How To Win A House Bidding War

by Mike Holman

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There are some hot real estate markets in Canada, namely Toronto and Vancouver.  One of the results of a hot market is a tendency for sellers to underprice their houses in order to create a bidding war.  This benefits the seller because it speeds up the selling process and they might get an above-market sale price if the bidders get carried away.

Some buyers feel that sellers are behaving inappropriately or even unethically by underpricing their house.  My opinion is that buyers have to deal with the real estate environment as it is and need to figure out how compete effectively for a house, rather than worry about ethics or the fact that bidding wars are “not the way it’s supposed to be”.

Asking price is meaningless

The first thing to realize is that the asking price for a deliberately underpriced house is meaningless.  Just ignore it, except as a very general guide.

You are “negotiating” against the other bidders, not the seller

Traditional house purchasing negotiation is between one buyer and one seller – the asking price sets the intent of the seller and negotiations start from there.

In a bidding war, the seller may control the process, but they take themselves out of the negotiation process.  The auction is between the potential buyers, who don’t directly negotiate against each other, but are competing amongst themselves to buy the house.

A bidding war (intentional or not) effectly removes the relevance of the asking price and allows the bidders to determine the selling price of the house.  By pricing the house too low, the sellers might as well set an asking price of zero and let the potential buyers figure out what the house is worth.

On a related note, a friend of mine successfully sold his house recently using the 5-day method which requires the seller to set the “asking” price to 50% of the estimated market value and then let the bidders determine the fair market value.

To compete effectly against your competitors in a house bidding war, the best things you can do are:

  1. Be able to walk away.
  2. Know your housing market.
  3. Ignore the other bidders

Related: Real estate appreciation

Be able to walk away from the house

As I mentioned here in Things to think about when buying a house, don’t fall in love with a house before you own it.  There are other houses for sale and if the price goes too high – don’t be the idiot who overpays.  Walk away if you have to.  Your agent won’t be pleased, since as I wrote about in why you can’t trust your real estate agent when buying a house, at the point when you are bidding for a house, your agent is your enemy – not your friend.

Learn how much houses are worth

Knowing the market means looking at enough houses in your target area and their eventual sale prices (ignore the asking prices) to be able to determine how much a house might sell for.

Related: How to value real estate

Consider your appraisal value as the “asking” price for that house and go from there.   Ignore the seller’s asking price.  Ideally you should determine beforehand what your upper limit is and stick to it.  I’m not sure how realistic that is.  If you are in a hot bidding war, I would figure out your upper limit and make that your first bid.  If necessary, just do small increases after that, but don’t exceed your upper limit by much.

The two biggest mistakes you can make with a bidding war are:

  1. Paying more than you can afford.   Solving this take discipline.
  2. Winning the auction by a large margin.   This means you overpaid.

Ignore the other bidders

It can be intimidating to go up against a lot of bidders for a house, but don’t assume that all of them are rational bidders.  There were 14 bidders when I sold my first house and I can tell you out of that group – only three were really in the running.  There was another group of about four that had reasonable bids, but not good enough.  The remaining seven bidders were all under market.  The house was very comparable to a few recent sales and any good agent should have known that those bids were a waste of time.  Ironically, one of the lowest bids was from a real estate agent.

Some bidders are irrational on the other extreme – they will pay whatever it takes to get a house.  Whatever you do, don’t be this person and don’t compete against them.  There aren’t a lot of fools with a lot of money (for obvious reasons), so rest assured that if you are bidding against one of these crazies - just move on to the next house if things go too far past your limit.

I’ve heard friends claim “I’ll never get into a bidding war“.  This doesn’t make sense to me.  It doesn’t matter if a $500,000 house has an asking price of $450,000 or $550,000 – it’s still a $500,000 house and the asking price is wrong.  In either case, just ignore the posted price and proceed with a proper bid.

You can remove the auction element of the buying process by knowing how much the house is worth and just bidding that amount.  If the bid isn’t accepted, move on.  If you lose out on a lot of houses,  clearly your appraisal method needs some revising.

My wife and I were involved in a bidding war when we purchased our current house.  Because of the research I had done, it was clear that the market value of the house was about 8% above the asking price.  We bid that amount and bought the house.  Now, to be clear, we didn’t ‘win’ the auction because of my research, but knowing the true house value allowed us to make a rational offer and not feel like we were overpaying.

Interestingly enough, the seller turned down a higher offer because that bidder wanted to knock down the house.  We were planning to fix it up (it was a wreck) and since the seller had grown up in the house, he took our offer instead.

To sum things up…

The winner of a house auction is not necessarily the person who buys the house.

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{ 9 comments… read them below or add one }

1 Barb

On solid economic principles, if you “win”, rather buy, something at an auction where price paid determines the winner, you have paid too much.

Obviously, you have paid more than anyone else would pay for the same item.

Not good….

Yet, when a house is foreclosed and sold at auction, the property tax assessors won’t use that price as an indicator of what the value is….

2 Potato

The only way to win is not to play.

One issue with going in with a rational bid is that many bidders play the “count the noses and add $10k per” method of bidding wars, so if you lose and the very presence of your bid helps goose some emotional bidder to drive the price through the stratosphere, then that’s going to make it tougher for your future comparables.

3 Mike Holman

@Barb – I don’t agree with you. Just because you paid more than anyone else for something, doesn’t mean you overpaid.

The fact is that most transactions involving unique items are auctions, but they only involve one bidder.

4 Mike Holman

@Potato – Not playing doesn’t necessarily produce a winning outcome.

You are right about the extra bids jacking up the price. I saw it myself.

5 jesse

It is important to ignore the other buyers, foremost because you are not guaranteed of honesty from the seller about the strength of their offers, since they are secret. If you cannot verify the offers, assume they are lying.

And another important point: appraisals are based on prevailing market conditions, which may or may not be rational. If you rely on these, just be aware that valuations have, in the past, changed significantly, and not always to the upside.

In my experience the biggest killer for those not wanting to enter a bidding war is exhaustion. Having a deadline to buy, for whatever reason, will cause emotional response to overbid, as will the monotony of bidding on, and not getting the winning bid on, several properties beforehand. That’s a powerful emotion that shellshocks buyers into submission. I don’t know how to solve it but something to be aware of.

6 Shawanda @ You Have More Than You Think

I found the greatest amount of wisdom in the final quote of this blog post. If you overpay for a home, then you’ve lost.

7 Joe Q.

It’s also important to mention that, in Ontario, both the asking price for a home, and the fact that it is listed at all, have little or no legal meaning. A seller can advertise a home for sale and then pull it from the market for whatever reason, even if above-asking offers have been received. It can usually later be re-listed at the same price without penalty. Even more reason why the asking price for a home is meaningless.

8 Joe Q.

Good post. It’s important to note that, in Ontario at least, the listing price for a home (or even the fact that it is listed at all) has very little legal meaning, at least from the buyer’s point of view. A seller can list a home for sale at a given asking price and then proceed to turn down all offers, even unconditional ones, above that asking price. The seller can then terminate the listing and re-list later, often at the same asking price as before (there is a legal gray area there, though).

This is very different from the retail world, where listing an item for sale, and then refusing to sell it at the advertised price, is illegal. House listings are not considered “advertisements”.

9 Jerry

When we sold out house we actually sold it to someone who was offering the SECOND highest amount, because there was just something about the high bidder that lead us to feel skittish. She wasn’t nearly as reliable, and we wanted the sale to go through, so we took the offer for 5k less. It was not a bad decision, we still had the insurance that we were making a profit on the sale, and it went through without a hitch.
Jerry

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