There’s no doubt about it. We’re in a seller's market… which means the buyers are NOT having a very fun time.
Demand has remained high, and the biggest story is the lack of listing inventory. When demand is greater than supply, prices are on the way up.
Scared of a bidding war? Make it your VERY BEST offer right away
We prefer to use the less intimidating term “multiple offer” instead of “bidding war”. It’s never an auction-type of environment.
The only difference between traditional negotiations and multiple offer situations is that. You MAY only get ONE shot, and ONE round.
So… it’s rather simple. Just put your best foot forward on step ONE.
Regardless of how many times the listing agent and the seller decide to open up to other buyers to improve their offer. Your job is to put your absolute best offer out there, and see if you get it or not.
Want a test to see if the offer is REALLY your best? Ask yourself, “If I found out that this home sold for $500 more tomorrow, would I have paid it? Would I be upset?” And keep doing that until you reach the absolute max number. Where you would walk away if someone offered even a small amount more.
That way, there will be no regrets.
Four things EVERY seller wants
If you really think about it, and look at it from the sellers’ perspective, they ALL want the same four things in any offer:
Least (or no) conditions: A condition on financing and home inspection is standard in a more balanced market, but as the number of competing offers increases, it’s much more likely that at least one buyer will remove all of their conditions.
Deposit cheque in hand: We recommend to many of our buyers to bring a bank draft or certified cheque with them, or to get one from the bank.
How much deposit is required? Generally 3-5% of the value of the home, although in some cases it can be more. It’s not unusual in the City of Toronto to see even higher deposits, sometimes as high as 10%.
Highest price: This seems pretty obvious, right?
The sellers’ ideal closing: If you’re not prepared to give the seller THEIR date to close (if they have an important date in mind), you’re going to struggle to get your offer accepted.
These four things are written in order of importance. There are times when the seller might look at two competing offers – one with a higher price AND conditions, and the other with a slightly lower price with NO conditions – and many sellers will choose the slightly lower offer because it means they’re more confident that the sale will firm up without problems. Other sellers might decide it’s worth the risk to get the extra money.
Your odds also increase when you and your agent are physically in person at the time of making the offer when possible.
Comparable sales mean nothing
One of the ways we establish value in real estate is to look at recent sales and then make value adjustments for things like flooring, finished basements, fireplaces and premium lots.
It’s called the “direct comparison” approach to value. And it’s almost useless in a strong sellers’ market.
Because the reality is… every new sale breaks the previous record. It doesn’t matter that the last townhouse, which was nearly identical, sold for $600,000. This one could go for $620,000 or more.
The next time will be worse
The decision most buyers will make in a sellers’ market where prices are rising with nearly every sale is:
“How much do I need to overpay NOW, so that I can avoid competing next time?”
It’s not a very attractive proposition, but it’s true. This is exactly what happens.
Was it better for the buyer to pay $752,000 instead of $801,000? Definitely.
You may have to buckle up and pay a higher price than you want… because next time it could be (and probably WILL be) worse.
Choosing the right offer amount will depend on your own market experience, your timeline, the number of other offers, and how many other homes you’re interested in… just to name a few.
Your safety cushion is a larger deposit and a longer closing
Banks have two ways they establish value, because they will only lend in situations where they feel the price paid was fair value. One is to use a computerized algorithm, and the other is to send an appraiser to the home.
Often in a sellers’ market, there’s no justification in the neighbourhood sales history for the price paid. Every new sale breaks the previous record.
And if the price paid was significantly more than asking… the bank WILL send the appraiser. It’s pretty much guaranteed.
Since the bank will only fund the lower amount between what was paid, and what the appraiser says it’s worth, the buyer is left to come up with the difference between the two values IN CASH to close the deal.
If the appraisal comes in low, a buyer who has 5% down is not in a very good position to bring more cash to the table to close the transaction. But a buyer with 40% downpayment can take $10,000 out of that amount to buffer the difference between the price paid and the appraised value, and still have plenty of downpayment left to satisfy the bank’s requirements.
Now keep in mind that a low appraisal DOESN’T mean the buyer overpaid. It means the appraisal can’t justify the price paid based on historical sales.
The other thing that can help is to get a longer closing, perhaps 90 days. By the time another month or two comes, there’s a good chance there WILL be other higher sales that can be used to justify the price the buyer paid. Second appraisals closer to the closing date are very common in a sellers’ market, and they often come in much higher than the first appraisal.
Be sure to get a GOOD mortgage specialist in this market. It helps a LOT.
Don’t like competition? That’s okay.
Remember that you’re in control, and you don’t HAVE to do anything that you’re not 100% sure about. Make good choices, listen to your agent, and don’t get caught up in the pure emotion of the game.
Stay grounded in your values and what’s important to you, and you’ll find a great home for the right price.
Even if that price is higher than the last sale…