Whether you’re just keeping tabs or you’re an active participant in Toronto’s real estate market you’ve probably heard the terms ‘bidding war’ and ‘bully offer’. Here’s a brief summary that explains the motivations and circumstances which, in any market condition, create these situations.
A ‘bidding war’ is when more than one buyer submits an offer to purchase on the same property at the same time. Each offer is confidential, meaning only the sellers and their representatives are aware of the details of each offer, while all buyers remain ‘blind’ to what other purchasers are bidding. In these situations, buyers must effectively submit a bid containing the terms and price most attractive to the seller in order to successfully secure the property. A ‘bidding war’ can occur at any time on a property listed for sale, but most often occurs when a seller has listed their property some days in advance of the date they are prepared to review bids. This situation is called a ‘hold back on offers’.
Setting a ‘hold back on offers’ can serve as a measure of convenience, as a means to let the market set value, or as a strategy. A busy seller may be traveling on business and return to review any offers on the scheduled posted date out of convenience. Or a seller may elect to take a vacation and return to review offers on a specific date as a means to bypass the stress of living through the selling process. The executors of an estate, or the officers of a company assigned to liquidate a property asset, may list the property at or below market value and hold back offers to allow time for prospective buyers to complete their due diligence in advance of submitting a bid. In these situations the executors or officers are removing themselves from any personal bias or liability and allowing the free market to set value. But it can also be used as a strategy whereby sellers set a hold back on offers with the intention of inciting competition amongst buyers to blindly bid against each other and increase the sale price. In this situation, a seller intentionally lists their property at a price below recent comparative sales in order to garner the attention of more than one buyer with the hopes of driving the sale price up.
A ‘bully offer’, perhaps more appropriately called the ‘preemptive offer strike’, is where an offer is submitted by a buyer in advance of the ‘hold back on offer’ date the seller has posted. By disregarding the hold back instructions, the buyer attempts to ‘bully’ the seller into accepting their bid before other parties can submit.
Submitting a bully offer is best-suited for confident risk-takers and the financially secure. Usually a clean cash offer free of any conditions, with a sizable deposit, and a sum over the list price will convince a seller to forgo a pending bidding war. In order to remove the property from the market and be done with the process, the seller must be convinced that waiting for the hold back offer date may not realize a higher price.
For some buyers, the bully offer is a strategy that can secure the property and save them money. The clever buyer submits a bid which has a price near the top end of value based on recent comparable sales, but is lower than their maximum bid should they have to blindly compete in a bidding war on the hold back offer date, when price-inflating ‘emotional premiums’ are more likely to occur. Here they bypass their competition and can potentially secure the property for less than they’re truly willing to pay. In the event the seller refuses to be enticed, they can return on the offer date with the same or better bid. This strategy is rarely detrimental to the astute buyer.
Buyers submit bully offers for two reasons. One reason is that they love the house so much they are willing to offer the sellers a sum substantially above the asking price simply to secure it. By offering the list price + their ‘emotional premium’ the bully offer, if acceptable to the sellers, buys them the house and eliminates the risk of losing it to another buyer in a bidding war. Incidentally, through 2010, a bully offer was generally ten to fifteen percent above the list price. In softer markets the sum may be at, or slightly above, the list price.
The dynamics of real estate require both Sellers and Buyers be prudent, educated, rational and strategic, in particular in markets where there is an imbalance between demand and supply. Even in times when the media might tout doom and gloom in real estate, specific locations and properties may garner more interest than most. This makes it critical you, as a Buyer or Seller, engage the services of a realtor who has experienced both the rise and fall of the value and volume of real estate sales and prices, has the skill set to negotiate in a changing market, and understands the perspectives of each facet of real estate.
With a multi-disciplinary education in housing, over twenty years of real estate sales, marketing and development including a superb reputation as a Top Producer, I welcome guiding you through all your real estate needs. Do you have questions? Please know I am here to help!
Sales Representative, Bosley Real Estate Ltd., Brokerage 416-322-8000