You’ve fallen in love with a house and are about to make an offer…only to find out there are 3 other offers. What do you do? How do you decide how much to bid? How do you win the bidding war without overpaying for the house?
For Starters: Reduce the Seller’s Risk
If the Seller has multiple other offers to choose from, one of the most important things you can do to encourage them to take your offer is to reduce their risk in picking your offer. The Seller doesn’t want to worry that you’ll change your mind or that something will go wrong. In bidding wars, you can reduce the Sellers’ risk by:
- Giving the Seller their desired closing date. If they are moving into their new home in 60 days, you won’t make any friends by forcing them to close in 2 weeks and temporarily move in with their parents. Same goes for making them wait 120 days and forcing them to carry additional costs.
- Having a big juicy deposit ready-and-waiting. In Ontario, you have 24 hours to produce the deposit (usually 5% of the purchase price), but Sellers like to physically see the cheque with your offer. It reduces their risk that you’ll change your mind before submitting the cheque tomorrow and it gives them comfort that you have the financial goods to close on the home. (You can read more about deposits here)
- Waiving any conditions. If you’re competing with multiple offers, no Seller wants to risk that you won’t get financing or that you’ll want to renegotiate the price after a home inspection. Do your due diligence BEFORE the offer – meaning get a firm approval from your lender for that particular property, schedule the home inspection or have the status certificate reviewed by your lawyer.
Next up: Show Me the Money
In a bidding war, there are five things that factor into the price you should offer:
- The comparable sales in the neighbourhood that point to the value
- The current conditions of the real estate market
- The other Buyer’s motivations and experience
- The Seller’s expectations
- Your budget/comfort zone for that property
These five factors, taken together, determine the magical price that will win the bidding war.
Let’s unpack each of these:
1. Comparable Sales
Your agent is skilled at valuing properties using past sales information. They’ll look for recent sales of similar homes in the area and adjust those prices based on market activity. While it’s tempting to cherry-pick the comparable sales that support the price you want to pay, the magic is actually in guessing how the Seller and the other bidders will look at the comparables. No two agents will look at past sales the same way – it’s why our agents often get a second opinion of value from their colleagues on the team.
2. Current Market Conditions
If the market is increasing in price, the next sale price will be higher than the last sale. Think of an increasing market like steps on a staircase – the next one is always higher than the previous one.
If the market is going up and it’s the beginning of a busy market season (for example, the spring or fall market), new benchmarks are being set every day and it’s hard to predict how big that next step will be. It’s critical that your agent is on top of what is happening this week. See Benchmark Prices in Real Estate
In a declining market, we don’t often see multiple offers, but we’d expect the next sale to be lower than the last one (like you’re descending that staircase).
3. Expected Behaviour & Motivations of the Other Bidders
If only we could read the minds of the Buyers you’re competing with, or better yet, see the contents of their offers. But alas, we can’t and we won’t, so we’re left to predicting their behaviour. Experienced agents know to look at:
- What happened in the last two weeks in the neighbourhood. Did similar homes get multiple offers? How much over-asking did they sell for? It’s very possible that some of the bidders you’re up against lost out on those bidding wars. What lesson will those sales have taught them? Will they be more or less aggressive as a result?
- What’s happening with similar properties in the area that are taking offers at the same time. How many offers do they have? That’s an indicator of competition in the neighbourhood.
- How other Buyer agents might look at the comparable sales
- The natural bidding war numbers – for example, many Toronto Buyers will bid $100,000 over asking – so bidding $110,000 over asking might just be the winning strategy.
4. The Seller’s Expectations
We regularly see Sellers receive multiple offers and decline them all because none of the prices are what they expect. Part of a top agent’s strategy in winning a bidding war is finding out as much as we can about the Seller’s expectations and trying to predict which comparable sales they are looking at. And yes, Sellers like to cherry-pick sales that work in their favour too.
Getting inside the head of the Seller is easier when we know the listing agent. When we know their usual pricing tactics, experience in the neighbourhood and the type of results they normally get, it helps us predict the type of advice they are likely giving to their Sellers. (yet another reason to work with an experienced agent)
5. Your Budget
Arguably, this is the most important factor in deciding how much to bid in a bidding war. How much can you afford? How comfortable is your lender with the offer you want to make? How much is this home worth to you? How much financial wiggle room do you have if the house doesn’t appraise at how much you paid?
Related: All About Bank Appraisals
The Number That Will Win It
Don’t worry, I’m not suggesting that you throw in ALL your money to win the bidding war…but you will need to look at the price the comparable sales support, factor in what you think the other bidders are likely to do, consider the Sellers’ expectations, the current market conditions and your personal budget. Throw in a little strategy and you just might be a new homeowner.
Looking for an agent to help you win a bidding war? Get in touch.