If you find yourself in a competing offer situation – commonly referred to as a bidding war – and you’re willing to participate, understanding how they work and having a game plan will help you avoid a nightmare scenario.
First thing you need to know is this isn’t like an auction – you’re not going to have the advantage of knowing where the leading bid stands so you can respond accordingly. The only information that must be shared amongst buyers in a competing offer scenario is the number of offers that have been submitted to the seller, whether any of the buyers are represented by the same brokerage that is listing the property and whether the listing brokerage has a commission agreement with the seller that may give its buyers an advantage. You won’t know the substance of the offers you’re up against; only the seller and their real estate representative see those details. If you choose to participate, you basically need to make your best offer and hope for the best.
The seller can accept your offer, reject it, or make a counter-offer. Some will send back a select number of offers to be “improved”, looking for a higher offer, but this is not always the case. That means the first offer you put in may be the only one you get to make.
It’s important to point out that sellers are under no legal obligation to choose the highest priced offer. Other factors will play a role depending on their situation, such as the size of the deposit, closing date and other conditions attached to an offer. For example, they may accept a lower value offer with an earlier closing date because they already bought their new home and can’t afford to carry both mortgages at once.
In the heat of a bidding war, you might be tempted to waive or strike out some conditions (for example, making an offer conditional on financing, home inspection, insurance, etc.) in order to make your offer more appealing to the seller. Think very carefully before doing this because conditions protect you as the buyer. If you choose to waive or withdraw them, you’re taking a significant gamble. An accepted unconditional offer is a firm and binding legal contract. That means you’ll be on the hook if you end up having trouble securing a mortgage, or you find the home needs costly repairs once you take possession.
It’s important to have a game plan to guide how you approach a competing offer situation. It starts with crunching the numbers at the outset of your search to determine how much you can afford. Set a price limit and stick to it. That way, if you find yourself in one of these situations, you’ll know what you can comfortably afford.
Don’t let emotion or competitive spirit drive your offer price above that mark. When you’re setting your budget, remember to factor in the extra costs that come with buying a home (for example, legal fees, land transfer tax, utility hook-ups, etc.).
Finally, work with your real estate professional to get a sense of the price ranges of the neighbourhood. How much have homes similar to what you’re looking for sold for in the past? What are similar properties listed for now? Researching the value of homes in the neighbourhood may take some of the surprise out of the process by giving you an idea of what your target home may sell for.
5 tips for keeping a cool head in a hot market
Knowing the right questions to ask and steps to take before starting the house hunt is one way to help keep emotions in check. And, many common home buying missteps can be avoided by following these five tips.
1. Read and understand everything before you sign
When you hire a real estate representative to help you buy or sell a home, you will be asked to sign an agreement that defines your relationship with the representative’s brokerage. It is a legal contract that contains rights and responsibilities for both parties. Similarly, if you purchase or sell a home, you will be asked to sign a legal contract to complete the transaction. These are just two examples of real estate agreements that are legally binding, meaning you typically can’t back out of the agreement once you’ve signed on the dotted line. That’s why it is important that you understand everything in the agreement before you sign. If you don’t understand something, ask your real estate representative to explain it to you. If you are still not satisfied, you can seek advice from a real estate lawyer. And, if you’re not comfortable with the contents of the agreement, have a conversation about it with your representative before signing.
2. Be sure you and your representative are on the same page
When working with a real estate representative, it is important that both of you have a mutual understanding of what services he or she will be providing to help you buy or sell a home. Have a thorough conversation about the details and then make sure they are contained in the agreement you sign. It’s also a good idea to do some advance research on your own about the buying and selling process. Take the time to learn about the forms and contracts you will be expected to sign and what the conditions are like for buyers and sellers in your area. A good starting point for your research is www.reco.on.ca. An educated consumer is an empowered consumer. By doing your research and making sure you and your representative are on the same page, chances are you will avoid surprises down the road.
3. Leave your emotions at the door
Buying or selling a home can be an emotional rollercoaster. The best way to prepare yourself is to make a plan in advance and stick with it through the process so that you will make informed decisions you won’t later regret. If you are a buyer, decide where you want to live and which features in a home are important to you. Determine your maximum budget and then stay firm, even if a bidding war arises. If you are a seller, decide in advance what price you need to get for your home and how you want offers to be presented to you. By making a plan and sticking with it, you will have an easier time walking away from a deal if it’s outside your comfort zone.
4. Know your tolerance for risk
In a hot market, you may be tempted to submit an offer to buy a property without any conditions attached so that you get a leg up on the competition. However, before deciding to skip the home inspection, status certificate review or the financing clause, you need to consider whether you’re comfortable taking on that level of risk. Can you afford to fix a major issue with the home that an inspection may have detected? Or potentially lose your deposit if your lender denies your financing? If not, then waiving conditions may not be the way to go to win a bidding war for a home. If you do end up waiving conditions, be sure you have a contingency plan in place to manage any financial risks should they arise.
5. Be flexible and have a back-up plan in place
Real estate transactions can happen at lightning speed, which means even the best-laid plans might have to be adjusted. The best way to prepare for something unexpected is to do some advance research on how the process works. Before getting into the market, learn about the pros and cons of selling first versus buying first. Assess your tolerance for risk and determine how you can lessen those risks – possibly by attaching conditions to your offer. You should also build a contingency plan that will help you manage a situation where you find yourself owning two homes, or no home, for some period of time. By preparing ahead of time, you will be well-positioned to respond to quick developments in your real estate transaction.
There’s no shortage of information available about buying and selling real estate, though much of it focuses on market trends and how to get the best price. But you also need information about your rights and responsibilities as a buyer or seller. How do you ensure you are protected?
Fortunately, the Real Estate Council of Ontario (RECO) is here to help. We work to protect people just like you and enforce the rules that real estate professionals in Ontario must follow. That means we can offer buyers and sellers impartial advice
on how to protect themselves and ask the right questions before making one of
the most important financial commitments of your life.
Three pillars of protection.
All brokers and salespersons in Ontario are registered with, and regulated by, RECO. That’s why working with a real estate professional provides buyers and sellers with three pillars of protection: Knowledge, Professional Standards and Insurance.
Real estate professionals must complete courses before they can enter the real estate sector. And once they are in the profession, they complete additional courses every two years to keep their knowledge up-to-date and their skills sharp.
Brokers and salespersons are required to uphold professional standards that emphasize treating anyone involved in a transaction with fairness, honesty and integrity, and following rules and regulations that are there to protect consumers. In the rare instance that something goes wrong and you want to complain about your representative or the brokerage, RECO will investigate the complaint and take steps to hold the real estate professional accountable for their actions.
Deposit insurance provides you with peace of mind knowing that your hard-earned deposit will be held in trust and insured against loss, insolvency or misappropriation by a brokerage.