On Saturday afternoon, I chatted with a young couple who had been in the market for quite some time, but for whom success was unfortunately not attained.

They had made six offers on houses in Toronto and lost all six times.

I asked them, “Can you tell me a little bit about your journey?  Maybe recall a few houses and what you offered?”

He told me, “I can do you one better.  I can tell you every house we offered on, what we offered, and what it sold for.”

That’s my kind of guy!

Except that once he started rattling off the dates, properties, and bids, I realized he wasn’t my kind of guy, since he and his fiancee were always offering just enough to ensure they lost.

Their first bid was last October.  The property was listed for $999,900 and sold for $1,310,000.  They bid $1,150,000.

“We didn’t think it was worth much over $1,100,000,” she said.  “But we added a small premium to give ourselves a chance.”

Their second bid was two weeks later.  The property was listed for $929,900 and sold for $1,245,000.  They bid $1,050,000.

“That one really over-sold,” he said.  “That price was, like, stupid.”

He told me about the next two and then I said, “I think I get the point.”

I asked something that I almost always ask when I speak to people for the first time, which should come as no surprise:

“May I be honest with you?”

Famous last words.

People love honesty in this business, except when it doesn’t work in their favour.

“You guys are always offering enough to get out of the first tier of offers, what I call the ‘dummy offers,’ but never enough to get into the top tier.  You’re always offering just enough to ensure you lose.”

There was silence on the phone so I said, “Can I explain?”

They said, “Sure.”

When a property is listed for sale, at a deliberately low price, and there’s a strategic offer date set, there are always three tiers of offers:

1) Dummy Offers.  These are the true garbage.  They are just above, at, or even below the list price amid extreme competition, and have no purpose being submitted.

2) The Muddled Middle.  These are the offers that are well over the list price but still nowhere near what would be needed to be successful.  They’re well below whatever the most recent comparable sale was, which shows, in theory, that the buyers or agents should know better.

3) The Top Tier.  These are the only people who have a shot at actually buying the property.

I explained to the young couple, “All of your bids were in the muddled middle.  They just didn’t have a shot, and I’m sorry.”

She said, “Our agent always told us it was okay.”

He added, “Our agent would just ask us, ‘What do you want to offer?’ and we would give her a price, and that was what we went in at.”

So, I was able to deduce that it wasn’t this young couple who was living in denial about the market like so many folks out there, but rather it was their representation that was poor.

And this is the key, because there are several reasons why people make muddled-middle offers or dummy offers.  More on that in a moment.

But first, let me use an example from a recent listing.

We’re listed for $1,199,900.

It’s under-listed.  Obviously.

Even that silly House Sigma “Estimator” tool said it was worth $1,400,000, so there’s really no excuse for dummy bids and yet, as they always do, they were submitted!

Here are the offers:

$1,180,000
$1,200,000
$1,200,000
$1,210,000
$1,260,000
$1,285,000
$1,300,000
$1,350,000
$1,360,000
$1,450,000
$1,475,000
$1,490,810

So can we break that down?

In this case, it’s almost like there were four tiers, but work with me here.

The “Dummy Offers” were these ones:

$1,180,000
$1,200,000
$1,200,000
$1,210,000

Somebody actually offered $20,000 below the list price, even though there were twelve bids.

That makes absolutely zero sense.

Then again, so too did the two offers of essentially the list price (plus $100) and the bid for $1,210,000.

The “Muddled Middle” were these ones:

$1,260,000
$1,285,000
$1,300,000
$1,350,000
$1,360,000

I’m tempted to further divide these up.

Is it unfair to suggest that $1,260,000 and $1,285,000 were “dummy offers?”

I mean, they’re not on par with the folks offering the list price, but they’re still not great.  They still had zero chance.

And while the bids of $1,350,000 and $1,360,000 also had no chance, they’re clearly a level up from the dummy bids as well as those other “muddled middle” bids.

Regardless, none of these bids had a shot.

The ones that had a shot were in what I call the “Top Tier” which were these ones:

$1,450,000
$1,475,000
$1,490,810

There were twelve bids on the house but only three people really ever had a shot at it.

And that is so incredibly common in our market.

Today is not the day to grieve about “how properties are under-listed in Toronto,” since I think most of us (?) have simply come to accept that.

I’ve always maintained that for anybody who understands the process and the market, this is fair game.  But the problem remains: many don’t understand and/or don’t want to understand.

So my question today is simply this:

Why bother with a dummy offer?

Let’s work through a scenario and I will try not to write this with inherent bias, but rather try to lead you through the trail of bread crumbs that results in a person making a dummy offer.

A property is listed for $799,900.

The buyer agent emails the property to the buyers.

The buyer agent either: a) Suggests that this could, would, or should sell for $1,100,000, or, b) Says nothing at all.

Right there, we know there are two ways that dummy offers happen, ie. the buyer could have no knowledge or the seller could have no knowledge.  Or both…

The buyers visit the property, see thirty business cards from real estate agents on the hall table, the agent hands off the keys to another agent and buyers who are waiting, and they see there’s interest.

They run their comparable sales and see that this property could, would, or should sell for $1,100,000.  Or, they don’t.

Offer day comes along.

Every time an offer is registered, an email is sent to the buyer agent.

“One Offer Registered On 758 Parkhurst Boulevard,” the email reads.

This continues throughout the day.

“Two Offers Registered on 758 Parkhurst Boulevard,” the email reads.

And you would like to think that, every time an offer is registered, the buyer agent is telling his or her clients.

Regardless, 6:30pm comes along and there are nine registered offers.

The buyer agent calls his or her clients and they discuss.

Agent: “There are nine offers.”

Buyers: “Okay.”

Agent: “The property is listed at $799,900.  What would you like to offer?”

Buyers: “$800,000.”

And you can fill in the rest of the conversation from there.

By 7:00pm, or 7:10pm, or 7:30pm – whenever the last offer is finally submitted, there are a total of twelve offers.

The listing agent sends out a final email with the total number of offers.

What are the folks who offered $800,000 thinking?

More importantly, what are the folks who offered $800,000 doing?

Their actions make zero sense, and yet this happens all the time.

I’m so used to it that I’m almost desensitized.

I had five offers on a condo listing last month and somebody offered $50,000 under the list price.  But that’s not what’s crazy.  What’s crazy is that the buyer agent sent me multiple text messages asking, “Any update?” and “How are we looking?”

So that brings me to the why.

Why do buyers submit dummy offers?

Why do buyers, when knowing there are ten competing bids, submit offers of the list price with two conditions and no deposit cheque?

If a buyer knows there are ten competing bids, and the buyer wants to make an offer of the list price, the obvious question to the buyer is this:

“There are ten competing bids.  The property is listed for $800,000.  You want to offer $800,000.  Do you believe that the other ten bids are all below $800,000?”

That is the key.

But some buyers don’t ask themselves this.  Some agents don’t ask the buyers this.

And that brings me back to an explanation of the why.

The way I see it, there are five main reasons why buyers end up submitting dummy offers:

1) Buyer Inexperience.

There’s no reason why every buyer out there can’t be completely prepared, whether it’s through doing research online, finding a pricing app, or hiring an agent.  And yet, so many buyers are and often remain inexperienced in perpetuity.

I’ve been writing here on TRB for sixteen years.  Some of you have been reading for nearly that long as well.  As a result, we might take for granted how difficult it can be to navigate the Toronto market for somebody who is brand-new, ill-prepared, and who often doesn’t want or undertake the necessary steps to learn.

But as is always the case, it takes two to tango.  And in order to fully lose yourself in this market, you need an equally as inept partner…

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2) Agent Inexperience.

Is it fair to blame a buyer for being inexperienced?

Maybe.  Maybe not.

But it’s the job of the agent to advise the buyer, whether that agent is a one-week warrior or a thirty-year veteran, and many agents just don’t have the right advice because they don’t have the right experience.

Some agents haven’t been working long enough whereas others don’t know the area, or don’t know the market.

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3) Buyer Agents Who Live In Fear.

There’s nothing worse in this business than a buyer agent who doesn’t give his or her real opinion.

Many buyer agents simply take orders and never risk disagreeing with or offending the client.

But who are they helping?

If a buyer wants to submit dummy offers on a property every month for a year, and prices go up 12% in that year, then is this buyer agent really “helping” the client?”

Of course not.

But so many agents live in fear of losing clients that they’re not willing to ever risk making an unpopular statement.

There’s nothing “wrong” with telling your buyer-client, “Hey, our offer of $10,000 below the list price isn’t going to beat the other six offers tonight, so let’s have you guys go home to your kids instead of spending time and energy on this offer.”

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4) Buyer Denial, Anger, & Resentment

Let’s look at this statement again, from the perspective of a buyer agent asking a buyer:

“There are ten competing bids.  The property is listed for $800,000.  You want to offer $800,000.  Do you believe that the other ten bids are all below $800,000?”

Do you know what some buyers say in response?

“I don’t care what the other ten bids are.  I only care what my bid is.”

That’s defiance.

That’s anger.

That’s resentment.

And that’s common in this market where you often have far more demand than supply, where competition is fierce, and where essentially every buyer in the city wants more than they can afford.

Some buyers simply live in denial.

Some say things like, “We have to just keep trying.”

But remind me: what’s the definition of insanity?

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5) Hope.

This is a tough one, because if I’m going to undermine hope then I’m certainly not going to win any popularity contests.

But it’s not that I’m unsympathetic.  It’s that I’m realistic.

Two years ago, I had a tense conversation with a client a week before Christmas.  He had asked about a house that was listed for $3,000,000 that was re-listed for $2,199,000, which was his high-end budget.

I told him, “They’re not adjusting their target sale price by $800,000.  This property is now listed low with an offer date.  It’s an awful ‘strategy,’ if you can call it that, and it will fail.  They will terminate this listing and put the property back out at $3,000,000 in the New Year.”

But my client said he wanted to look at the house because he felt there was a chance the sellers would take $2,199,000.

“You never know,” he said.  “They could be broke.  They could be getting divorced.  They could need a firesale.”

I said, “The market is too efficient for that to happen.  If they really needed to ‘firesale’ the house, they’d sell it for $2,800,000, or even $2,700,000.  It’s not worth $3,000,000 but the market would never let it go for $2.2M.”

He said, “Well we have to try.”

I asked why.  Why he wouldn’t just consider looking at houses priced at $2,200,000 that he could afford.

I asked him, “What is your strategy here.”

Do you know what he said?

“Luck.”

He said, “We need to get lucky.”

I paused, collected my thoughts, and said, “Luck isn’t a strategy.  And that thinking is a recipe for failure.”

The day that I stop being honest with my clients is the day I no longer belong in this business or writing this blog.

But the point here is: buyers can’t think that making a dummy offer serves a purpose because they “hope” that it’s successful.  They “wish” about it at night and they “dream” about it during the day.

Again, call me unsympathetic.

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In the end, it’s these dummy offers that help to inflate prices in our market.

If there are seven offers on a property and three are complete throw-aways, then we can all agree that the property wouldn’t sell for as much if only the other four were submitted.

So what purpose do these dummy offers serve?

That’s not quite rhetorical, since they don’t serve a purpose for the buyers submitting them, but they do serve a purpose – in the form of leverage, for the sellers of these homes.

Kind of ironic, right?

Buyers make dummy offers on properties they can’t afford, but if nobody ever submitted a dummy offer, then properties wouldn’t cost as much.

Tell that to the next person who wants to make a conditional offer of 98% of the list price for a property with twelve registered offers…