Myth #2 - There is no harm in trying

Here is some background information by using an example ... buyers like a home that has a delayed bidding war date (that is you have to wait till a set date before submitting an Offer).  The asking price is $589,000 and the buyer's budget is $630,000. What should we do?

First of all, I need to do a detailed CMA (comparative market analysis) to determine the value of the home.  In this case, my CMA indicates the home is worth $620,000. On the bidding war night, there are 3 competing offers (not including ours).  From my experience, each offer increases the final SOLD price of the home.  In this case, I know that each additional offer is worth $10,000***. So if there are 4 offers, the final selling price will be approximately $630,000 ($589,000 plus 4 x 10,000).   My clients don't want to pay $630,000, but want to try and submit an Offer at $600,000.
What happens? 
The home sells for $631,000 and the clients are disappointed, but are ready to try again.  Unfortunately, its not that simple ... if my clients did not participate, there would have been only 3 offers and the home would have sold for $620,000.  So what?  My clients helped the Seller get more money, but worse, my clients increased the benchmark for all similar homes in the future.  Going forward, all similar homes in the future will expect at least $630,000 (if not more, especially in a market that is increasing in price) and in this example, my clients are priced out of the area since their budget was only $630,000.
This was a really simple example and I know there are a lot of assumptions made, but I hope this explains what happens when you compete in a multiple offer situation. You are just helping the Seller and hurting yourself in the long-term.
So what should a buyer do?  Never compete in a bidding war? NO
Here is my advice ... a buyer should only compete if they have a good probability of winning the multiple offer. Let me explain with the above example with a change in the buyer's budget to $650,000.
The home is asking $589,000 and the CMA indicates the value is $620,000 and this is within the buyer's budget.  So far everything checks!  However, I remind my clients that the final SOLD price is not based on the CMA, but also on how many competing offers appear at the bidding war. So the buyer needs to plan /prepare to compete (and I have a checklist of items that needs to be done - another blog), but the Buyer needs to be willing to "back-out" if there are too many competing offers that will increase the price above their comfort level.
In this case, if the Buyer only wanted to pay $600,000, they should not have competed.  If there are 4 total competing offers and the Buyer was prepared to pay $630,000 (based on the $10,000 for competing offer ***), then the buyer should compete and "try."   However, if there were 6 competing offers, then the estimated final selling price would be $650,000 and if the buyer was not prepared to pay this amount, they should back-out and not compete (to keep the final selling price lower).
*** Depending on the type of home and the area, it is not always $10,000 for each competing offer.



Albert Yu
Office: 416-494-9858
Location1st.ca 

Comments

  1. Maybe you can do a TED talk on bidding strategies for 1) buyers; 2) sellers. Could be neat. Like some kind of applied game theory scenario. I'd watch it.

    ReplyDelete
  2. Thanks Jon. I appreciate the vote of confidence ... I am considering adding videos to the blog posts, so I will add these as some future topics to consider.

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  3. Great post Albert, this brings back memory to us buying in 2018 now. Great to see that your passion continues and now expanding more blogs and online videos! I'll be sure to come back to see your new content.

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  4. I remember this well from our own house searching in 2016! If we didn't participate in the bidding war that spontaneously took place we would not be in our current home, but you are right it also depends on the situation and your chances of winning the bid or just adding dollars to the sellers pockets and increasing market prices.

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