If there’s one aspect of organized real estate in Toronto that continues to frustrate buyers, it’s the idea of the “hold back” offers, or a set “offer date,” whereby the sellers expect multiple offers.
It’s not always the idea of an offer date that’s the most frustrating, but rather the process.
Would it be easier, and more transparent, if we held real estate auctions?
This is a very common practice in Australia. Take a look at the video below…
“Lack of transparency” is the number-one reason why buyers dislike the current process for reviewing multiple offers, as you never know what really happened behind the scenes.
Many of my buyer clients are surprised to know how the process works, when I tell them for the very first time, “You won’t get to know what other buyers are ‘bidding’ for the property.”
It’s essentially a blind process, and what’s even more frustrating, is that even if you are the highest ‘bidder,’ the seller and the listing agent can always come back to you and ask for more money, or they can ask the second-highest bidder (or third, or fourth…) the same.
So would we be better off with an auction?
Everything out in the open – everything is known. No variables, no funny business.
Just complete and utter transparency.
Is there any way this could work in Toronto?
Jeremy
at 9:35 am
I think it would be interesting to see the results. I think it could go either way – people might bid even higher in the frenzy of an auction or the prices might actually end up lower (e.g. you are bidding against what the other buyer ACTUALLY bid, vs. what they are perceived to have bid in the current process).
A British relative lost out on a property and while very gentlemanly congratulating the winner who had won by a small margin, was told “If it makes you feel any better, we were prepared to go much higher.” He said “It does actually!” I think part of the frustration of the current system is losing out on a house that you were never really in contention for anyways, but the list price made you think you might have a chance.
How about a blind auction where you bid “e-bay style” and you each bid the maximum you are willing to pay for the house, and the winner pays either what they themselves bid, or X% above the next lowest bid – whichever is lower? Sale is binding (perhaps with a minimum reserve price) so it could help do away with those people who keep re-listing to try and get more than their house is worth.
Kyle
at 10:27 am
I feel that a lot of the pro-auction contingent are inexperienced buyers who are just looking for something to vent their frustration at. Most have not conidered the implications of auctions, they just know they got beat, and would like a scapegoat rather than accepting that, someone outbid them.
Do they really want to pay a buyer’s premium for that transparency? Do they really want to forced to make one of their biggest financial decisions in a split second? Do they really want the emotion, the competition and the pressure of a live auction environment, where prices rise by $5000 increments with each bid? Auctions really only work when there are lots of buyers and sellers, do they really want to spend countless nights bidding on houses that may never meet the reserve? And evidence suggests that auctions increase the prices of homes, is that what they really want? I strongly suspect the answer to all these questions is NO.
Frankly, i think the answer is for these buyers to educate themselves, rather than pointing the finger at the “system”.
Joe Q.
at 1:22 pm
Kyle has advanced these arguments before — that calls to move to transparent auctions are driven by “inexperienced buyers”, and that auctions lead to higher prices than the current system (thus imposing a premium for open auctions vs. a series of parallel one-on-one negotiations). I can’t say I’m convinced.
One can argue that a move to an open bidding system would improve the reputation of Realtors in general, by preventing the worst excesses of “dual representation”.
I am hard pressed to think of another area of commerce that functions quite like our current system for multiple offers in RE (with its fixed offer dates, creative re-definitions of “advertising”, etc.)
Kyle
at 1:46 pm
The buyer’s premium i refer to is the actual transaction cost paid to the auction house, which is usually 5% of the purchase price and is PAID FOR BY THE BUYER. For many first time buyer’s that’s the equivalent of their entire downpayment. They would also have to come up with a 2.75% CMHC fee. So on closing day they would already have negative equity. Sure you’ll have a little bit more price transparency on offer night, but you’ll be paying for that transparency on your mortgage (assuming banks will even finance this negative equity situation), for the next 25 years.
Joe Q.
at 4:21 pm
Is it a given that RE sales through an open bidding process would have to go through a traditional auction house, using the exact same payment model as is currently used for fine art or antiques?
Kyle
at 5:45 pm
No it’s not a given, but so long as the seller is paying the full transaction costs (as they do now), it makes absolutely no sense for them to offer transparency into the offer prices. Or are you suggesting that we should all just switch to an auction market, where sellers continue to pay the full transaction cost AND provide transparency to buyers, purely out of the kindness of their hearts.
For buyers the process may be tough to swallow, but one day if you find yourself in the seller’s shoes i suspect you may feel very differently about the whole thing.
Joe Q.
at 8:43 pm
Thank you for clarifying — this is the argument I thought you were getting at (sellers’ market, they can sell any damn way they please, you’re naive now but you’ll understand when you’re more experienced, etc.)
jeff316
at 7:17 am
Kyle’s point about buyer maturity is a bit obnoxious but that doesn’t negate that there is some truth to it. The people talking about regulating the offer process are, to a near universal extent, buyers – most often first timers, and “young” ones at that – with minimal experience on the sales end and no coherent rationale for why the process shouldn’t be regulated other than the fact that it would make them feel more secure when they win and more justified when they lose.
No one seems to be able to answer the basic policy question – “what is the problem?” – other than it is not transparent enough for their liking. That’s fine, but transparent, however, is an adjective and not an outcome.
J
at 2:50 pm
I’d just like the current system to be transparent. You bid and you know what everyone else bid as well. You can offer more or not. If nothing else, it prevents some degree of artificial inflation of prices. We were once one of two bidders on a house. We bid asking and then walked away. The house sold for almost $300,000 over asking!! I always wondered how those buyers would feel if they’d known they could have had the house for $300,000 less, but then again, someone who bids $300,000 over asking when they’re competing against only one offer probably doesn’t care!!
Megan
at 3:52 pm
I’m strongly in favour of 2nd price auction for home purchase. EBay is similar to it. Here’s the popular online definition:
“A Vickrey auction is a type of sealed-bid auction, where bidders submit written bids without knowing the bid of the other people in the auction, and in which the highest bidder wins, but the price paid is the second-highest bid.”
When people hear auction, they often think about live cattle auction. But the second price auction is a calmer, more rational way to do it.
Of course, the problem with a 2nd price auction for the average house is that it would only work if all other things were equal. Such as: deposit amount, closing date, lack of conditions in the offer, etc.
That’s a pretty big “if”.
Joe Q.
at 8:47 pm
Both Megan’s and J’s proposals will not fly, for the reasons outlined by Kyle above.
AndrewB
at 12:55 am
Plus, why would sellers want the second highest bid, and not THE highest?