If you’re in the market to buy a home right now, you already know it’s not easy. There aren’t a lot of homes listed for sale and the competition is fierce. We’ve written a lot of articles about how to win a bidding war and how much to offer, so today we’re going to focus on how to mentally prepare for a bidding war.
What’s your BATNA?
In negotiation-speak, BATNA is the Best Alternative To a Negotiated Agreement. What are your other options? What’s your Plan B if you don’t win? If you know your BATNA, you know when to walk away from a negotiation.
Things that might affect your BATNA when buying a home:
- Your budget and what else you can buy
- Your neighbourhood needs: If you need to be in a specific school catchment area because your kids already go to that school, or you want to be able to walk to work, you’ll have fewer alternatives.
- Your timing needs: If your landlord has given you notice and you have to be out of your current residence by a specific date, or you want to take advantage of a locked-in interest rate, you have fewer options.
- Your lifestyle needs: If you have a baby coming, a new job, a divorce, etc.
- The speed of the market. If prices are increasing quickly and you’re near the top of your budget, you may need to be more aggressive today so that you don’t get priced out of the market.
- The seasonality of the market. If you’re buying in January, you won’t have a lot of other homes to look at. If you’re buying in April, you can usually count on having a better selection of homes that might suit you just as much.
- Your flexibility with the type of home you’re looking for (condo, townhouse or house). The more flexible you are, the more alternatives you have.
Pro Tip: If you have unicorn needs and you found your unicorn, you don’t have a great BATNA. Always know your BATNA. What are your other options?
The Endowment Effect and Emotional Premiums
In a traditional auction, let’s say, on eBay, potential Buyers compete against each other for an item, raising their bids incrementally until the highest bidder is found.
Research has shown that buyers are affected by something called ‘the endowment effect’, the phenomenon where possession of an item increases the value associated with it. So if you’re the highest bidder in an auction – or in the case of a blind auction like a real estate bidding war, you think you’re the highest bidder – you want it EVEN MORE. As buyers fantasize about owning the item (or home), they place even higher bids.
The endowment effect can be even more pronounced when it comes to bidding on a house. Buyers aren’t just buying a physical structure, they’re buying a lifestyle. They picture celebrating holidays with their families in the living room, snuggling up by the fireplace on cold winter mornings and hosting friends for BBQs in the summer in the backyard. The lifestyle that fuels their bid may not even be realistic – I once bought a house because I was convinced it would lead me to be more active because it was near a ravine with great trails. In the 6 years I lived in that house, I hiked those trails less than 10 times. But my attachment to the life I thought I would lead in that house helped me justify how much I bid for it and I paid an emotional premium because of it (FYI, I never regretted it).
Pro Tip: It’s hard not to get emotionally attached to a house you’re bidding on, so hire the right REALTOR who can help guide you if your emotions take over.
Do You Want to Win at All Costs?
While this isn’t a strategy we recommend, some Buyers will bid more for a home than they think it’s worth because they want that damn house. They consider the premium – the amount they offer beyond what they wanted to offer and what they think it’s worth – a type of insurance that will get them the house they want.
Pro Tip: You need to have a lot of financial flexibility to win at all costs.
Buyers Want What Others Want
People are so used to bidding wars in Toronto that if there are no other offers or fewer than expected, they panic. Why doesn’t anybody else want this house? Are they seeing something I don’t see? Is there something wrong with me because I want this house and nobody else does? As humans, we’re all influenced by what’s popular, but when it comes to real estate, there can be a lot of reasons why a home might not get multiple offers.
It’s just as important not to be swayed by the popularity of a home and convince yourself that you want something, just because everybody else wants it.
Pro Tip: If nobody else is bidding on a home, this might be a golden opportunity you shouldn’t pass up. Smart real estate decisions are made when they’re right for you and your lifestyle, not because everybody else is doing it.
Be Ready to Relinquish Control of the Process
One of the worst parts about bidding wars is the lack of control Buyers feel on offer night. The Seller will dictate when and where they will review offers. They’ll dictate the process and whether or not you’ll have a chance to improve your offer. You’ll know how many other offers exist, but you won’t know the details of those offers and how yours compares. Here’s a blog we wrote about what the offer night bidding war process looks like from the Seller’s perspective.
Pro Tip: Get your agent to find out as much as they can in advance about how the bidding war will be run. Stick to your pre-determined strategy and do some deep breathing.
Make Sure You’re On the Same Page As Your Spouse or Partner
As REALTORS, we see a lot of marital conflict during the home buying process, but some of the ugliest and loudest fights we’ve witnessed are during bidding wars. Be honest with your partner about your needs and expectations and the emotional premium you’re willing to pay to win.
Be Ready For Things to Move Quickly (and yet Not Quickly Enough)
Some Sellers review offers quickly and you’ll know if you’re the successful winner within minutes of submitting your offer; others will drag the process out for hours. The wait will always be painful.
Make sure to lock down your strategy in advance and plan for all potential scenarios:
- What’s my top price for this house? What’s my top top price for this house?
- If I’m asked to improve my offer, can I?
- Run all the financial scenarios with your mortgage broker in advance – there won’t be time to do it in the middle of a bidding war.
- If I win, can I deliver the deposit cheque tonight?
Pro Tip: Avoid the temptation to pour yourself a cocktail until it’s over. You may have to react and make quick decisions and you’ll need all your faculties.
Know That You’ll Second-Guess Yourself Tomorrow
Everybody questions their decisions the day after a bidding war. The losers wish they’d made higher offers and the winners worry that they overpaid.
Pro Tip: Be ready for regret. It’s normal.