Bosley Realestate

A Winning Bidding War Strategy

October 17th, 2013 | Tales From The Real Estate Trenches

This week we went head to head in a bidding war against six other realtors in our quest to secure an original detached house in a highly coveted midtown location which had been well-maintained by its owners of almost fifty years.

We, along with our highly informed Buyers who had already lost several properties in competition, knew the under $900,000 list price was aggressively low to attract multiple offers. So the question was not "How high might this property sell for?", but "What price will ensure we get this?"

In a city where bidding wars are common, most Buyers going through the purchasing process will find themselves in competition for a property they really like that they lose. The first time they do this the gap between their offer and the winning bid is often substantial. The Buyers are both surprised and crushed.

They say "We submitted a bid that reflects the market value of properties similar to this, and yet someone else paid an amount much higher"

"Why are we getting crushed in bidding wars?"

 

 

In the bidding war scenario, the ultimate final sale price of a property is often precedent-setting. The equation equals the total sum of the following four 'values':

1) The rational prudent educated 'appraised' value the Buyers and their sales representative have established through research and experience,

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2) The emotional premium accorded the Buyers because the property really truly absolutely is 'the one' (think Prince Charming and Romeo constructed of bricks and mortar),

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3) Their 'motivational cost', which is the sum that reflects a Buyers urgency to move. For example, if you've sold your existing property and it closes in 30 days leaving you with no place to live, you're significantly more motivated and likely to offer a larger amount than the buyer who has yet to sell their existing home. The same goes if you're a corporate relocation and your family is living in a hotel. Or perhaps you are sleeping on a couch at your in-laws. What 'premium' would you pay to change that?

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4) The 'Buyer fatigue' value that Buyers add in their frustration to end a long extended search. If you've consistently come in second place in a dozen bidding wars over a year(s) long search, at some point you're going to reach a level of fatigue that will compel you to pony up more cash. Especially as you realize - and have to rationalize - that every sale you've lost has set the market value for the next property like it.

In other words, the precedent setting price that comes with winning the bidding war may surprise the market the next day, but within a few months that very sale will be used to introduce a new buyer exploring Toronto real estate illustrating what 'market values' are for properties like it by condition, size and location. And that new buyer will begin their home hunting journey using that sum as their 'base line', from which they will eventually add their emotional, motivational and fatigue value.

So what does one do when you want to win the deal? You strategize.

 

Our Buyers number crunched and, after much extrapolation, decided they were prepared to go to $999,000 to "get our housing search done and over with."

They asked our opinion and here was our response.

"Without question 999k is a strong number and extremely competitive. It will most definitely put you in the top tier of bids. However, if you really want this property let's be strategic.

First, most every Buyer offering operates in $5000 and $10,000 increments. Which means your $999k offer leaves you potentially vulnerable to losing the house by a painful $1000, should another Buyer submit a $1,000,000 bid in their effort to slam dunk the deal. It could happen.

Second, if you're truly committed to buying this house, then we'd like you to pretend you're the Sellers of this house and not the Buyer.  Would you want to see a bid of 999k, when items with the number '99' in them are typically on sale and psychologically 'cheaper' if only by a penny, or the sum of $1,000,000? The truth of the matter is that $1 million dollars is a zillion times more impressive than 999k. Especially if you, like these elderly sellers, had bought your house for $18,500 nearly 50 years ago. These Sellers will be seeing more zeros than they likely ever imagined, and they will feel like they won the lottery. Is it worth increasing your bid by $1000 to achieve this? Strategically the answer is yes.

Third, we don't encourage you to submit an offer with a round number, as it's what most bidders choose - in those 5k and 10k increments. In a situation as competitive as this, always tip your bid by a modest sum. In this case we'd recommend adding an additional $100 to whatever offering price you decide to proceed with.

It is not lost on us that we're encouraging you to consider offering a sum which requires you to cross a rather daunting psychological and financial threshold. We respect that One Million Dollars is a scary amount, and likely reflects your comfort in suggesting your 999k price. This is a bridge you may not want to cross, even if the sum of $1,000,100 is strategically advantageous.

What Happened?

Our Buyers submitted a bid of $1,000,100 against six other offers and secured the deal.

By $100.

Yes, the second offer was for $1,000,000.

When the listing realtor called me in and proceeded to have my Buyers' offer accepted he said "Your offer was not only superior, but your Buyers went to the trouble of including a bank draft with their offer, while the second ranking bid had not. We all know that providing a bank draft with an offer makes it instantly firm and binding, such that it didn't make sense for us to go another round. Your Buyers earned the Sellers' and my trust. Congratulations!"

At urbaneer.com, we believe it pays to choose a realtor with experience and intuition. With a comprehensive understanding of Toronto’s 42 village neighbourhoods, and over twenty-three years of real estate experience, we pride ourselves on being one of the city’s more personable real estate boutique services. Ranking in the Top Ten of Bosley Real Estate’s 220+ sales associates, we are your friendly, effective realtors! Consider letting us help build your real estate portfolio, one property at a time.

Want to learn more about bidding wars? Check out our Homewatch Newsletter called "Bully Offers and Bidding Wars".

~ steven and the urbaneer team

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