10 Tips On How To Win A Bidding War In Toronto
Home Buyer Resources|
If you are even casually interested in buying a home in Toronto, you are well aware that most homes are selling in ‘bidding wars’ and for well above the asking price.
Just what exactly is a bidding war anyway? Here’s how it typically works:
- Someone lists his house for sale at a price that is obviously well below its fair market value.
- The listing information advises that the seller will consider offers in several days. Usually, the offer date will be about one week after listing.
- On the ‘offer date’, all interested buyers submit their offers to the listing agent by a pre-determined deadline.
- The seller reviews all of the offers and then either accepts the best one or, more commonly, offers each buyer an ‘opportunity to improve’.
- Once each buyer has improved his offer (or not), the seller will then accept the best offer or, potentially, offer the buyers yet another chance to improve.
- In principle, this process can continue as long as the seller pleases, though it rarely goes beyond one round of improvements.
- In many cases, the seller is willing to consider offers in advance of the ‘offer date’. These are called ‘pre-emptive’ (or ‘bully’) offers. If this happens, the offer presentation proceeds as above, and other competing offers can be still be submitted. However, the time frame is accelerated, and the stress level is increased for all involved.
So, if you are aiming to buy a house, how do you give yourself the best chance to win a bidding war? Here are 10 tips to help keep you sane:
- Be realistic – Get educated as to what you can get for what you can afford, and be prepared to do what it takes to win. No buyer in his right mind enjoys competing in a bidding war, however, if you aren’t prepared to do so, you might as well wait on the sidelines until the market cools down. Also, don’t count on winning the first bidding war you participate in – you may have to try several times before you get that dream home. Do your best not to get too emotionally attached to the properties you are bidding on (this is a tough one!)
- Get fully pre-approved – It’s not enough to go online and use a mortgage calculator to find out how much you can afford. You need to get properly pre-approved through an experienced mortgage specialist. This way you can make certain there won’t be any unexpected hitches in the mortgage approval process after you buy the house. Also, you should consider including your pre-approval documents with your offer to reassure the seller that you are ‘good’ financially.
- Be prepared to make an offer without a financing condition – Most sellers will avoid accepting conditional offers when there are multiple bids on the table. After all, if the condition is not satisfied a week later, and the deal falls apart, the seller may ultimately be forced to accept a much lower price. Many buyers believe that, if they are pre-approved, they don’t need a financing condition, but this isn’t true. The bank is not just approving your ability to pay, they also need to confirm that the property is worth what you are paying. If the appraised value turns out to be lower than the selling price, you will either have to come up with more cash to make up the difference, or be able to finance the property with a lower down payment. Have a heart-to-heart talk with your mortgage lender about the risks involved in not including a financing condition. You may also wish to explore emergency back-up options to obtain additional cash (e.g., from the bank of Mom & Dad) should the worst happen. If, in the end, you decide that it’s simply too risky, you will probably not be able to compete effectively in a bidding war.
- Be prepared to make an offer without an inspection condition – Just as sellers are unwilling to accept an offer with a financing condition, they are also unwilling to accept an offer with an inspection condition. Fortunately there are more options here to reduce the risk:
- Many sellers will provide an inspection report for you to review before making an offer;
- You can have your own inspection done prior to making an offer. This will cost about $500, a relatively small price to pay for ensuring there are no serious issues with the house;
- If you want to save the cost of an inspection, you can have a contractor friend check out the house before making an offer;
- You can ask the seller for information about the roof, furnace, wiring, plumbing, etc. to see how recently they have made improvements in the mechanical systems;
- You can include a seller’s warranty in your offer that all mechanical systems will be working properly on closing. The seller is more likely to accept a clause like this than an inspection condition; or
- You can include a very short inspection condition, where you have an inspector lined up to do the inspection the next morning. This will allow the seller to quickly invite the other buyers back to the table if you don’t release the condition. This would still be an undesirable option, however, as other buyers would wonder what is wrong with the property.
- View the property as soon as possible after it comes on the market – If a bully offer is submitted by another buyer, you will not be in a position to make a competing offer if you haven’t yet seen the property, Some listings say that there will be ‘no pre-emptive offers’ but, even then, the seller has the right to change his mind and look at a bully offer anyway. If you like the look of the house online, go and see it as soon as you can.
- Include a large deposit with your offer – Ideally, you should have a bank draft ready to hand in as soon as your offer is accepted. The deposit should be at least 5% of the price you are offering, and you should consider an even larger deposit if you can. A big deposit gives the seller some assurance that the deal will close, and a bank draft ensures that the buyer won’t get cold feet and decide not to bring in the deposit the next day. You could even go one step further. If you see a house as soon as it comes on the market and decide you want to make an offer on the offer date, you could get a bank draft immediately. This way, if there is a bully offer, you can make a competing offer and will have a bank draft ready to hand in if you win. A bit extreme, perhaps, but sometimes this is what it takes.
- Consider making a bully offer – If you do this very soon after the property comes on the market, and if your bid is aggressive (well above asking, no conditions, big deposit), you may be able to catch other buyers flat-footed. You might not avoid competing offers altogether, but hopefully there will be fewer than on the offer date. Worst case, you can always re-submit your offer on the offer date.
- Get an accurate evaluation of the fair market value of the property. These days, asking prices are all over the map and bear no resemblance whatsoever to the value of the property. You should hire an experienced realtor to determine what the property is actually worth so that your bid will be in line with what the property will eventually appraise for.
- Give the seller what he wants. Find out the seller’s ‘perfect’ closing date, and give that to him if you can. Also, limit your inclusions to what is on the listing – don’t ask for stuff that the seller wants to take with him.
- Write a personal letter to the seller. While price is most often the deciding factor, if your offer is very close to another offer, a personal note (including a photo) that describes who you are and why you want to be the next owner of the house can sometimes make all the difference. If the seller has been there for many years, it could be important to him to ‘pass the baton’ to someone who will be a good steward.
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