How To Calculate Your Magic Number In A Bidding War
Although the Toronto real estate market has transitioned from the insanity of our spring market - where values spiked 33% higher than they had a year earlier - the movement of real estate in the central core of the City remains buoyant. What's interesting to me - is that while prices have dropped by upwards of 20% since that peak - which I documented in last August post called The Wackadoodle Toronto Real Estate Market - the continued presence of Bidding Wars and Bully Offers remains part of our real estate landscape.
First, allow me to explain what Bidding Wars and Bully Offers are.
The Bidding War
A ‘Bidding War’ is when more than one Buyer submits an offer to purchase on the same property at the same time. Each offer is confidential, meaning only the Sellers and their representatives are aware of the details of each offer, while all Buyers have no knowledge of the specifics of other bids. In these situations, Buyers must effectively submit a bid containing the terms and price most attractive to the Seller in order to successfully secure the property. A ‘Bidding War’ can occur at any time on a property listed for sale, but most often occurs when a Seller has listed their property some days in advance of the date they are prepared to review bids. This situation is called a ‘hold back on offers’.
Setting a ‘hold back on offers’ can serve as a measure of convenience, as a means to let the market set value, or as a strategy. A busy Seller may be traveling on business and return to review any offers on the scheduled posted date out of convenience. Or a Seller may elect to take a vacation and return to review offers on a specific date as a means to bypass the stress of living through the selling process. The executors of an estate, or the officers of a company assigned to liquidate a property asset, may list the property at or below market value and hold back offers to allow time for prospective Buyers to complete their due diligence in advance of submitting a bid. In these situations the executors or officers are removing themselves from any personal bias or liability and allowing the free market to set value. But it can also be used as a strategy whereby Sellers set a hold back on offers with the intention of inciting competition amongst Buyers to bid against each other and increase the sale price. In this situation, a Seller intentionally lists their property at a price below recent comparative sales in order to garner the attention of more than one Buyer with the hopes of driving the sale price up.
The Bully Offer
A ‘Bully Offer’ - perhaps more appropriately called the ‘preemptive offer strike’ - is when an offer is submitted by a Buyer in advance of the ‘hold back on offer’ date the Seller has posted. By disregarding the hold back instructions, the Buyer attempts to ‘bully’ the Seller into accepting their bid before other parties can submit.
Submitting a Bully Offer is best-suited for confident risk-takers and the financially secure. Usually a clean cash offer free of any conditions, with a sizable deposit in the form of a bank draft payable to the Listing Broker, at a sum over the list price will convince a Seller to forgo a pending bidding war. In order to remove the property from the market and be done with the process, the Seller must be convinced that waiting for the hold back offer date may not realize a higher price.
For some Buyers, the Bully Offer is a strategy that can secure the property and save them money. The clever Buyer may submit a bid which has a price near the top end of value based on recent comparable sales, but is lower than their maximum bid should they have to blindly compete in a Bidding War on the hold back offer date, when price-inflating ‘emotional premiums’ are more likely to occur. Here they bypass their competition and can potentially secure the property for a sum less than they’re truly willing to pay. In the event the Seller refuses to be enticed, they can return on the offer date with the same or better bid. This strategy is rarely detrimental to the astute committed Buyer.
Buyers submit Bully Offers for two reasons. One reason is that they love the house so much they are willing to offer the Sellers a sum substantially above the asking price simply to secure it. By offering in advance of the offer date the Bully Offer, if acceptable to the Sellers, secures them the house and eliminates the risk of losing it to another Buyer in a bidding war.
In the Bidding War or Bully Offer scenarios, the ultimate final sale price of a property may be precedent-setting, though in a transitioning market it could still align with comparable sales. In today's market, rarely do I see a final sale price for a shocking sum that raised eyebrows like it once did, as I wrote about a year ago in This Toronto Real Estate Sale May Leave You Speechless. However, the dwelling in a Triple AAA location that marries size, good condition and the seduction of being well-presented can still garner Top Dollar. For the Buyer looking to lock down a property for the next Chapter of their Life - generally spanning a decade of longer - they may be willing to pay the premium knowing that regardless of where market values go, they're buying for the long haul.
The Four Values Of Real Estate
Although the dynamics of Toronto real estate have changed, what hasn't is our psyche favouring -or at least being familiar with - Bidding Wars. For well over a decade the Toronto Real Estate market has been accustomed to seeing properties listed for sums below their true market value. This is the case for both the public at large and we realtors who have long been operating in a real estate climate of scarcity.
It's true that there was - for a brief period of time - a resistance to the Bidding War approach during the Summer when the market was lagging. It resulted in a bit of listing freneticism, where properties were being offered at prices intended to incite bidding wars which never materialized, then re-listed for higher sums leaving room to 'negotiate', where bids also never materialized. However, this autumn - when Buyers began participating in the market more actively after a period of 'wait-and-see' and realtors were pricing properties even more aggressively low - Bidding Wars began to recur, even for properties which had been up and down on the market using multiple approaches the twelve weeks prior. What this indicates to me, is that the strategy of listing low with a holdback on offers will always be an approach used (or attempted) by realtors in the City of Toronto, who are counseling their Sellers that regardless of market conditions, this is a best way to expedite a sale quickly. For those who want to let the market establish the Market Value of property - even when values are decreasing from previous precedent setting prices - pricing competitively and inviting more than one Buyer to set the value in competition is a sure-fire way to determine what your property is worth over and above the three traditional approaches based on cost, income and sales comparison which I discuss in Dear Urbaneer: How Much Is My Home Really Worth?.
So how might a rational, prudent and educated Buyer arrive at the right sum for them?
Here's my equation for a Winning Purchase, which equals the total sum of the following four 'values':
1) The rational prudent educated 'appraised' value the Buyers and their sales representative have established for the listing by researching and viewing comparable properties,
2) The emotional premium accorded the Buyers because the property really truly absolutely is 'the one' (think Prince Charming and Romeo constructed of bricks and mortar),
3) The 'motivational cost', which is the sum that reflects a Buyer's urgency to move. For example, if you've sold your existing property and it closes in 30 days leaving you with no place to live, you're significantly more motivated and likely to offer a larger amount than the Buyer who has yet to sell their existing home. The same goes if you're a corporate relocation and your family is living in a hotel. Or perhaps you are sleeping on a couch at your in-laws. What 'premium' would you pay to change that?
4) The 'Buyer fatigue' value that Buyers add in their frustration to end a long extended search. If you've consistently come in second place in a dozen bidding wars over a year(s) long search, at some point you're going to reach a level of fatigue that will compel you to pony up more cash. Especially as you realize - and have to rationalize - that every sale you've lost will still set the market value for the next property like it, even when the market is declining.
It's important to recoginize that in any market dynamic, it is always the most recent comparable sales which realtors use to educate incoming Buyers on where 'market values' are landing. These sales serve as the 'base line' new Buyers will use in their home-hunting journey, from which they will eventually add their own emotional, motivational and fatigue values (if any), based on their own situation and circumstance. Given the original City of Toronto is made up of 42 village neighbourhoods ranging from working class to wealthy - as well as a variety of products (high-rise condos, co-ops, stacked townhouses, hard and soft lofts, row, semi and detached freehold houses) - and lifestyle markets (first-time buyers, singles, mingles, young families, move-up buyers, downscaling zoomers, the artist, the creative class & white collar professional, for example) - any premium property listed at or under market value may be a contender to go into competition or receive Bully Offers. As a result, the prudent Buyer and Seller would be well-served understanding the process and risks of this real estate approach in any market condition.
For more in-depth info on bidding wars, check out these two posts:
Even in times when the media might tout doom and gloom in real estate, there will always be signature properties which may garner more interest than others. This makes it critical that you - whether a Buyer or Seller - ensure you seek the counsel of a reputable realtor who has experience in every facet of real estate
Are you engaged in Toronto real estate? Here's some of my related posts which may he helpful:
As a realtor who serves both Buyers and Sellers in the original City of Toronto - I stay actively engaged analyzing all property types in every price range - including a background specializing in unique urban spaces. And with 25 years of credibility navigating declining, rising and transitioning real estate markets, I have the experience necessary to strategically negotiate in any changing market. If you're seeking someone to serve your best interests, consider reaching out to my team and I! We are here to help!
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
- we're here to earn your trust, then your business -
*Like what you've read? Did you know we were recently listed as one of The Top 50 Blogs On Toronto? Consider signing up in the box below to receive our FREE monthly e-newsletter on housing, culture and design including our love for unique urban homes and other Toronto real estate!
*Love Canadian Housing? Check out Steve's Student Mentorship site called Houseporn.ca which focuses on architecture, landscape, design, product and real estate in Canada!