If you’re friends with any real estate agents, then you’ve probably heard about what’s been happening: record-breaking bidding wars and record-breaking prices. Case in point in the last few weeks:
- 35 offers on a house in Little Italy (sold $260,000 over asking)
- 32 offers on a house in the Junction (sold $220,000 over asking)
- 24 offers on a fixer-upper in East York (price not public yet).
So what’s going on? Here are 5 reasons to explain the bidding war frenzy:
1. Sometimes, houses are EXTREMELY under-priced. Whether you blame the agent, the Seller or both, the reality is that all three of the houses I referenced above were listed drastically below what the comparable sales indicated they’d be worth. Extremely low asking prices brought in tons of Buyers who couldn’t actually afford the house at what it was likely worth, let alone what competitive Torontonians would do to the price in a bidding war.
TRUTH: In most bidding wars, there are really only a few contenders (“the Players”). A bunch of people who can’t afford what the house is really worth make offers just in case (“the Dreamers”). Their agents may not have properly educated them as to what the house was really worth, or they’re just hoping it might work out. The increased number of offers gets the Players all worked up and competitive, and the price gets driven up. This is what Sellers are counting on when they list low. The Dreamers never had a chance. Of course there are always a bunch of people who have solid bids that reflect what the comparables indicate the price SHOULD be, and they just get shut out and frustrated by the whole process.
2. We have a supply problem with not nearly enough houses on the market for all the Buyers. Blame the land transfer tax, blame the weather, blame the fact that Sellers are stuck in a vicious hamster wheel: “I have a house to sell, but I need to buy a house first, but there aren’t any houses on the market, so I can’t put my house on the market either”.
TRUTH: As I wrote about a few weeks ago, this is VERY NORMAL for February. More properties will come on the market in the upcoming months, so the best way to avoid the craziness is to sit by the sidelines and wait it out.
3. Everyone wants to live in the same place and wants the same kind of house (or more accurately, 2 kinds of houses: fully renovated or needs-to-be-gutted). There are some amazing houses in amazing neighbourhoods that have been on the market for a few weeks and represent WAY better value than some of these houses that have been caught up in all the frenzy.
TRUTH: These are the Junction, Little Portugal and Bloordale neighbourhoods of a few years back, (read: opportunity to score a bargain in a rapidly developing neighbourhood). Don’t know where those ‘hoods and houses are? Contact us for the scoop.
4. Buyers are getting bad advice. If you’re losing 10+ bidding wars in a row, you’re either a Dreamer (see above) or you aren’t getting good guidance about what these houses are worth. If you’re winning the bidding war but paying significantly more than what can be justified by recent neighbourhood sales, you may have a serious problem getting financing. Most lenders will want an appraisal to confirm that you didn’t pay too much for the house, and the appraiser will be looking at those same recent sales. Paid too much? You won’t get the mortgage for the full amount, plain and simple.
TRUTH: Do your due diligence. Always.
5. The winning Buyer’s motivation may be something so personal and unique that others can’t compete with it. Maybe mom and dad live across the street and will be babysitting the kids for free. Maybe the Buyer needs to find a house right away or face moving back in with mom and dad. Maybe the Buyer’s intentions for the house (e.g. renovations, time horizon) fully justify paying far more than what anyone else wants to pay so it makes sense for them.
TRUTH: You can’t compete with someone else’s motivations, so know your own and stick to a plan that will help you achieve your goals.
