House Bidding Wars

by Mike Holman

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I read yet another article in the newspaper today about a bidding war in Toronto and how this is supposedly a big problem for people who are trying to buy a new house, especially if it’s their first one.

The article covered a house sale sale where they were asking $1.3 million and got $1.9 million which is pretty amazing when you consider they got almost 50% more than they were asking for. Now I don’t know if this house is worth $1.9 million or not but from the description it sure sounds like a pretty good house in a pretty good area.

Later in the article there were some comments from real estate agents who were saying that a lot of their clients are tired of getting into bidding wars and having houses sell for more than asking. They also mentioned how some clients just refuse to rent because they have been taught (brainwashed?) about the value of house ownership by their boomer parents. I think those house buyers should consider the value of renting according to Financial Jungle. Ok, it’s a different city but the logic still applies.

Know your real estate market

When I was looking for my current house, I made an effort to look at as many houses as possible in order to get a sense of the market value for the type of house we wanted. Normally what I would do is look at a house, and then see what it would sell for. After a while I noticed that there were some houses that sold for over asking (bidding war), some houses that sold for around the asking price (quick sales) and some houses that sold for less than the original asking price, in some cases much less (greedy, delusional sellers).

Asking price is meaningless

What did I learn from this? Mainly that the asking price doesn’t mean anything. It’s up the buyer to know roughly what the house is worth by getting familiar with the market. If you look at a house and think it will be a steal for $450k, then guess what…you won’t be alone, since there will probably be other people who will be thinking the same thing. Don’t complain if the house ends up going for $500k or $550k. If that’s what it’s worth then that’s what it will sell for. The other thing for buyers to consider, especially for their first house is that maybe their dream of owning a detached house on a nice street on their limited budget is a fantasy and they should start looking at different areas, semi-detached houses, townhouses and condos and just work with that they have.

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{ 11 comments… read them below or add one }

1 moneygardener

I agree.

We paid more than asking for our house in 2005, because we thought it was worth more – and it was probably the best possible move we could have made looking back now.

2 FourPillars

MG – it’s for hard people to grasp the size of a house price – better they just look at the monthly payments and see how that fits their budget.

I have a couple of friends who did 10 year house searches because they thought every house was “too expensive”. If you decide you want a house and can swing the finances then you have to just bite the bullet and pay the market price.

Mike

3 telly

Get Rich Slowly had a guest post on the subject of renting vs. owning that I really enjoyed.
http://www.getrichslowly.org/blog/2007/07/16/renting-vs-buying-the-realities-of-home-buying/
Note the many defensive comments in favour of buying. I’m a home owner (+ 2 rental properties) but I still wonder if it’s the best bet.

As for the bidding wars, obviously homes could be listed for more but from what I understand, realtors are telling buyers they have one chance to “bid” on a house – this tends to increase offer amounts because the buyer is afraid to lose out. Realtors are doing rather well with this tactic.
Interesting post.

4 FourPillars

Thanks for the link Telly – that’s a pretty good post.

It’s hard to argue that anyone would be better off renting over the last 10-15 years since the real estate returns have been above average but if you have normal returns (ie inflation + 2%) then it’s not very clear that home ownership is the better investment compared to renting and saving the difference.

Mike

5 guinness416

Did you read the article about bidding wars in the Star at the weekend (don’t know where you are geographically)? Thought the sidebar about Australia’s system was really interesting. At home in Ireland there was something of a furore recently when estate agents were trying to raise their fees …. from 1% to 1.5%!

6 FourPillars

Hi Guinness, yes I did read that article. I’m in Toronto.

Real estate agents are definitely overpaid. 10 years ago they charged 6% and now they charge 5% but the houses are worth twice as much as 10 years ago.

I don’t mind paying them but I’d rather pay a fixed amount like a real estate lawyer.

Mike

7 FinancialJungle.com

Thanks for the link, FP.

This may not be applicable to you, but One Percent Realty charges just slightly over 1%, but they’re primary located out west. I believe they’re setting the stage for more “discount” real estate brokers to come. This is quite exciting.

One peril I like to point out about comparison shopping is that the entire market may be overvalued. The fair market price isn’t necessary the intrinsic value.

I actually started a post on renting. Hope you don’t mind if I overlap a bit.

8 FourPillars

FJ – I believe there are some discount real estate brokers here although there is some debate about whether they can advertise on MLS or not.

You’re right about the market being overvalued (esp. in VAN!) but I was thinking more along the lines of someone who has decided they definitely are going to buy a house (regardless of the market). They need to look at as many houses as possible – and take notes too.

And feel free to overlap as much as you want.

Mike

9 homeinboca

Since I own homes in South FL and Toronto Canada, I follow both markets and enjoy your blog.

This article in The Star reminds me of the time I was dragged out by my uncle to wait in line to buy condos in Boynton Beach.

http://www.thestar.com/Business/article/240381

When people start camping out overnight to buy a condo, and I’m sure most of them were investors, surely this means the end of the condo boom is near!

10 FourPillars

Thanks for reading the blog Boca!

I read the article – very interesting. It said that it was real estate agent & brokers who were lining up…are they buying the units for clients? Shouldn’t the clients be lining up?

Mike

11 Gilbert

This sounds so stupid to pay for a house 1,9 million instead of 1,3 million…….. better to buy a land and to build one new big house. The house will be built during six month or even during one year….whatever…!!!
Rent is more or less 2000 dollar monthly so 24000-25000 dollars in the year! But not 600 000!!!!!! If one idiot can pay 600 000 dollar over price why he can’t build the house and to pay less?????

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