July 23, 2018

How to avoid a bidding war while house hunting

A 'sold' sign in front of a house. A 'sold' sign in front of a house.

Purchasing a home in Canada’s biggest cities has become far more competitive over the past decade.

Prices have gone up substantially and stricter mortgage rules are now in place, leaving prospective buyers with a major challenge to find a house.

Complicating matters are bidding wars that can leave buyers with frequent disappointment when they repeatedly come up short for houses that should be in their price range.

Despite a recent cooling in the market, it’s still easy to find yourself in a situation where bidding against other buyers can spiral out of control. That said, there are some things you can do to try and avoid bidding wars.

Understand what the list price means

Most buyers have a list of requirements when looking for their desired home, but each search typically begins with a budget.

If a buyer has a budget of $700,000, they probably wouldn’t view a house listed for $799,000. Instead, they would likely target homes in the high $600,000 to low $700,000 range. This is when bidding wars can arise.

Often a seller will list his or her home for significantly lower than it’s worth in hopes of creating a bidding war. Listing with a lower price increases interest in the house and can better the odds that multiple people fall in love with it.

Low-ball listing

For example, a seller might believe they can get around $800,000 for their home, but list it at $699,000. This brings in people with a budget of between $700,000 and $800,000, essentially doubling the number of prospective buyers.

When the bidding is completed, the seller may get more than the $800,000 the house was theoretically worth, leaving those with budgets closer to the listing price disappointed.

"Sometimes a property is underpriced [intentionally] and will sell for more than asking, and that sadly has become a marketing tool, allowing the seller and agent to say that they got over asking," Richard Silver, an agent with Sotheby's International Realty in Toronto told the Globe & Mail Opens a new website in a new window.

A good way to avoid falling into this trap is by researching recent sales in the neighborhood. If all the houses in that area are selling for more than $800,000, then there’s a good chance the seller is intentionally listing at $699,000 to start a bidding war.

Rely on your agent

Your real estate agent’s job is to track down homes in your price range and in your desired location, but they also should be providing you with other information about a house as well.

One of the things they can do is connect with the selling agent to potentially get a better picture of what the sellers’ motivation is for putting their house on the market.

The selling agent may indicate how quickly his clients want to sell or if it will take a much larger offer than the listing price to secure the home. You might think a house is in your price range, but the seller may be in no rush to sell and looking to cash in on a competitive market.

If you have a better idea of what number it’s really going to take to get the house, you can make an informed decision on whether it’s worth bidding the property. Acquiring this information could save you from getting your hopes up needlessly.

Try a proactive offer

This is a bold strategy that gets the seller thinking.

Some sellers set a date, usually a week after their property hits the market, to accept offers. A proactive offer is made before then, and is usually above the asking price. This means your offer will likely be one of the first a seller sees. They’ll have time to think about accepting it, or risk getting less on the scheduled offer date.

You won’t necessarily enjoy an amazing deal in this situation, but there’s a possibility the seller could be happy with the number they see and jump on it without taking bids. This way you don’t have to deal with the frustration of going back and forth during a bidding process.

There may not be a lot of downside to this approach. If your offer is rejected, you could always put in another when bidding opens, or the seller may even come back to you if they don’t like what they see from all the bids.

Consider the home’s potential

You might think a house that isn’t move-in ready and needs substantial repairs wouldn’t be highly coveted, but that’s not always the case.

If you think there won’t be many bids on a house because it’s in rough shape and you may escape with a steal, keep a few things in mind. First off, pay attention to the area. Are there other houses in the neighborhood that have been rebuilt lately? It’s possible a builder has eyes on the home to tear it down and rebuild from scratch, only to flip it for a quick profit. If that’s the case, you can expect that builder to be prepared to place a high bid.

It’s not only builders you have to watch out for in these situations, as investors may also view a fixer upper as a potential goldmine. If the house has a separate entrance for the basement and doesn’t need too much work, someone could purchase the home to use as a rental property. Investors like this can also bid high, as they will likely have renters helping to pay off their mortgage.

Sometimes a home is much more attractive than its outside appearance would indicate, and if you see potential in it or the property, chances are others will as well.

There’s ultimately no perfect solution to dodging a bidding war and house hunting is by no means easy, but learning to anticipate what homes will likely sell for will hopefully help you avoid disappointment along the way.

This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.

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