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rebeccahpedersen · 6 years ago

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Are Bidding Wars Coming To An End?

TorontoRealtyBlog

Have you been reading Toronto Realty Blog for a week? A month? A year?

Choose any of the above, and surely you’ll have heard me talk about misleading headlines in the media, and how much that bothers me.

More often than not, it’s a headline like, “Real Estate Market Nosedives In May,” which leads the reader to assume that prices are down, when in fact it’s sales that have declined, and all the while prices are up.

But what conclusion would you draw from this headline?

“Frustrated By Bidding Wars? Home Buyers May See Some Changes Ahead”

An optimistic reader might assume that “bidding wars” are coming to an end, some way, somehow.

But it’s not the bidding war itself that the article is referencing in terms of “change,” but rather the process of bidding, and that’s the issue I take with this headline.

I understand that to get people to buy a paper, or click on an article, the headline has to entice. I’d be lying if I didn’t admit I’ve been lured in by those sponsored ads on the sidebar of websites that look like articles, with headlines like, “These NFL stars’ wives are turning heads.”

But when it comes to real estate, which is my occupation and passion, it bothers me more than anything else. I’m sure the same would be true of whatever industry you happen to be in, and how headlines could be misconstrued.

Over the past couple of weeks, I have seen multiple headlines about “bidding wars” all of which don’t accurately reflect what’s actually happening in real estate circles. The above headline is a great example.

But even the articles themselves, or the sub-headings often don’t explain the issues at hand.

This article, “Ontario May Let Realtors Tell Homebuyers The Price Of Other Bids,” offers the sub-title, “right now, buyers often blindly offer more than what they had wanted to spend in hopes of beating their competitor.”

Well no kidding.

I wanted the house for free, but alas, what I wanted was not in line with fair market value.

Sarcasm aside, the true issue I have with that sub-title is that it seems to alleviate the buyer of all responsibility. It surmises that it’s somehow not the buyer’s fault, or that the buyer wasn’t in control of their actions, which isn’t the case.

It can’t be the case.

You can’t walk into Shopper’s Drug Mart to buy Tylenol, walk out with two magazines, Q-Tips, some Hallmark cards, and eight bottles of Pert Plus that were on sale, and then turn around and blame Shoppers from forcing you to spend so much.

So on the one hand, you have a headline suggesting that somehow bidding wars might be coming to an end, and on the other hand, you have a headline suggesting that it’s the fault of the system in place for buyers over-spending.

I don’t like either suggestion.

Here’s a headline that is more accurate:

“Ontario To Consider Allowing Disclosure Of Prices In Real Estate Bidding Wars”

Only now, I take issue with the term “bidding war,” because once again, it’s misleading.

What is a bidding war, after all?

Frustrated buyers have a completely different definition than most, and depending on whether you’re a buyer, seller, agent, or onlooker, you would define the term differently.

Let’s not confuse “a multiple offers situation” with a “bidding war.”

Because the moment we start referring to three offers on a $799,900, 3-bed, 2-bath semi-detached house on the east side as a “bidding war,” then we’re overreacting, and fear-mongering.

For as long as I have been writing this blog, and as long as I have been working in the real estate industry, there have been multiple offers on properties. Houses, condos, low-end, high-end, it doesn’t matter; every segment of the market is prone to having more buyers than sellers.

This is a fundamental principle in almost everything we discuss here on TRB, and it often goes without saying.

The media headlines seem to suggest that if there are five offers on a house, which is under-priced to begin with, that this is a “bidding war.”

I could not possibly disagree more.

A bidding war, in my opinion, occurs when two or more parties submit multiple bids, for the same property, at the behest of the seller.

For example, that $799,900 listing gets five offers, and the people who bid $1,005,000, $995,000, and $975,000 are all invited to “improve their offers.” And they do.

But then after that improvement, the seller’s agent says, “You’re all still soooo close, why don’t you improve again?” And they do.

And then after that, one of the buyers decides to improve even more, by his own accord, and the listing agent has a legal obligation to inform the other two bidders, so he does. And they may or may not improve again, but if they do, then the first bidder can improve yet again, and then the other bidders might want to as well, and then we’re into “bidding war” territory.

But if those three bidders simply improved their offers after the first submission, and then highest bid was chosen, that’s called “Tuesday” in my books. It’s nothing special. It’s ordinary, routine, expected, and the norm in the Toronto real estate market.

I can’t help but feel as though people like to use the term “bidding war” as a blanket statement to refer to essentially any offer process, and that’s such an incredible overreaction. If you encounter traffic on the highway tonight, you can’t go around saying, “All highways are trafficked, all the time.”

I have seen buyers who live in fear of multiple offers, and in many markets, they don’t end up buying. That’s tough in a market that’s appreciated every year for twenty-one straight years…

Now as for what’s really happening behind the scenes in this world of reports about “bidding war changes,” the last headline gave you an idea, but here’s the best article, and most accurate headline thus far:

“Ontario Looks To Level The Playing Field Between Home Buyers And Sellers”

This was published on Monday by Shane Dingman from the Globe & Mail, who is probably one of the most informed and accurate real estate reporters out there today. I’m not surprised to see his name accompanying this headline.

Level the playing field. That’s a good way of putting it.

Another term used with respect to potential changes is “modernization.”

Essentially, Realtors are governed by the Real Estate & Business Broker’s Act, which was written in 2002, and as OREA’s Tim Hudak has mentioned on many occasions, it’s wee bit out of date. It’s like reading George Orwell’s 1984 today, and expecting to learn something.

I’ve spoken to Tim Hudak about this on many occasions, and I recently gave him examples of my conversations with folks at RECO with respect to advertising, and how they fail to distinguish between different forms, ie. they have many of the same rules for online and print, which is like having the same instruction manual for a car and an airplane.

REBBA simply must be modernized, and I think Mr. Hudak and others are doing a good job of consulting agents to see what types of reform are needed.

When it comes to the rules associated with multiple offers, this is the area of the Act where, in my opinion, changes would be greatest felt by consumers.

The question at hand is simple: why can’t a listing agent divulge the terms and conditions of competing offers to bidders in a multiple offer process?

People refer to the bidding process as “blind,” and it is, to some extent.

On that $799,900 listing, the buyers with the three bids clustered at the top – $1,005,000, $995,000, and $975,000 clearly know something about what they should be offering, otherwise they wouldn’t be so close together. It’s called “Doing your homework,” and the person who offers $850,000 deserves to have their time wasted, as they clearly hired an agent who didn’t know what he was doing, or had no clue themselves.

The public, however, would love the process to allow for the listing agent to say, “The highest bid is $1,005,000, let me know if you want to improve your bid.”

That would be great for the bidder at $995,000, because if he was going to improve to $1,020,000, now he knows he would be over-bidding, and instead need only go to $1,006,000.

Everybody wins, right?

Well first of all, the seller doesn’t. But that’s why all of this “disclosure” would need the seller’s consent, and why I personally think no seller would consent, and why these changes mean nothing. But let’s keep the conversation going.

So what happens when the $995,000 bidder moves to $1,006,000? Does the $1,005,000 bidder go home?

No. He’s allowed to improve.

So he goes to $1,007,000.

And then the bidder at $1,006,000 goes to $1,008,000.

And so on.

And thus I ask, how is this any different in the end? How is this LESS of a “bidding war” than what the media currently refers to when discussing multiple offers?

In theory, allowing the listing agent to disclose the prices of offers (assuming this is after ALL offers are submitted, otherwise how the hell could any of this work?), would avoid the person at $995,000 from jumping to $1,050,000. But I can tell you that this rarely happens. In fact, the “over-bid” is almost always at the start of the process.

For example, that house listed at $799,900 gets five bids as per our previous example, only the top three are $1,050,000, $995,000, and $975,000. That is how the “over-bid” happens in 99% of cases, in my opinion. Those big bids are made right from the start, and thus the proposed changes to the Act wouldn’t prevent this.

Now from here, the natural conversation goes to something like, “Well why don’t we have open auctions, like they do in Australia?”

Ah, right!

We’ve all seen the video on YouTube, we’ve all read about it in the Toronto Star, and we’ve all seen online comments about how great their “system” is, and how it would allow people to bid in a transparent process that’s fair to all.

Except those bids are done in person, on the front lawn, during the middle of the day. I can’t wait until somebody suggests that this isn’t “fair.”

And many of those listings are sold before the auction begins.

And many of those listings are “withdrawn” before, during, or after the auction.

And many of those sales are not binding as they don’t meet the seller’s reserve; which leads to the property being “passed in” as the terminology goes, meaning “passed in to further negotiations.” In some auctions, 30-50% of “sales” are actually passed in.

And so on, and so on, and so on.

And what about online bids? What about phone-in bids? Who is responsible for live-streaming? And who sets the bid increments? And are we assuming all of these offers have the same deposit, closing date, and are unconditional?

The grass is always greener on the other side, especially when it’s in Australia. HERE is a 2018 blog post I wrote about Australian auctions.

So what’s my conclusion?

That we’re all screwed?

Not exactly.

I’m completely in favour of a change to allow the listing agent to divulge the terms of competing offers to buyer agents (and thus buyers), but only with the seller’s consent.

And I’ll let you in on a little secret folks: it’s already happening.

I don’t mean that John the listing agent is telling Bob the buyer agent what Cathy the buyer agent’s offer is, because John doesn’t like Cathy or because John likes Bob more than Cathy. I mean that it’s very common for a listing agent to say to a buyer agent, “Your offer is the second-highest, but the highest is conditional. Can you match the highest offer? If so, we’ll take your offer, so see if you can come up $10,000.”

I see no issue with that, and the only folks that would are those viewing real estate sales in a vacuum, and who believe that high prices are the fault of agents and their actions.

But then again, rules are rules, and if the rules say we can’t do that (which they don’t, exactly), then we can’t. And shouldn’t.

But we do.

Figure that one out…

So let’s update REBBA to reflect how agents are already doing business, but allow the seller to have the final say.

Does that “level the playing field,” or not?

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