How Do You Win a Bidding War?
Up until mid-March 2020, Canadian real estate was on track for a busy spring market. As the pandemic hit and social distancing measures took effect, the resulting business closures and greater economic uncertainty lead to a dramatic (albeit temporary) downturn for home sales across the country and around the world. Interestingly, Canada’s decline in transactions was proportional to the decline in new listings hitting the market, which meant market balance didn’t change a whole lot in many regions. This means that seller’s markets were still seller’s markets; inventory was still low, and the competition was still fierce. Even during the pandemic, RE/MAX brokers reported multiple-offer scenarios in key markets such as Toronto, Ottawa and Vancouver. What prompts multiple offers, and how do you win a bidding war?
What is a seller’s market, anyway?
In a seller’s market, there are more buyers than there are homes available for sale. The combination of limited inventory and high demand puts upward pressure on prices. Homes typically sell quickly in a seller’s market, and multiple offers on a listing are more likely, giving the seller the upper hand.
What prompts multiple offers?
When market conditions favour home sellers, it means demand is usually up and inventory is down. With few listings on the market, the seller and listing agent will set an offer deadline by which interested buyers must submit their offers. The seller then reviews all offers, comparing the best ones. When some of the offers are close, the buying agents will go back to their clients to check if they want to up the ante, and if they do, a bidding war ensues.
How do you win a bidding war?
“Winning” is relative to the homebuyer’s goals. If the only objective is to get the home, then offering the highest possible purchase price and no offer conditions is your best bet. However, most homebuyers don’t have an unlimited budget and frankly, some of those conditions should not be avoided, such as the home inspection.
To that point, remember that just because someone outbids your offer doesn’t necessarily mean you should volley back. A professional, experienced real estate agent who knows the local market can help keep your eyes on the prize – a home that suits you and your family, as well as your budget.
Here are some strategies to help you make a smart bid and if all goes in your favour, a wise purchase.
Know your budget. As a homebuyer, a mortgage pre-approval should be step #1, regardless of market conditions. This informs you of how much you can spend on a home, and guarantees your mortgage interest rate for up to 120 days. This number is your hard limit. Do not exceed this amount. Furthermore, having a mortgage pre-approval means your offer, when you’re ready to make one, won’t be conditional on financing, since you already have the pre-approval in place.
Aside from knowing your budget, also consider what the home really worth. Your real estate agent will pull recent sales stats, giving you valuable insight on the price of comparable homes in the same neighbourhood and under the same market conditions. This can help you determine your offer amount, and whether it even makes sense to compete against other bidders.
Reduce your offer conditions. In a seller’s market, having fewer conditions on your offer can work in your favour. Conditions such as a flexible closing date could be enough to tip the scales in your favour. In a seller’s market and especially in a bidding war, a clean offer is more likely to win.
Know what you’re buying. Despite what we just said about reducing your offer conditions, we highly recommend making the offer conditional on a satisfactory home inspection. Keep in mind that in a seller’s market, even if you discover issues with the home, you may still not have much negotiating power. However, having this information will help you decide if the home is worth what you’re expected to pay.
Beyond the home itself, keep in mind that location is a huge factor in determining a home’s value. Premium neighbourhoods come at higher prices, thanks to proximity to the downtown core or public transit routes, access to good schools, parks and recreation, shopping, services, community or all of the above. Whatever is drawing people into the area, it is also bringing up that asking price.
How do you avoid a bidding war?
Short-term strategy: One trick to winning a bidding war is to avoid it altogether. Make an offer before the home hits the MLS system or gains buyer attention through an open house. Your agent will best advise you on how to proceed, so prepare to drop everything to tour a new listing and make your offer, before someone else does! (Note: Mortgage pre-approval in this scenario is key.)
Long-term planning: The spring and fall real estate markets see the most activity under normal conditions, with buyers out in droves and bidding wars bubbling at the surface. If you’re not in a hurry to buy, minimize your competition and possibly even price by shopping in the “off” season. Winter sees a drop in inventory, but also in demand, reducing your chance of being outbid.
Do your homework. You’ve determined how much you can afford to spend, right? And you know what the home is worth based on the comparables your real estate agent pulled for you. You also know what the home is worth to you, based on your lifestyle, budget and future employment prospects. Make a bid that’s reflective of all of these considerations. Before jumping on the bidding bandwagon, have confidence that you’re getting a good deal.
When asking how do you win a bidding war, remember that the spoils don’t always go to the highest bidder. Know when to walk away. Even in a seller’s market, the perfect home is out there, waiting for you to find it.
RELATED READING: How much will it cost to buy a house?
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