Is This A Better ‘Bidding’ System?

Business

10 minute read

April 5, 2021

And how was your long weekend?

How did you possibly get through Friday without new content on TRB?

A reader emailed admin@torontorealtyblog.com and said, “Whaa no blog today?”

True, I never post blogs on holidays.  And this time around, who would be reading?

I make the assumption that most TRB readers are online between 7am – 10am, drinking coffee, procrastinating at work, and settling into their days.  I know that’s what I do.  My morning is routine and ritualistic.  I drink my extra-large Tim Horton’s while catching up on headlines from CNN, CBC, and Yahoo Sports.  I check my Hotmail, which is where emails from eBay or other merchants are sent, and I slowly respond to the “low-hanging fruit” of business-related emails.

Of course, I also make the assumption that on Holidays, people are with their families, enjoying time outdoors, and not checking their phones at all.

Then I think about how my holidays go, and I realize: many people are more likely to check their phones and/or read TRB and other social media and news sites on a holiday than on a workday!  Tell me I’m a terrible father, but man-oh-man, can full days with the kids be exhausting!  Every holiday weekend, I gain a new appreciation for my wife and how great she is with our two kids, always finding new and exciting activities for them, and doing the simple things that I forget, like making sure to give them food and water.  Seriously, true story.  My little guy is fussing and it takes me a half-hour for the lightbulb to ding, “Maybe he needs some water or a snack?”

In any event, I did spend a couple of hours in the office on both Good Friday and Easter Sunday, and had only one appointment on Saturday.  It was wishful thinking for me to believe that maybe the March TRREB stats would be released over the weekend, so I could blog about it on Monday, but in the end, it was a reader who sent me the topic for today’s blog.

I’m going to quote her verbatim:

 

Personal take: there’s always going to be a percentage of the buyer population who will whinge about fairness regardless of the process because…emotions.

 

Maybe you thought I’d give you the topic first, but it’s more fun this way.  Plus, you probably already knew from the title and the teaser on the home-page today…

Last week, we talked about the impending market-crash that’s never happened, and probably won’t, and the idea of “fairness” when it comes to under-listing properties for sale in Toronto before setting a bid-date for all buyers to attend.

I can’t think of a more perfect follow-up than this article from New Zealand where houses are sold at auction.

Here’s the entire article:

 


 

Auckland Investment Home Buyer Says Auctions Sending House Prices Sky High
New Zealand Herald
April 2, 2021

Jose De La Macorra’s shoulders hang heavy a day after buying an Auckland investment property.

“I feel like I’ve been robbed,” he says.

He paid $899,000 for a three-bedroom Glendowie unit in Auckland’s east – an investment he had hoped would secure his 21-year-old daughter’s future.

The problem was he paid $50,000 more than he could afford, “losing himself” in the pressure-cooker auction environment, he said.

Real estate agency Barfoot and Thompson said its staff ran auctions to high professional standards and they served as transparent markets benefiting buyers and sellers.

But Macorra said he felt “pushed and squeezed” after standing up to leave when he reached his maximum price, only for an agent to hurry across and encourage him to stay.

That left him in the sights of the auctioneer.

“I was weak, and the man with the hammer kept looking and making jokes, pushing the price up – $1000 more, $1000 more.”

De La Macorra had been hunting for an investment property because the market had boomed so much, he felt his children would never be able to afford to buy without help.

Having paid off his family home and with Auckland’s median price hitting $1.1 million in February, after leaping $205,000 in 12 months, he was now determined to leave behind two houses, one for each of his children.

“Even if you get a good job and you get paid $1000 a week – how are you going to pay for a house,” he said.

“The housing market doesn’t reflect the economy of my daughter, or that of any daughter.

“To get $200,000 or $400,000 for a deposit, God, it is going to take them a lifetime.”

It was even worse for families on $500 to $600 a week with children, he said.

He arrived in New Zealand 20 years ago with just $1000 and had worked hard.

But he looked at the woman who served him his morning coffee each day, knowing she would likely never own her own house.

“She works just as hard as I work, but I was maybe just a bit luckier – and it is sad because I’m not an a***hole,” he said.

De La Macorra said there was a damaging unfairness growing in New Zealand.

“The whole system – I’m not saying Barfoot and Thompson – but the whole auction system is built to push the prices up and up and up – not letting you freely to decide,” he said.

However, Barfoot and Thompson auction manager Campbell Dunoon said it was people, not auctions that pushed house prices up.

He said auctions could benefit buyers and sellers because they were open and transparent, and the bidding helped everyone understand what each home’s market value was.

“You can see you the competition happening in front of you and that gives you the chance to make an informed decision,” he said.

Alternately, with price-by-negotiation deals, buyers typically didn’t know what other offers buyers were putting forward and with what conditions attached, Dunoon said.

Barfoot and Thompson also made sure all its bidders were informed before going to auction. Its contract clearly stated buyers could withdraw a bid at any time up until the point a property was sold, he said.

Dunoon said his auctioneers were “not fast, rapid guys as you may have seen elsewhere”.

“We try and make you feel comfortable because, I’ll be honest, if you are comfortable then you are more likely to bid for a property.”

But De La Macorra said he didn’t feel comfortable.

He had known the agent who sat beside him for a long time and told her before the auction the maximum price he could afford to pay, he said.

During the auction, she sat beside him, telling him “he was almost there, almost there” – encouragement he took to mean that he was close to the reserve price at which point the owner would sell.

However, when he reached his limit at $850,000, De La Macorra stood up and walked to the back of the room to leave.

The agent hurried after him, saying he should stay to see what price the home sold for.

But with De La Macorra being one of only two bidders left in the hunt, the auctioneer immediately turned to him asking if he wanted to bid.

De La Macorra ended up paying $899,000 for the home. And he said he wasn’t even happy with the quality of it.

That extra $50,000 was a big burden when staring down the barrel of another 30 years of mortgage payments, he said.

‘You are vulnerable, you are like a little baby at that moment even though you might be like 50 or 80 years old,” he said.

“Because you are surrounded by all these people that are pushing you towards paying the most – they squeeze you.”

 


 

So, what do you think?

Who’s “fault” is this?  The agent or the buyer?

I can make an argument each way.

On the one hand, the buyer got up to leave but the agent “hurried after him.”  Should agents be literally chasing buyers and pulling them back into the auction?

On the other hand, in lieu of the literal “gun to the head,” isn’t it always the buyer’s final decision?

I’ll be honest here, folks: this seems like bitching and whining to me.

This is a story that should have never been written: one about a guy who regretted his purchase, which is something that millions of people experience every single day.  And in the end, I don’t know if we can even conclude that this man “regretted” his purchase, since it seems he’s just regretting that he had to pay more in the end.

This is quite the familiar tale for those of us in Toronto: a person who feels that his children will never be able to afford real estate.  It’s a story about a market that is appreciating to the point where a large percentage of the population can’t afford to buy a property comfortably.

Did we think that we were the only ones, here in Toronto, that suffered the same affliction?

In 2015, I wrote a blog post about how real estate is bought and sold in England:

March 2, 2015: “Gazumped”

If you’ve never heard of this, and you feel that the way real estate is bought and sold in Toronto is imperfect, then read this:

Gazumping occurs when a seller (especially of property) accepts an oral offer of the asking price from one potential buyer, but then accepts a higher offer from someone else. It can also refer to the seller raising the asking price at the last minute, after previously orally agreeing to a lower one. In either case, the original buyer is left in a bad situation, and either has to offer a higher price or lose the purchase.  The term gazumping is most commonly used in the UK and Australia, although similar practices can be found in some other jurisdictions.

With buoyant property prices in the British residential property market of the late 1980s and early 1990s, gazumping became commonplace in England and Wales because a buyer’s offer is not legally binding even after acceptance of the offer by the vendor. This is because, by s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 and in order to prevent dishonesty, a contract for the sale of land must be in writing, a requirement of English law that dates back to the Statute of Frauds of 1677. This requirement was originally intended to promote good faith and certainty in land transactions.

When the owner accepts the offer on a property, the buyer will usually not yet have commissioned a building survey nor will the buyer have yet had the opportunity to perform recommended legal checks. The offer to purchase is made “subject to contract” and thus, until written contracts are exchanged either party can pull out at any time. It can take as long as 10–12 weeks for formalities to be completed, and if the seller is tempted by a higher offer during this period it leaves the buyer disappointed and out-of-pocket.

Imagine that you purchased a house on Beresford Avenue for $1,651,000.

You then listed and sold your condo on Queen’s Quay for $682,500.

Two weeks before the closing date for the house on Beresford Avenue, another buyer comes along and offers the seller $1,680,000.

The seller accepts this offer.

You are now without a property to purchase and move to.

What do you do about your condo sale?

Believe it or not, this is how the real estate market works in England.  I know, first-hand, because I have family over there who report back to me about this on a regular occasion.  In fact, they were gazumped on a house that they ended up losing.

Oh, and one more thing about real estate in England: there is ONLY multiple representation, no buyer agents; all agents work for the seller.

In 2018, I wrote a blog post about how real estate is auctioned in Australia:

March 28, 2018: “Is The Grass Greener Down Under?”

If you read the article above, you already know how some whining, complaining buyers might have their feelings hurt at the end of an auction.

But what else can happen in the auctions?

Well, for starters, most properties don’t actually sell at auction.

There are five situations that can occur when a property is posted to auction:

1) Sold prior to auction
2) Sold at auction
3) Sold after auction
4) Withdrawn
5) Passed-in

Many of the properties listed for auction don’t make it to the auction.  This is exactly the same as what we do here in Toronto when we list a property for sale with an offer date, then accept a pre-emptive or “bully” offer.

Whether or not a property gets any bids, or gets bids but doesn’t meet the reserve, properties can always be bought after the unsuccessful auction.

Many properties are taken off the market before or even during the auction.

And then some properties do sell, but don’t meet a reserve, so they are “passed in” to further negotiations.

The “Clearance Rate” is the percentage of all properties listed for auction which do end up selling.

These clearance rates can be anywhere across the board.

I’m looking at auction results right now through this site: https://www.realestate.com.au/auction-results

Only 65% of properties listed for auction in Queensland were sold this past week.

Of the 62 properties posted, 38 sold at auction, but 21 were passed-in.  This means that the properties did sell, but not for enough.  One sold prior to auction, one sold after auction, and one was withdrawn.

So is this system “better?”  What’s the point of the auction if a third of the properties are “passed-in?”

Picture that house on Beresford Road that’s listed for $1,199,900, and gets four offers, only to see the listing terminated and the property is re-listed at $1,649,900.  That’s what happens in an Australian auction when a property is “passed in.”

There, are however, more pitfalls with these auctions.

Common complaints:

1) The “expected listing price” is published exceptionally-low to entice prospective buyers, and many buyers wish the price was more realistic.

Oh, no kidding?

Where have we heard this before?

2) Friends of the seller or auctioneer can make false offers to excite and spur on the crowd, thereby pushing the bidding price higher.

Years ago, the idea of a “phantom offer” here in Toronto was somewhat of an urban legend.  What stopped a listing agent from telling buyer agents there were six offers when there were only five?  Nothing, in theory.  But in practice, how about a lawsuit alleging fraud, and losing your real estate license?

During in-person auctions, the idea of “momentum” is huge.

As the buyer explained in the article above, he got carried away.  He may have been “caught up in the moment.”

You never know who you’re bidding against in these auctions, and because the seller doesn’t have to sell, if a “fake bidder” were bidding up the price, and that bidder ended up winning, the seller could just post the property for auction the next week after he and his friend agree not to transact.

3) All diligence must be done in advance.

Home inspections must be done in advance, and unlike here in Toronto, they are not paid for by the seller.

Any issues with title, survey, easements, etc., are the responsibility of the buyer.

Any outstanding property taxes or liens are also the responsibility of the buyer.

Also consider that pests are a big problem in some areas of Australia, and thus an inspection is absolutely necessary.  Buying a house that does have pests could be exceedingly costly.

Some sellers do provide a list of “guarantees,” but that too has to be reviewed by a lawyer in advance.

4) Houses are effectively sold in as-is condition.

As per the above, there’s zero liability on behalf of the seller.

If you purchase a property at auction, and the basement floods tomorrow, tough luck.

Not all properties in Australia are sold at auction.

Websites like the one I linked above will show that most properties are sold privately.

But again, if you’re looking for a better “system,” then consider many jurisdictions don’t have an MLS equivalent, and you’re right back to the 1960’s, knocking on the door of a brokerage and asking, “What listings do you have?” where you’re forced to use the listing agent as your agent, who clearly doesn’t represent your interests.

I have my own issues with the “system” we have in place right now, but my issues have more to do with incompetent agents and uneducated, naive buyers than the actual framework of how properties are bought and sold.

Ultimately, this comes down to an existential belief in nature versus nurture.

I don’t believe that the system is unfair because people aren’t born with the right characteristics to work within it, but rather I believe that those who make poor decisions in our market will turn around and blame the world in which they live.  But that’s like everything else in life today, right?

I don’t know how real estate is sold in Greenland, but I’m sure they have their critics too.  Same with the real estate industry in Argentina, and ditto for Japan.

If the people who find fault with our system and are constantly suggesting we adopt a different model – one they don’t know anything about, spent their time researching and learning how to navigate and master our market, they would be wildly successful…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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17 Comments

  1. Pingback: Best Real Estate Agent In GTA – Is This A Better ‘Bidding’ System? – Toronto Realty Blog
  2. Ed

    at 7:50 am

    4) Houses are effectively sold in as-is condition.

    As per the above, there’s zero liability on behalf of the seller.

    If you purchase a property at auction, and the basement floods tomorrow, tough luck.
    ///////////

    Not necessarily true. This is exact thing happened to my cuz in Melbourne as a buyer. They backed out of the deal the seller sued but in the end she won.

    1. Angie M.

      at 4:48 pm

      Honest question here but is this rule different in Ontario?

  3. Geoff

    at 11:10 am

    ugh what a wuss. Take some ownership – you weren’t tricked or manipulated, you made a choice. Sure it might have been impulsive but such is life. If you’re out shopping for an $850K home an extra $50K really shouldn’t frighten you that much. I thought the article was going to be that the house he bought wasn’t what was sold to him or something more interesting.

  4. Marty

    at 12:27 pm

    BEST LINE:

    I have my own issues with the “system” we have in place right now, but my issues have more to do with incompetent agents and uneducated, naïve buyers than the actual framework of how properties are bought and sold.

  5. AK

    at 2:11 pm

    There will be problems with every system of transacting. The bottom line is people probably hate the price appreciation (well buyers do…) more so than the actual system of transacting, but the blame the system for pushing up the price.

    If we had a perfectly transparent online bidding system here for every house sold, yes I think it would be better than this mess, BUT I seriously doubt prices would be any less. The market finds an equilibrium: interest rates are too low, we have too many buyers, not enough sellers. That’s basically it.

    1. Condodweller

      at 4:36 pm

      I think it’s a fair complaint if the system is in fact to blame for unrealistic price increases. I would have no issue accepting that prices are going up but I would have an issue with the current situation where on top of increasing prices I had to pay an increasing premium just to seal the deal.

      I think the effect of this is that high prices are brought forward effectively pricing out people unnecessarily early.

  6. Condodweller

    at 4:48 pm

    Just because our system has some issues does that mean we have to throw it out in favour of another? I would not want a live auction process where in addition to worrying about the price I would be under time pressure as well.

    What do these two processes have in common? The agent. At the end of the day, it’s the agent’s job to maximize the sale price for the seller. Any changes would have to be surrounding the ethics of this and eliminating certain things like asking the highest bidder to improve his/her offer. I would also like to see something done about agents
    “leaking” leading price information where they may “guide” the buyer agent that a successful bid would have to be over say 1.5 million when the highest offer is currently at 1.35.

    While I agree that one could argue either way as to who is at fault, I would always lean towards the professional give the benefit of doubt to the often inexperienced buyer. I mean common, the guy was ready to leave and if the article is accurate was leaving the auction only to be pulled back by the auctionaire and his own agent for crying out loud.

  7. Angie M.

    at 5:04 pm

    If a house is “passed in” would it also not be “burnt”? That is to say, its value immediately drops because no one was willing to pay what the seller wanted?

    If a house was listed at 1.2m but the seller wanted 1.7m and didn’t get it on the offer night, only to terminate and relist the next day, is that house not actually worth 1.7m? And yet somehow that house will then turn around and sell it for 1.9m the very next week. This is what I can’t wrap my head around. Is it access to information (or lack of access/knowledge) or do people just not care about what may or may not have happened before?

  8. K

    at 11:10 pm

    As far as the situation described, I think both are to blame. Ultimately it is the buyer’s responsibility, but for the agent to chase after the buyer and pressure them to stay after they have reached their limit, that to me is also irresponsible on the agent’s part.
    But while I think it’s fair to point out flaws in other systems, I disagree with the implication that since other systems have problems or are worse, that it’s not worth improving our system. There’s also a lot of discarding people’s complaints about the system as ‘they just don’t understand how the market works right now’ but actually it’s quite possible to understand how it works and yet dislike it.
    When people complain that the system is unfair they may be complaining about affordability and/or transparency, and yes, some of the complaining about affordability is just unrealistic expectations, but I think there are also some real concerns about sustainability and people’s ability to afford housing in the city they live in, given that housing is a basic need, and I also think there are legitimate complaints about transparency or the lack thereof in the current system. Affordability is the more complex to address given the economics of supply and demand and the need for more supply, but I really think there’s a lot of room to improve transparency within the system and that it mainly hasn’t so far because it suits those in charge for it not to be transparent.

  9. MM

    at 6:44 am

    I recall a big successful agent in our neighborhood laughing to us about the buyer of one of his listings. The buyer paid way WAY over where the other offers were bunched . He told us the spread. This was 2017. The “winner “ is still probably under water on the house. And more importantly, was denied the information needed to make an informed decision.

    1. Bal

      at 9:55 am

      where is Appraiser…wondering how come he is not celebrating March sold data…he is the first one to provide this kind of update….????

      1. Appraiser

        at 11:10 am

        Did you miss me Bal?

        Sorry, I was busy collecting my jaw off of the floor when I saw the numbers this morning. Wow!

        TRREB sales data for March, 2021: 15,652. More than 500 sales per day.

        Just Wow!

        1. Bal

          at 2:42 pm

          good thing you picked up your jaws and please make sure you tie them tightly…bcz when numbers will start to reverse…there is a possibility that your Jaws might drop again…lol…of course we all miss you

      2. J G

        at 2:44 pm

        How about the stock market, it’s been rolling for the last 12 month! Not just the last 12 weeks like Toronto RE.

  10. Keith

    at 10:25 am

    Any time there is information assymetry in the market, the consumer pays through the nose. Car repair, home repair, investing – on Mike Holmes original show, he was getting 1300 emails per week. As for the prospect of a lawsuit and losing your license being a deterrent to unethical behaviour by a real estate agent, give me strength. How many agents actually lose their license in a year – the only cases I’ve heard of are for stealing client deposit money. The prospect of being sued in a blind process is basically zero, buyers would only ever have suspicions.

    All that said, the core of the argument remains sound – there is likely no satisfactory alternative, because human nature is to game the rules to your advantage. As long as the disparity between supply and demand is so great, buyers will have a very difficult time of it.

  11. Steve Mitchell

    at 9:07 pm

    We have a pretty good system if you ask me.

    Listening to the calls from various members of the chattering classes, most of whom have no little real world experience in the real estate trenches, for ‘open bidding’ would be disastrous. It would trample privacy for one.

    We’ve struck a great balance in Ontario I think. Verifiable transparency on the number of live offers on the table, but opaque on the content of same.

    This let’s buyers understand the level of competition they face, but still let’s them run their own race. They can bully bid, or call the bluff and stand pat on what maximum value the property represents to them with their best offer.

    I say stay the course.

Pick5 is a weekly series comparing and analyzing five residential properties based on price, style, location, and neighbourhood.

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