When you are the owner of a prime piece of property in Canada, you can often find yourself receiving a wide variety of offers, along with real estate agents circling you with offers that exceed your own predicted value of your home. If you aren't ready to list right away, you might be pestered with crowds of deals as well as proposals prior to listing your property. Before you know it, several offers start accumulating and you are suddenly in the middle of a bidding war.

There is a fine line in between having several bids on the table and a bidding war.  It is very crucial for you to understand the difference particularly if you are selling a property in Canada. Likewise, if you end up on the opposite side of things and seek to buy a home, you could find yourself caught up in a stressful bidding war. The information below covers everything your should know about bidding wars in Canada, and how they impact the realty market.

Differences Between Several Offers and Bidding Wars

Numerous deals refer to a circumstance where there is more than one offer to a buy a property. As soon as the deals are presented, the realtor can connect with the person that submitted the very best deal and accept it, or they can give other buyers the chance to improve their offer and continue to bid for the property.  This encourages a healthy, balanced and friendly process where each buyer has a fair chance, it gives the seller the chance to examine each offer prior to choosing the most suited one.

The other situation is when a bidding war occurs.  This usually happens when the seller's real estate agent participates in verbal negotiations with the realtors of several different interested buyers and a number of individuals are trying to outbid one another. Bidding wars happen when there is a high demand for a property or area, it is also something realty agents use to boost home property prices to ensure that their clients get a higher profit from the sale of their home. Sometimes a bidding war can cause the asking price of a home to skyrocket and become a lot higher than the asking price and market value.

A bidding war is a method that benefits property owners, since they make a substantial profit by offering their home above the listing price and sometimes over market value. Furthermore, it benefits realtors as they can charge a higher commission on the deal. Both entities are driven by the guarantee of more money made.

Nonetheless, individuals who experience the most hardship as a result of a bidding war are buyers, for who it can become incredibly tough to search for a residence that falls into their budget. On top of that, the buyers' agents also suffer because they aren't benefiting from the commission if their customers don't buy a property and get shut out of bidding war after bidding war.  They are not paid for their time until their clients purchase a property.

Naturally, there are legal and moral issues that arise because of of bidding wars. These practices can tip the realty market against the surrounding problems, as well as the anticipation and worry of losing out can push people into believing that the price they are paying is reasonable and worthwhile when, in fact, they may be vastly overpaying for the property. In many cases, although very immoral and not legal, some realtors might also make use of incorrect or 'phantom' quotes to give buyers the impression that there is a great deal of competition for the preferred residential or commercial property.

Legal Issues with Bidding Process Battles

The realtor stands for the seller and their best interest, instead of any type of third party. It is then difficult for the realtor to convince other buyers of a bidding war without getting the green light from the property owner. If we think about the lawful aspects, there is no regulation in any province that restricts actions that cause a bidding war.

As a result, agents are well within their civil liberties to connect with numerous other agents to initiate interest to potentially generate offers. It is necessary to note that they cannot speak about fake offers, which would compel the buyers to present elevated offers, as this method is illegal. Some provinces, like Ontario restrict realtors from disclosing information of other deals, which suggests that they can just share the variety of offers presented and not the value of the offers of those deals.

The Ontario federal government is likewise wanting to make adjustments to real estate laws in favour of the purchasers, so they can have accessibility to vital information they need prior to submitting a deal to purchase property.

Honest Standards

In Ontario, and other parts of Canada, real estate & brokerage firms must adhere to the Code of Ethics set out by the Canadian Real Estate Association (CREA). Although there are no lawful constraints for bidding wars, there are ethical aspects to be thought about when realtors are entertaining bidding wars.  If there are any types of provincial legislations that ban the disclosure of competitive buyer deals, they should stick to those along with other various ethical constraints.

Why Do Individuals Participate In Bidding War Battles?

Now, you understand that bidding battles are managed by sellers and their realtors, but what forces customers to play this game and then attempt to outbid each other? Firstly, bidding wars aren't normal with every home. Instead, it usually has to do with picking a desirable property or location that is desirable by many and harder to come by in the current market. Unless the marketplace is a strong sellers market, then even for land-only sales there tends to be bidding wars.

One of the major reasons that buyers are in competition against each other is that they tend to make snap decisions based on emotions as opposed to thinking clearly and keeping the focus on the actual worth of the house they are wanting to buy.

People may have access to an excess of funds but often their financial knowledge and experience is greatly lacking. As a result, buyers often end up paying way more than they should for a property which is ultimately not a good financial decision.

Advertising And Marketing Techniques That Lead To Bidding Battles

According to market experts there are 2 primary methods that tend to contribute to a bidding war. The initial one has been referred to as mob mentality which is rather common all around the world. A mob mentality is an attitude that refers to many people following a trend that's popular among the people who are currently around them.

As a result, if there is a highly sought after building or property that has many interested buyers, there is a good chance that multiple people will want to acquire the property as well. This creates overbidding so they can win the bidding war and win the home. It has been researched that around 1/3rd of people that are competing to buy a property would quickly resort to offering 20-30% over asking price simply to secure the purchase.

The other marketing strategy that contributes to a bidding war is the feeling of urgency, this is a common feeling buyers have in the current housing market in Canada. Being outbid multiple times will increase the stress level and feeling of urgency especially if the buyer has already sold their home and have limited time to find a home to move into. This could cause a buyer to act even more emotionally when entering into a bidding war. In cases like this it can be hard for a buyer to see past the feeling of urgency, the emotional excitement about the home, and the fear that yet another home that suits their needs could slip away yet again.

Using An Escalation Clause Within A Bidding War

Some realtors are more considerate than others, they add an escalation clause to make things easier for the buyers. This is so the buyers can increase the offer by a certain amount but only until they reach a certain limit. Without this clause buyers can jump the price to any amount they choose which can create a real issue when there are 8-10 or more people taking part in a bidding war.

However, escalation clauses might not provide the ease for the buyers in all cases. Sellers can then access the contract and see the maximum bid price for each active buyer. So, if your maximum bid price is $350,000 and your current offer is $275,000 the seller and their realtor may attempt to get you to go closer to the limit.

Techniques of Winning a Bidding War in Canada

Most people intend on avoiding bidding wars and to not be a part of them to the best of their ability. However, the current market conditions tip the scales in favour of sellers, who have the most control. There has been a large increase in house sales in the past year alone. This is mostly because there is less supply than what’s needed. You could very be up against 30-40 buyers at a time depending on the area and property. As a result, the average resale cost of homes in Canada is also more than likely to increase every year.

If houses are being purchased as quickly as they are listed, and buyers are consistently lined up then the competition and high prices will continue to climb. There are, however, some strategies and techniques you can use to improve your chances at winning in a bidding war.

Avoid Positioning Numerous Deals

You need to be extremely daring if you think you can take part in multiple bidding battles at the same time. On occasion, you can find opportunities to investigate a property that hasn't yet been listed in the MLS system, which will usually guarantee that the current competition for this property is lower, as well as if you can place your offer swiftly, you could have a better possibility of having your deal approved without a bidding war taking place.

Understanding Market Value

As pointed out above, sellers do tend to take advantage of bidding wars as well as numerous offers since they ultimately will obtain more cash when they sell their house this way. Therefore, they might also utilize another method to boost the competition level, this is when they declare and list the building at market value. That list price will certainly draw in 2x more buyers to view the property and a bidding war will be even more likely.  

Another tactic is when sellers list their home, but they do not allow offers to come in until a certain date, usually 2 weeks from the list date. This allows a frenzy to occur as many people come to see the listing and interest builds over the two weeks. If the property is desirable there could be a dozen or more offers on the table when the offer date arises. It's common that several buyers will raise their bids in order to defeat their competitors before the offers have even been presented to the sellers.  

Remember to always place your best offer if you know that there is likely going to be high competition for the subject property. Additionally, you could also show the listing agent exactly how sure you are by preparing your deposit cheque in advance, this is one more step towards securing your desired home. If you still have questions about offers and bidding wars please call our office and one of our mortgage experts will be happy to speak with you.