The market continues to be hot and there has been no shortage of discussion in the media on bidding wars. So I thought I would answer some of the common questions regarding bidding wars for you.
What Is A Bidding War?
A bidding war is a seller’s dream and a buyer’s nightmare. A bidding war takes place when a property receives multiple offers from multiple buyers. The seller and his/her real estate agent will review all of the offers and decide whether to accept an offer, reject an offer(s) or modify an offer(s).
The process usually takes place over the span of a couple hours. Only one offer will be accepted so the remaining buyers who submitted an offer are back to the house hunt.
Can A Bidding War Be Created?
Sometimes, but not always. There are two main components that most real estate agents use to try and spark a bidding war.
First, the home is usually underpriced. For example, if the property’s market value is really $525,000, it may be listed for $499,900 or even $449,000. This tactic is used to help attract buyers from several different price brackets.
Second, a specific offer presentation date is set and it is usually one week from the date the property is initially put on the market. This ensures that as many interested buyers can get in to see the house within that first week, and the seller hopes will results in several offers being submitted on offer presentation day.
Can It Backfire?
You could get seven offers, one offer, or no offers. There are no guarantees on what the response will be.
If you get no offers and you have under-priced your home in an attempt to create a bidding war you are then in the awkward position of either needing to raise your asking price to better reflect what the market value of your home truly is or leave it at the lower price and be prepared to get low ball offers. If you get no offers within the first week, your home then gets a bit of a stigma. Other agents and buyers will wonder why your home didn’t sell and what is wrong with it.
Real estate agents often encounter buyers, especially first time home buyers, who are often very reluctant to submit an offer on a property that is set up to spark a bidding war (under-priced and holding off on offers). Buyers don’t want to get their hopes up and feel pressured to surpass their budget. So often times they won’t even submit an offer if they think the house they like could pull multiple offers.
The other thing to remember is even though you may get multiple offers, there is no guarantee that any of these offers will be offering a price far above what you listed your home at. You may get three offers and all three buyers are offering $500,000 which is still $25,000 under the market value of your home (if we use the example from above).
What Are The Dangers?
In bidding wars, sellers ideally want a clean offer with no conditions. Meaning buyers will be encouraged by the seller and seller’s agent to remove their financing and home inspection condition.
When I have clients who want to purchase a home that I suspect will likely generate multiple offers, I suggest that we do a home inspection prior to the offer deadline. This way the buyer knows what condition the house is in prior to even submitting an offer. You do the home inspection, decide you still want the home despite the fact that the furnace is ancient, and then are able to leave the home inspection condition out of your offer. There is no need for the home inspection condition because you have already done it.
Deciding not to include a financing condition in your offer isn't as straight forward. Making this decision requires a very open conversation with your mortgage professional about whether they support you in the decision to not include a financing condition in your offer. Often times if you have a good size down payment and are purchasing below the maximum amount you were approved for your mortgage professional will give you the green light to remove your financing condition. If your mortgage professional is uncomfortable with you not having a financing condition in your offer, you need to have one.
When you are in a bidding war and submit an offer with a financing and home inspection condition in it, you can expect that the seller will likely favour an offer without the conditions in it over yours. However, if you are able to accommodate the seller's preferred closing date or increase your offer price slightly it might be enough to tempt the seller to accept your offer, even with the conditions.