How Does the Bidding Process Work?
When a seller lists their home on the market, it allows potential buyers to make offers on the property. Although sellers usually specify an asking price, buyer offers can range from slightly below to well above that figure. It is up to the seller to decide if they want to accept an offer once they have received it. In some cases, the buyer and seller may even negotiate the price of the home.
In an overheated market like the GTA, a home will likely receive multiple offers, also known as bids. When several buyers place bids, the seller must decide to whom to sell the house. In such situations, the seller will usually have their real estate agent reach out to the buyer with the highest offer and offer them the home. They may, in some cases, reach out to the unsuccessful bidders beforehand and encourage them to increase their bid to stay in the running.
Given the GTA's high demand for real estate, most bidding processes turn into bidding wars. A bidding war occurs when the seller's real estate agent is in constant communication with the agents of several buyers who have all bid on the same home. The seller's realtor will encourage bidders to offer as much money as possible without disclosing what other buyers have already provided. This practice is known as blind bidding.
The problem with blind bidding is that buyers often panic and bid as much as they can afford. In some cases, desperate buyers will overpay for a home even when there are no other offers, as this information is not made public. This increased payout leads to raised prices on surrounding homes and disproportionately large profits for the seller and listing agent involved. This process has been a major contributing factor to the inflation of real estate prices across the GTA and beyond.
Although the Canadian government has promised to stop blind bidding, it has only made it optional, allowing sellers and agents to continue the practice if they wish. Given these circumstances, your ability to win a bidding war will come down to your preparation and understanding of the process.
Bidding Wars: How to Win Them
Although there is no way to guarantee a win in any bidding war, here are a few steps you can take to increase your odds of success:
- Try to make the highest offer. While the highest offer is not always the one that wins, putting down a higher bid certainly increases your odds of success. Now that blind bidding is no longer mandatory in Canada, if the competing offers are similar, you may be informed by the seller and given a chance to increase your bid.
- Be prepared to walk away. Sometimes, bidding wars can inflate prices until they fall outside your budget. It is important to set hard limits on your price range to avoid purchasing a home you cannot realistically afford. You may have to participate in a few bidding wars before finding the right house in your budget range, and that is okay! Bidding high is important, but bidding smart will save you a lot of trouble in the long run.
- Get pre-approved for a mortgage. When you work with a professional Clover Mortgage broker, you can obtain a pre-approval on a mortgage for the property you are bidding on. A pre-approval proves to the seller that you can afford the home and are eligible for a mortgage. It also indicates to sellers that you are serious about buying their home and have been doing your research. All in all, a pre-approval makes you a desirable candidate and will increase your odds of winning the bid.
- Consider an escalation clause. If you are willing to pay above the asking price but only want to raise your offer if absolutely necessary, an escalation clause might be a good choice. In your agreement with the seller, you can specify that you are willing to outbid all competing offers by a couple of thousand dollars up until a limit price— which you can set according to your budget.
- Offer a Cash Sale. If you can afford an all-cash deal, your odds of winning the bidding war will immediately skyrocket. Paying in cash can be an excellent choice for buyers who are downsizing from their current home or have fully paid off their previous home and have a lot of capital from the sale.
- Drop Contractual Contingencies. A contingency is a condition that must be met in order to finalize the sale of the home. Contingencies are usually listed in the contract between the buyer and the seller and protect the buyer in case circumstances change. By dropping the contingencies from your agreement, you make yourself a more attractive buyer— the seller knows the deal is set in stone. As a consequence, however, you are subjecting yourself to greater risk.
5 Most Important Elements of the Bidding Process
Understanding the Market
The Canadian real estate market has been overheated for the past few years. Since the beginning of 2022, home prices have slowly begun to drop and the market has begun to cool due to the increased interest rates introduced around the second quarter.
Despite this, the demand for real estate in Canada continues to be at an all time high. Even if prices drop, competition for housing may still remain high. In any case, it is good practice to prepare yourself for a bidding war— just in case.
Knowing Your Seller
In any bidding process, your success depends on how well you, as a buyer, match what the seller’s needs. When looking at house listings, it is important to consider what each seller might be looking for and whether or not your offerings can match that description. If your seller is looking to move homes, they may be more compelled by a quick close. If your seller is looking to sell off their property and retire, they may be looking for the highest bidder.
Unfortunately, there is no easy way to gather this information from a house listing. If you want to increase your odds of success, the best thing you can do is to have a few different properties in mind, to increase your odds of landing at least one of the deals.
Evaluating Competing Offers
What separates a winning bid from a losing one? Although it may seem as if sellers always choose the highest offer, there are other factors that may sway their decision. Being an attractive buyer can sometimes go beyond the amount of money you have to offer, which is why it is important to consider all angles when placing your bid.
For instance, a seller may be concerned that their home will be appraised for a lower price than they are selling it for. In this case, they may choose a buyer who made a smaller bid but waived all appraisal contingencies. If they choose the higher bidder, the deal may be called off weeks from now when the appraisal comes back too low.
Closing the Deal
Once a seller has accepted your offer, it is time to close the deal. As a buyer, there are a few things you need to be aware of when closing. First, it is important to familiarize yourself with the contingencies in your contract with the seller. Common contingencies allow you to walk away from the deal if the property is appraised below the asking price or if you uncover severe issues during the home inspection.
On top of the asking price, it is important to consider the additional hidden costs that come with closing a deal. The home inspection, appraisal, and legal litigation may have hidden fees. There may also be moving or renovation costs to consider.
Consulting the Pros
In highly competitive markets like the GTA, having the edge over the competition is an essential part of the bidding process. One of the easiest ways to secure this advantage is to work with a professional Clover Mortgage broker. Our expert team of brokers can help get you pre-approved for a mortgage on your dream home.
A pre-approval shows the seller that you are secure financially and will be able to follow through with the deal. This bonus can be the difference between winning and losing a home.
Ready to show sellers you are serious? Contact Clover Mortgage for a free consultation today!