage typically will be for a percentage of the homes appraised worth.
Let's say with your deposit and downpayment the bank was willing to loan up to 70% of the appraised value. If the house was appraised at $500,000 the bank would only loan you $350,000 even though you offered $650,000. That's 70% of the appraised value. You would be required to come up with the rest of the money on your own to purchase the house, should your offer be accepted.
Avoid the Battle - Win the War
One guaranteed way of never losing a bidding war is to never enter one. Confucious said, "fight your enemies where they aren't", or was that Alex Hopper from the movie Battleship? It doesn't matter, it's good advice either way. Avoiding the battle can save you from over-paying. or even worse, entering into a risky offer.
How can you avoid the battle? You can select houses that are a little less popular or looking at exclusive listings. Right now with COVID, exclusive listings are more popular. Some sellers don't want hundreds of people trooping to their house to view it and choose to keep it exclusive (that just means off-board, no MLS listing).
The key is to work with a real estate broker that can find these exclusive listings for you.
