Time to Go To War…a Bidding War That Is!
If you are looking to buy a home in the Greater Toronto Area, chances are, you may find yourself in the midst of a bidding war. In any war, the key to winning is a good strategy. (Big guns may help too!) Here are a few pitfalls to be wary of and strategies that can help you win a bidding war, or help you from regrets that will make you feel you ‘lost the war’, just to ‘win the battle’!
First, realize you are at the mercy of the seller. In a bidding war, the seller has the control. The more flexible and accommodating you can be, the better your chances. While buyers are always encouraged to stand by their ‘morals’ when negotiating, if you want to win a bidding war, you must put your pride aside and accept that you are not in a position of power.
Typically, the person with the biggest guns, or in this case, highest price wins the war. So, forget about the asking price. In fact, many times a home will be purposely priced below market to drive interest and create a bidding war. Even if the home is priced at, or slightly above, market value, when more than one person is interested, the asking price is usually not even a starting point! The general rule that many realtors go by is; for every extra offer on a home, add around $5000 to the asking price…to start. In the downtown core, it is considerably more. So, the trick is to figure out what the home’s fair market value is, then, what the home is worth to YOU. You should also consider you budget, your needs, how important the area is to you, etc. These points will ultimately decide what the price of the home should be for you. Of course, an experienced Realtor will help you with this part of the decision making process.
A good way to look at the cost of the home is to look at the monthly costs and not the ultimate price. It costs roughly $5 a month to mortgage $1000 at 3.5% (25 year amortization) So, if you are wondering if you can afford to pay an extra $10,000 to win the bidding war, just add $50 to your monthly budget and see if you are still comfortable. It would be a shame to lose a bidding war for a mere $1000 when the extra $5 would be insignificant to your budget, just because you were focused on, and emotionally attached to the larger number.
The next thing to consider, when gearing up for battle, is you more than likely get one shot at the target. These are not the normal back and forth negotiations. You must go in with your strongest offer. That doesn’t mean just the highest price you are willing to pay, but with no conditions, or at the very least as few conditions as the situation will allow. (Some special homes, such as century homes, heritage homes, or homes with special zoning may demand a clause to investigate matters that cannot realistically be checked beforehand) Sellers generally want firm offers. If the seller accepts a conditional offer, they assume the risk that something may kill the deal, and it is unlikely they will be able to go back to one of the other offers and get the same money. It is only logical that a seller will give a firm offer more consideration than a conditional offer, even if that conditional offer is for slightly more money. Another point on the money side: have the deposit ready with the offer. This shows the seller you are serious and may increase your chances. The larger the deposit, the better, but 5% is an accepted minimum.
That being said, the best way to submit a firm offer comfortably is to be prepared and do your due diligence before hand. Get a guarantee from your lender that they will back the firm offer; so there is no chance of financing falling through. If you want a home inspection to put your mind at ease, get one before you put an offer in. Of course you will have to pay for the inspection – whether you get the home or not, however, the money spent on a home inspection that proves the home is not well maintained, or has expensive problems, will save you a lot of money and hassles and is money is well spent. The trick is to give yourself the best chance of winning, while still protecting yourself your interests.
While buying a home is an emotional process, and it’s very easy to get excited and emotionally attached to a home, it is very important that you step back and detach yourself from the outcome. Putting a firm offer over asking price is no guarantee that you will win. Many buyers have stretched themselves too thin just to ‘win the battle’, but they have ‘lost the war’. Paying over asking should not mean “over paying”. Unless you plan on staying in a home for a very long time (although there is no guarantee that your life circumstances will not change suddenly), and you make a conscious decision to pay well over market value (not asking – market value), you may regret it when you try to sell and the market is not as hot and you lose money on your investment.
Bidding wars are no fun for anyone, except the seller. As your Realtor, I will help you plan your strategy beforehand, make sure you know your limits and help you stay detached, to help give you the best chance of winning the war, and being happy with your Victory in the future.
So call me at 416-450-4503 and let's start the process.
Fire In The Hole!