Welcome to this month’s instalment of Dear Urbaneer, where my clients seek my counsel on all matters of real estate, housing, and real estate. This time around, I am responding to a Buyer client who has processed her property wishes, wants and needs, pre-qualified her preferred price parameters personally and with a lender, and completed sufficient market research to feel ready to submit an offer. After actively viewing properties over the past 90 days, she has a clear idea of what her spatial requirements are, which building components and architectural features she values in a home, and what the real limitations of her budget – both tangibly but also relative to her comfort level on the values similar properties are selling for. In this context, she wonders if participating in a blind bidding war is appropriate for her “a little bit cautious, a little bit conservative” nature, given during her dwell search she’s commonly seen houses in her price point end up in multiple bid situations, and selling for sums well above the list price.
In short, she wonders “Can a Buyer who isn’t willing to ‘pay any price for the privilege of winning’ still submit a bid on a property receiving multiple offers and find the experience worthwhile?”.
Dear Urbaneer:
I know bidding wars are a common occurrence in Toronto real estate, but I have some reservations about using that approach in my own real estate quest. I feel like my concept of what a home’s value (which is based on recent sales, the neighbourhood, and the housing type) is out of whack with what some people are willing to pay for a home – particularly when there are multiple bids.
When I find myself in likely competition with others who are willing to bid exorbitant amounts, my mentality is that I don’t want to waste everyone’s time submitting offers which I know I won’t win – both because my valuation is less and the top end of what I am willing to pay is going to fall short.
That said, I realize that an offer isn’t just about the dollar amount, but that there are other factors that can make my bid attractive. And I am more willing to compromise on secondary conditions and other things.
With this being my mindset, I wonder: is it even worthwhile to join in a bidding war? I guess you never know the outcome unless you try, but my recent experience has me rethinking my approach. Any advice?
Sincerely,
Baffled By Bidding Bullies
Dear Baffled:
First – let me say – the fact you’ve been able to clearly delineate the parameters of your search – and the budget you are comfortable with – and that you have clarified further what property aspects you are willing to compromise on is a great achievement in the purchasing process. We all start our dwell hunt with a vision of our dream home – and in Toronto where everything seems to be one dollar more than one has – there can be a bitter pill to swallow when we realize what we can buy in reality is far less than what we imagine in our dreams. And, to be candid, as a Toronto realtor for 30 years I’ve learned that whether your budget is $500,000 or $5,000,000, every Buyer has to make compromises.
So Bravo! Because you have clearly ruminated on this at great length, and you’re sufficiently informed having completed your due diligence in terms of house values, market dynamics, and identifying what properties best align with your personal circumstances and objectives, you’re sufficiently prepared to bid on a listing. More importantly, your journey thus far is the best way to find the home that suits you best – for today and tomorrow. Nothing spurs Buyer’s remorse quite like blindly bidding for a home in intense competition driven by the fear of missing out.
As a Buyer, patience and compromise are frequently the journey of any dwell hunt, meaning the more resistance you have to these truths the greater the frustration and resentment you may experience with the process. That’s why my team and I help you create your own personal Housing Matrix to help you develop a tangible framework for your dwell hunt – including clear parameters on budget, location, dwelling size, shelter type, property condition, architectural and lifestyle features, and even your timeline. Plus, we encourage you to go deep in your exploration here, by ranking each of your wishes, wants and needs in the context of your physical, mental, emotional and spiritual aspects of yourself. Consider checking out my post here called –> Dear Urbaneer: How Do I Know This Is The Right Home To Buy?
The key is to set your boundaries on the practical requirements, draw the line on your maximum budget, be flexible on how you may have to compromise, and trust that your intuitive ‘Yes!’ is guiding you in the right direction of getting what you like. Once you cross this threshold you’ll be manifesting the right place to lay your head. Need more clarity? Here’s my post about –> Maslow’s Hierarchy Of Needs And Toronto Real Estate For Buyers.
The Question of ‘Value’
You touch on the question of value – and valuation. In the simplest terms, the market value of a product or service is determined by what anyone is willing to pay for it at a given moment. And in a real estate boom that has been going on for the most part since 1995 – outside of periodic government interventions like the one we’re currently experiencing – property values have been outpacing incomes and selling for huge sums. The only reason dwellings are currently selling for sums that are lower than what they might have garnered earlier in the year – no matter how small the decrease – is because interest rates have been rising. So it’s important to be aware that when you’re questioning the value of real estate, it’s not just about the exchange value of the property but also how much the portion of borrowed funds are costing the consumer at any given time. What interests are at any given time can have a significant bearing on property prices.
From an empirical standpoint, the value of a home can be attributed to Understanding The Six Essential Layers Of Property, with respect to the site, structure, skin, services, space plan, and “stuff”! These are all factors which influence the value of a property – both in establishing its actual cost and its market value. (Incidentally, this is one of my most viewed blogs to date!)
With bully offers and bidding wars having been common place in Toronto real estate for decades, I’ve written many blogs on the topic, but my advice changes slightly with every fluctuation in the market. Now, I want to point you toward this piece of counsel: The Four Values Of Real Estate For Bidding Wars And Bully Offers In Any Market Climate (Plus Cats!). It offers valuable insights on determining what a property is worth to you, and I think it may help you reconcile some of your indecision.
However, with an ongoing mismatch of supply and demand (particularly for certain housing types and in certain Toronto neighbourhoods, where demand is always high), a culture spanning over two decades of paying top dollar as a means to end, the psychological driver over the fear of missing out and, until recently, ultra-low interest rates introduced during the pandemic to keep the global economy oscillating, means that properties have been attaining sums exceeding rational, pragmatic, comparative market values.
Part of the justification of this behaviour is the assumption that values will continue to skyrocket in Toronto. While it is true that real estate values do climb consistently over time, it is important to remember that real estate is cyclical, which means that it is very possible that values will dip over the tenure of your homeownership. Case in point, in this recent Dear Urbaneer blog called Does It Make Sense To Buy A Home In A Declining Market? I illustrate that spanning a ten year period from 1988 to 1998 Toronto real estate values went up and then down to land a decade later around the same price point. In other words, real estate was a terrible investment. But if your motivation to buy a home was your desire to make it your own, to enjoy the security of tenure that accompanies homeownership, and your preference to pay down a mortgage instead of giving your money to a landlord, each of these value-added benefits may be worth more to you than the cost of borrowing money.
If you are employing the buy-and-hold mentality, and your household debt is manageable, your income is stable or increasing, and you’re confident you can weather future higher interest rates, then paying a premium to buy the home you want today is more easily justified. It’s really your timeline that can drive your profitability, as I outline here in Dear Urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?. Basically, your property has to increase in value 8% to break-even, given the buying and selling costs associated with Toronto real estate. What’s essential is to have time on your side to ride out the ebbs and flows of the market.
Bidding Wars And A Supposedly Cooled Market
While the cooling market has pulled prices back from sky-high levels earlier this year, causing some beleaguered buyers to take a break from the intense and – at times – combative house hunt, it is important to remember that Toronto real estate is an ever-changing entity. Although interest rates have risen quickly, Buyers remain aplenty in Toronto, or perhaps I should say the number of Buyers looking to purchase continue to exceed the supply of centrally-located dwellings for sale continues even in our current market conditions. Just last week our Buyer client was one of 57 Offers On A Scarborough Fixer Upper Bungalow.
There was a period spanning the late Spring through the Summer when the Low List Holdback strategy of coming to market with a set offer date did not result in many sales. In the early days of the interest rate hikes – from March through July – those Buyers who didn’t withdraw from the market were uncertain, skittish, and wary of competing blindly against other parties. No one had the stomach to blindly compete when everyone was still collectively trying to gauge what was happening in the market and determine the extent to which property values were shifting. Buyers simply decided to let the offer date pass, with the objective of submitting an offer when they could negotiate with more transparency with the Seller rather than bid blindly against another party. However, by August Buyers and Sellers – and their realtors – were all getting a better read on the market and, as a result, the process by which real estate was being bought and sold returned to familiar ways
Although a Buyer’s dwell hunt search may shift more in their favour should interest rates continue to increase and more listings come to market for sale, it’s feasible they may still find themselves in a competitive situation, depending on the property type, its location, size and condition – and how large the pool of prospective purchasers actively seeking similar product. In this regard, it can be disconcerting to buy a home in a market that is moderating, given you could conceivably see the value of your purchase dip in the short term. I offer several insights and tips in last month’s dear –> Dear Urbaneer: Does It Make Sense To Buy A Home In A Declining Market?
That said, no matter the season (Did you know that there are Seasons To Real Estate?) or the market conditions at any specific moment in time, there are ways to improve your chances of securing the property you are pursuing in a bidding war. And spoiler alert – the advice on how to win the bidding war isn’t simply to submit the highest number.
We Do Not Recommend You Submit An Offer With Conditions
We advise against competing against other Buyers with a conditional offer. Why? The bid without conditions 99% of the time trumps those that contain a condition. I say 99% because it’s feasible that if the offering price was substantially higher it might be enough to sway a seller and get accepted but even then it would depend on the condition and the risks associated with accepting the offer.
For example, a condition on inspection – especially if the listing realtor provided a presale inspection report – would be highly suspect as it’s an easy clause to collapse and any serious buyer would bring in an inspector or contractor in advance of the offer date as part of their due diligence.
An offer with a condition on financing is perhaps more reasonable given our current market conditions but if the offering price with the condition is significantly higher than all the other offers it may in itself signal that it’s beyond the true market value (which generally is where the bulk of offers land) and there may be issues with the appraisal, causing the sale to collapse.
In our experience, it would be highly risky for a seller to accept a conditional offer after using the List Low Holdback Approach where a bidding war ensues, for the listing realtor is required by law to post on MLS what the condition(s) is/are and, should the sale fall apart, it could taint the property and derail the selling process.
Submit Your Offer With The Seller’s Preferred Closing Date
If the listing realtor communicates the seller’s ideal date to transfer the title, choose that date. Want to be even more competitive or if there is no specific preferred date? Submit an offer that states a specific closing date but includes a clause that allows the seller the right to advance and/or delay the closing date by a specific period of time – say 14 to 30 days – by giving you and your representative written notice within a set period of time – like 7 to 60 days. The more flexibility you provide the more attractive your bid, especially if the owners are selling and beginning to search for their next property purchase.
Submit Your Offer With The Largest Deposit Possible (In The Form Of A Bank Draft)
Most offers submitted on properties for sale in the City of Toronto are for a minimum of 5 percent. To distinguish your offer from everyone else, go big. Nothing says “I’m serious!” more than an offer that is submitted with a bank draft for $100,000 to $250,000 on a purchase listed for under $1,000,000. And always submit your offer with a bank draft that is made payable to the listing brokerage.
As A Rule, The More Offers There Are, The Higher The Sale Price Will Be
If you were one of three offers and you were submitting a bid for the list price or a modest amount higher or lower, then you might proceed in the hopes that your offer without conditions and the seller’s preferred closing date is enough to secure the purchase.
But if the number of offers registered were to climb from 3 to 6 or more, then at that point we might recommend you withdraw your bid because the likelihood you’ll secure a sale diminishes with each additional bid. I say this because the objective of many listing realtors using the List Low Holdback Approach is to generate as many bids as possible because the more bids there are the more likely there will be an individual who must ‘win at all costs’.
Our caution is that we wouldn’t want your offer to serve the seller by helping drive the price up even higher. After all, whatever it sells for sets the precedent for the next listing – so you could effectively be shooting yourself in the foot.
(Check out my post on the Low List Holdback Strategy For Buyers.)
Remember, getting the house of your dreams isn’t just about closing the deal. You have to feel good about your purchase today – and tomorrow too! That means developing a house-hunting strategy that truly meets your objectives. With decades of experience navigating all the ups and downs of the Toronto real estate market, I am able to expertly advise you on the best path ahead. I’m here to help!
Here are some great supplementary reads!
• 57 Offers On A Scarborough Bungalow Signals Demand Still Strong For Toronto Real Estate
• Dear Urbaneer: About Holdbacks On Offers, Bully Offers & Bidding Wars For Buyers
• The Four Values Of Real Estate For Bidding Wars And Bully Offers In Any Market Climate
• Maslow’s Hierarchy Of Needs And Toronto Real Estate For Buyers
Thanks for reading! We hope you enjoyed this and found it helpful.
Sincerely,
– Steve & The Urbaneer Team
The Urbaneer Team
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 –
*Did you know we were recently listed as one of The Top 25 Toronto Real Estate Agents To Follow On Twitter! – The Top 50 Blogs On Toronto – and The Top 100 Real Estate Blogs In Canada? 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!