Written by Jim Adair
Real estate sales are still booming in urban areas nationwide, as buyers get into the market before mortgage interest rates go up. With rates still hovering at near historic lows, it’s a great time to buy. However, it is also creating bidding wars for homes in neighborhoods across the country, driving prices up and leaving would-be buyers angry and frustrated after they are unable to get the home they want.
Losing a house you had your heart on buying is emotionally draining and it can also be costly if you’ve spent money on a home inspection and gone to the trouble of getting a certified check for the deposit. A recent survey by pollster Harris/Decima, conducted for BMO Financial Group, found that 15 per cent of homebuyers have been in bidding wars, and of those who didn’t get the home, 14 per cent say it caused them to overspend on their next offer.
Some bidding wars happen because a particular house strikes the fancy of a number of buyers who love a specific neighborhood or feature of the home. But encouraging multiple offers on a home is also a marketing tactic used by some real estate agents, who under-price the home and state they will not accept any offers until a specified time. The goal is to get a number of offers simultaneously and take the best one.
In many cases, unsuspecting buyers get excited about buying a home that seems to be in their price range, when it’s likely to sell for much more than they can afford. Once buyers discover they have competition for the house, they may already have an emotional and financial investment in the house (if they’ve paid for a home inspection) and it prompts them to push up their bids. In one city, some would-be buyers reportedly sent the sellers photos of themselves and their children, along with flowers and candies, in an effort to boost their offer. This is all great news for the seller, right?
Maybe not. Some agents say that multiple offers don’t necessarily net a higher price than if the home had been put on the market at its fair market value in the first place. Often many of the bidders can’t afford the home and are only involved because the house was priced so low in the first place.
Others argue that the under-pricing strategy is sleazy and unethical, because the seller has no intention of accepting an offer at the listed price. But real estate agents defend the practice as a way to get the best price for their client, which is their contracted duty. Sellers have the right to list their property for whatever price they wish.
Some of the under-pricing policies are extreme, including listing homes for sale for $1 and waiting for offers. A couple of years ago there was also a controversy in one city when an agent complained that “phantom offers” were being invented by agents to make it seem like there was competition for a home when none existed. A local Real Estate Board task force investigated the claims and determined that the law had provisions in place to prosecute any agent who was found guilty of this activity.
So if you’re shopping for a home and have fallen in love with that impossibly cheap home in a great neighborhood, how do you know if you should place an offer?
First of all, remember the old adage that if it sounds too good to be true, it probably is. Educate yourself about value of homes in the community by looking at the sale price of comparable homes or finding out from your real estate agent what other homes sold for recently. If it’s clear that the house is being underpriced to create multiple offers, you have a choice to make. You can play the game or walk away.
There’s a lot to be said for refusing to participate in bidding wars. Normally when you are thinking about buying a home, there’s time to look at the place carefully, come back a few times to make sure it’s what you’re after, compare it to other homes that are on the market, and have a home inspection done on the property. In a bidding war, you may not have time to do any of this. If you are bidding against others, you likely will have to come in with a “clean” offer – meaning no conditions. If there isn’t time to get a home inspection done before the offer deadline, you may have to buy without one. Your dream home may have all kinds of hidden problems.
It’s also good to remember that bidding wars are not happening everywhere. They are generally confined to the most popular neighborhoods or condo buildings. There are lots of other great properties available for sale, and although listings were in short supply early in 2010, they are now increasing every month. Look around and you might find something you like even better than this one.
What if you are absolutely sure this is the house of your dreams and you HAVE to have it?
First, before you even start looking, get a preapproved mortgage. Shop around among banks, mortgage brokers and financial institutions to get the best deal, and you’ll know exactly how much you can afford to spend and when to say no. Your total housing costs including mortgage payments, property taxes and utility payments should be no more than one-third of your household income.
For the best shot at getting the house, make an offer over the asking price. The more offers that are coming in, the more you’ll have to pay. In a bidding war you must make your best offer immediately because you may not get a second chance. Try to meet the homeowner in person at some point and get to know them a little – it can’t hurt. Put as few conditions in the offer as possible. Use the closing date that the vendor is seeking. Come up with a hefty deposit, in the form of a certified check, to show the vendor you are serious.
In the end, if you don’t get the house, just relax and let it go. Don’t worry – you’ll find another one!
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