When you are the owner of a premium property in Canada, you may find yourself receiving a plethora of offers to sell it, as well as realtors circling around you with massive offers to sell it that surpass your own self-valuation of your home. Even if you aren’t willing to sell immediately, you might be bombarded with hordes of offers and bids. Before you know it, multiple bids start piling up and you are suddenly in the middle of a bidding war, where each buyer is determined to outbid the other.
There is a fine line between multiple bids and a bidding war, and it is very important for you to understand this, especially if you own a property in Canada. Even if you are on the other side and want to buy a property, you might find yourself embroiled in a bidding war. This article covers everything you need to know about house bidding wars in Canada, and how they impact the real estate market.
Difference Between Multiple Offers and Bidding Wars
Multiple offers refer to a scenario where there is more than one written offer to a buy a property. Once the offers are submitted, the listing agent or realtor can get in touch with the person who submitted the best offer and accept it, or they can give other buyers the chance to increase their offer and stay in the race for buying the property. This encourages a healthy and amicable process where each buyer has a fair chance, and the seller can also review each buyer and their offer before choosing the most suitable one.
On the other hand, a bidding war occurs when the seller’s realtor engages in verbal negotiations with the realtors of several buyers, in an effort to get each buyer to outbid the other. Bidding wars occur when there is a high demand for premium property, and it is also a tactic employed by real estate agents to jack up property prices so that their clients can realize a greater profit off from the sale of their homes. As a result of a bidding war, the selling price of a property can become much higher than its actual value and the listed price.
Legal and Ethical Factors Involved in a Bidding War
A bidding war is a tactic that benefits property owners, since they make a massive profit by selling their property above the listing price and at times even above market value. Moreover, it benefits realtors as they can generate a higher commission through the deal. Both of these entities are driven by the promise of more money.
However, the people who suffer the most because of this are buyers, for whom it can become incredibly difficult to search for a house that falls into their budget. In addition, the buyers’ agents also suffer big-time, because they aren’t entitled to any commission if their buyers don’t purchase and close on a property, and their efforts and time go in vain.
Naturally, there are legal and ethical concerns that arise due to the practice of bidding wars. These practices can tip the real estate market against the prevailing conditions, and the speculation and fear of missing out can push honest buyers into believing that the property price they are paying a fair value when in fact, they might be overpaying for a property. Plus, in some cases, although highly immoral and not legal, some real estate agents may also make use of false or ‘phantom’ bids to give buyers the impression that there is a lot of competition for the desired property.
Legal Issues with Bidding Wars
The listing agent represents the seller and their interests, rather than any third party. Therefore, it is impossible for the realtor to sow the seeds of a bidding war without getting the green light from the homeowner. If we consider the legal aspects, there is no law in any province that prohibits actions that lead to a bidding war.
Therefore, listing agents are well within their rights to get in touch with several buyer agents to try to get them to convince their buyers to increase their bids. It is important to note that they cannot float around phantom bids, which would compel the buyers to come up with elevated offers, as this practice is illegal. Some provinces, like Ontario restrict realtors from disclosing details of competing offers, which means that they can only share the number of offers received and not the value of the bids of those offers.
The Ontario government is also looking to make changes to real estate laws in favor of the buyers, so they can have access to important information they need before submitting an offer to buy a house.
In Ontario, and other parts of Canada, real estate brokerage companies must comply with the Code of Ethics laid out by the Canadian Real Estate Association (CREA). Although there are no legal restrictions for bidding wars, there are ethical factors to be considered when real estate agents are entertaining multiple buyers, and if there are any provincial laws that prohibit the disclosure of competitive buyer offers, they must adhere to those in addition to various ethical constraints.
Why Do People Participate in Bidding Wars?
By now, you know that bidding wars are orchestrated by sellers and their agents, but what compels buyers to play at their game and try to outbid each other? Firstly, bidding wars aren’t normal with every property. Rather, you need to have or choose a prime property that would have more than one interested buyer, unless the market is a strong seller’s market, then even for land-only sales there tend to be bidding wars.
One of the major reasons why buyers continue to compete against each other is because they tend to make impulsive decisions, rather than thinking it out completely and considering the actual value of the house they are looking to buy.
Secondly, even though people have a lot of money, there is a lack of financial capability and literacy among them. Therefore, buyers oftentimes fail to have the business sense to alert themselves if a property is grossly overpriced, so that they don’t buy it.
Marketing Tactics That Lead to Bidding Wars
According to marketing experts, there are two main marketing tactics that can be attributed to bidding wars. The first one is known as mob mentality, and it is quite common in several industries and social structures around the world. Mob mentality refers to impulsively follow what a majority of the people are doing around you.
Therefore, if there is a highly sought after property that has many interested buyers, chances are that other people would also want to buy the exact same property. This causes people to overbid just so they can win the bidding war and get the home. One-third of the people who are competing to buy a home would instantly agree to offer 20-30% more money just to get the house.
Another marketing tactic that facilitates bidding wars is the sense of urgency, which refers to the hurriedness or shortage of time you would feel while competing to buy a house with several other people. If you have a house that you love, but there are several buyers competing for it, you would feel the urgency to close the deal much faster, no matter what you have to do for it. In this regard, you will have to pay more money, and it would still seem alright to do so.
The Use of an Escalation Clause in Bidding Wars
Let’s have a look at bidding wars with an example. Suppose there are two buyers who are competing to buy a property that has a listing price of $500,000. The first buyer expresses their interest in buying the house and when the other learns about it, they outbid the first by offering $20,000 more. Buyer A counters with a higher offer, and the cycle goes on and on.
Now, you can imagine this scenario with ten or more buyers, and this constitutes a full-fledged bidding war. Some agents are more considerate than others, which is why they add an escalation clause to facilitate the buyers. This allows the buyers’ agents to increase the offer by a certain amount, until they reach a certain limit.
However, escalation clauses may not provide the perfect alternative to bidding wars or make matters easier for buyers. This is because sellers can access the stipulations in the contract, and can also see the maximum bid price for each buyer. It means that if your maximum bid price is $500,000 and your current offer is $350,000, the seller and their agent could try to get you to go up to the limit.
This is a major reason why the Ontario Real Estate and Business Brokers Act implement a layer of protection for buyers. Due to this protection, the people submitting their offers can’t reveal any details of their bid, and the sellers can’t either. Moreover, the Real Estate Council of Ontario (RECO) also states that it doesn’t support escalation clauses and also asks sellers, buyers, and their agents to be wary of the legal and ethical ramifications of this action.
Strategies of Winning the Bidding War in Canada
As much as you want to avoid bidding wars and not be a part of them, the market conditions tip the scales in the favor of sellers and their agents, which are the main orchestrators. There has been a sharp increase in home sales in the past year alone. Plus, since there isn’t as much supply as there is demand for houses, you may have to compete against 30-40 buyers at a time. Therefore, the average resale price of houses in Canada also continues to increase year after year.
If houses are selling out like hot cakes and there are hundreds of buyers lined up, you have a lot of competition, as well as higher property prices. There are some strategies you can try to implement in order to improve your chances of wining the bidding war. Let’s have a look at them.
- Avoid Placing Multiple Offers
You have to be extremely courageous if you think you can participate in multiple bidding wars at the same time. This means that you should keep your options open and explore multiple properties before you decide on a property that you want to submit an offer to. Normally, buyers have the option of checking out multiple properties listed by several brokers, which means that there will be increased competition for all of them.
Generally, realtors make use of a unified solution called the Multiple Listing Services (MLS) tool, where realtors can share the commission when a property with multiple listing agents is sold. Therefore, if you check out a property that hasn’t been entered into the MLS system, it means that the competition for it is lower, and if you can put your offer in for it quickly, you might have a better chance of having your offer accepted without a bidding war.
- Understand the Market Value
As mentioned above, sellers benefit from bidding wars and multiple offers because they get more money when they sell their house. Therefore, they may use another tactic to boost up the competition and demand for their property: declaring and listing the property at selling value. This value would attract twice as many buyers to view the property, and each of them would submit lucrative offers in order to secure the deal.
Apart from this, sellers also make use of another technique, which involves setting a certain date until which interested buyers can submit their bids. For instance, if the house is listed on the 1st of May and the seller announces that offers will only be entertained until the 15th of May, dozens of buyers will likely come to view the house and many might even make an offer all within just two weeks.
Naturally, this could cause a frenzy around the property, and numerous buyers will boost up their bids in order to defeat their competitors. Therefore, if you are looking to buy a home, you can ask your broker or realtor to identify homes that are priced much higher than their market value. This would allow you to decide whether you want to enter the competition or look for a property with lower competition.
Apart from these tactics, you can use several others to help make sure that you come out of the bidding wars victorious. Remember to always put out your best offer if you know that there is very high competition for a house. Moreover, you should show the listing agent how serious you are by preparing your deposit cheque well in advance, as it would bring you one step closer to getting your desired home.