As the spring market heats up, and multiple offers are becoming just as common as they were last spring, many buyers are asking themselves, “At what point does ‘winning’ in multiple offers start to feel like a loss?”
Tough question to answer…
WINNING!
Duh!
That’s what it’s all about!
I tell my kids baseball team every year, “This isn’t about having fun. It’s about winning. Having fun, interestingly enough, is a by-product of winning! So if you win, then you will have fun. It’s a win-win proposition, pardon the pun.”
Okay, so I don’t tell them that.
Or maybe I do. You’ll just have to assume that through seven years of coaching, I’ve found my own way, and I’m not a bad guy…
When it comes to sports, the entire point is to win.
Herm Edwards said, “You PLAY……to WIN……the GAME.”
It’s that simple. Sports is about winning.
When it comes to multiple offer situations on houses, however, winning is not the ultimate goal. A true salesperson will tell you that it is, but I disagree. I don’t want to bury my client at $700K in a $600K house. What good would that be?
I was in multiple offers last week for a house, listed at $469,900, that was great….at the right price.
I arrived to present my offer, under the impression that there were three offers, since that’s what the front desk told me, only to find out that there were eight offers. Our offer of $503,000, which we figured represented fair market value, and was as much as we were going to pay, was blown out of the water by an offer of $535,100.
We didn’t want to “win” that one.
But that’s us. That’s our opinion.
Ask the person that paid $535,100, and they figure that they “won.” They got the house they wanted, at the price they wanted, and you know what? There are seven other losers in their eyes. Because they bought a house that night, and seven other buyers went home to lick their wounds. They’re out of the buyer pool, and hiring a moving van, and seven other buyers are going back to the drawing board.
So who is right? Who is wrong?
It’s all a matter of opinion.
I would NEVER have let my clients pay $535,100 for that house, because it was just a 2-bedroom, and thus the future value of the home would be capped. But the buyer of that house thought differently, and put a “W” on the board.
In a situation like the one above, where there are eight offers, my clients will often ask, “If we bid the highest, doesn’t that mean we’re the biggest sucker?”
Not exactly.
They’ll ask, “If we’re willing to pay more than seven other rational, logical, savvy, informed buyers, then aren’t we being overzealous?”
I don’t think so.
But theydohave a point. Think of the extreme for a moment.
I’ve heard about offer situations where there are thirty offers! I believe the most I’ve ever heard of was one down on Lake Shore Boulevard a couple years ago that topped out at thirty-three offers. Now, many of those offers are throw-aways; maybe half. But there’s are still a LOT of rational, informed buyers making offers, and thus in order to be successful and “win” in this situation, you have to pay more than all of them.
So again, let the buyer ask the question: “If we’re willing to pay more than ALL other rational, logical, savvy, informed buyers, then aren’t we over-paying?”
Who am I to say “yes,” or “no?”
In order to do so, I have to draw the line in the sand. I have to say that buyer #33 out of 33 was out of his mind, but buyer #8 of 8 was completely within his right to outbid the competition.
I’d be like the guy who divides the platinum seats at Air Canada Centre from the golds, even though they’re one row apart.
Every day, in my office, you hear somebody say, “Did you see what somebody paid for such-and-such house?” People laugh, people shake their heads, but at the end of the day, it’s up that one buyer who pulled the trigger. And a colleague of mine, who always disagrees with the laughing and head-shaking, will say, “You know what? That buyer has a new house, and they’re done looking. Your client is still out there, and they’re homeless!”
I can’t say he’s wrong.
How can you say a house is worth $700,000 but not $710,000?
It’s up to the buyer to decide.
There are 35,000 Realtors working in the GTA, and they all have different opinions. I might tell my clients that the 2-bedroom house, listed at $469,900, is only worth bidding $503,000 for, but somewhere, another agent advised his clients to bid $535,100. So long as those buyers trust their agent, see the value in what he or she is advising, and are happy with their decision, then I believe they truly “won” in multiple offers.
The only time we can say that argue that a buyer has “lost” with certainty is when one of the following scenarios occurs:
1) Affordability.
This is open to much debate as well, since the definition of affordability might vary from buyer to buyer.
Some buyers put down as little as 5%, and then I’ve had buyer recently tell me that anybody who doesn’t put down at least 50% is “nuts.” To each, their own. But assuming each buyer can determine his or her own affordability, bidding OVER that amount when in multiple offers will result in a “loss.”
If you’re looking to put down $100,000 on a $500,000 purchase, and you know you can’t go over that amount, then increasing your $500,000 offer to $517,500 at 10:00pm on “offer night” won’t necessarily be a “win,” will it?
2) Decision based on emotion.
Maybe that’s not fair, since I think everybody gets emotional during multiple offers, and since the purchase of real estate is far more emotional than the purchase of stocks and bonds.
But you simply have to go into a multiple offer situation with a game plan. You have to outline your best and worst case scenarios, and come up with a bottom line.
If you bid $700,000 and the listing agent tips his cap to your agent, then maybe moving to $702,800 to break a tie is worth doing.
But getting emotional often leads people to do silly things. Jacking up your “maximum price” while under duress is a terrible idea, and that’s why the maximum price should be set the day before, or the morning of offers, so that you don’t let emotion make your decision.
Emotions change, and the next morning when you’ve cooled off, perhaps that “win” might feel like a “loss.”
3) Competing.
Human beings are competitive by nature, but there is a right time and right place for competition.
If you want to bid more for a home because you don’t want “that stupid girl with the Fendi hand-bag” to win, then you’re going to end up losing.
More often than not, buyers will go to present their offers with their buyer-agents at the listing brokerage, and you see all the other buyers waiting outside, in the parking lot, in the lobby, or in the meeting rooms. Many buyers will make mental notes about the other buyers, and they get wrapped up in the competitive aspect of the process.
Don’t get me wrong – multiple offers means competition, but I’m talking about something else. I’m talking about buyers competing with identifiable people rather than nameless, faceless ones. It’s acceptable to go into “competition” when you’re making an offer and going up against four others, but it’s another thing entirely to see four couples sitting in the waiting room and decide right then and there that you want to pay more for the house than you did an hour ago.
.
And I’ll throw a final point into the mix, which many will think results in an automatic “loss,” and many don’t
4) Setting the new High.
It’s the “Greater Fool Theory.”
Somebody, somewhere, some time, will eventually come along and pay MORE than I paid for my house! So, it doesn’t matter what I pay…
If you pay $1,300,000 for a property that, in all likelihood, is worth $1,100,000, it doesn’t matter what you paid, so long as somebody comes along next year and pays $1,500,000, right?
That’s thegreater fool theory, and it often plays a factor in multiple offers.
If you’re a buyer, and you’re about to bid more for a property than any similar property has ever sold for (especially with condos when the properties are identical, ie. Unit #2102 and Unit #2202), then some might argue you didn’t really “win” in multiple offers.
I’m on the fence on this one.
What’s wrong with buying shares ofApplewhen they hit the all-time high at $80, so long as the stock heads to $700? It happened, and it continues to happen with stocks, real estate, and other investments.
Geoff
at 9:09 am
Part of the reason for pricing is another aspect of the negotiation process – leverage. Price is not the only lever for making decisions, other factors come into play. The couple willing to pay an extra $10,000 might have sold their house, have a baby on the way, and need to lock down the one house they’ve both agreed on in 3 months of looking.
Ralph Cramdown
at 9:47 am
It’s not enough to say that somebody will pay more later. You should have a theory as to WHY somebody will pay more later. Interest rates go down, so they can borrow more at the same monthly? Credit eases, so people who can’t get financed now will be able to borrow? Wages go up, so they can pay more at the same % of their income that you paid? Perception of the neighbourhood improves? Rents go up, making ownership a better relative value? Without a theory or two, it’s all hope and momentum.
Appraiser
at 8:41 pm
Simple. Buyers (not pretenders like you) will pay more (or less) later if the market says so. End of theory.
tzv
at 10:23 am
Value is not carved in stone. We should only speak of previous value based on comparable sales. If you are in the market for a home in one of the hot neighbourhoods than you must know that there is almost 0 inventory.
If 3 similar houses sold for 800k in September does that mean that forever those homes should sell for 800k? Or do you pay 830k when you are one of eight people that would like to buy the only house in that pocket? The opposite would be true as well; if we faced a mayor economic downturn and a significant number of people could no longer afford their mortgage and as a result 12 homes came on the market. You could buy the best house for less than comparable home sold in the past.
Be careful when you put things so definitive and say this house is worth 503k and not a penny more. Is it worth not getting the house that you really like for 20-30k? Especially if next year people start paying 560k for similar homes. On the other hand you do have to draw the line somewhere.
Going forward this problem is only going to get worse. We have no space to build more freehold homes and Toronto is one of the 2-3 cities in Canada that have some elements of a world class city. Toronto will continue to attract money and home buyers. And the way management companies run condos(ndp style,spend first think later)even the people that don’t mind apartment living will continue to run away from condo fees, putting even more pressure on the freehold housing stock.
Gypsy
at 12:52 pm
If you say that multiple offer scenario is same as last spring, why are these houses selling for less than asking.
http://themashcanada.blogspot.ca/
Are these multiple offers are all low balls and highest of the low ball offer wins?
tzv
at 12:55 pm
I disagree, unfortunatly most in demand neighbourhoods are selling for the same or more than they did last year.
Gypsy
at 1:11 pm
Here is a house in Rosedale that finally sold for 245,000 less than the original asking price. Isn’t this a in demand area? Did they get multiple offers? If so why did it sell for about quarter million less than the original asking price.
http://themashcanada.blogspot.ca/2013/02/and-it-went-for_4914.html#!/2013/02/and-it-went-for_4914.html
Ralph Cramdown
at 1:58 pm
Don’t think of it as selling below asking. Think of it as being listed above market. And with recent CMHC changes and credit tightening, the buyer has to come up with 20% of the first $1MM and 50% of the balance in cash, depending on the lender. Quite a difference from the $25k + closing costs that the buyer of a $500k crackerbox needs.
David Fleming
at 2:25 pm
@ Gypsy
I’ll answer your questions, even though I feel like you’re trying to pick a fight, and you’re relying on incomplete and misleading data to do so.
Yes, Rosedale is a high-demand neighbourhood. However, houses in the $2-3 Million range don’t usually sell in multiple offers. My blog post was speaking about the $500 – $800K range, where seemingly everything is selling in multiple offers. (although the market is SO hot, that two $2.2M houses DID sell in multiple offers, which never happens).
Secondly, the house you referenced is on a borderline Rosedale street, has no driveway, a disaster basement, and it backs onto a giant train track.
Third, while I have a tremendous amount of respect for THE MASH and what they do, you need to keep in mind that they are not Realtors, and they do not know the market like Realtors. I love their site, but any Realtor will give you a dozen reasons why that house you referenced was having trouble selling.
I know that not everybody who reads my blog agrees with my opinion, but the suggestion that many houses in the $500-$800K range are selling in multiple offers is not an opinion; it’s fact. My colleague is getting ready to submit an offer on an east-end house tonight that already has eleven offers. I’m offering on a west-end house tonight with five offers. Tomorrow I might be offering on another that will undoubtedly have 5++. This is the market we’re in. I wish it was slow, quiet, and affordable, but it’s not. I write stories about what is going on in the marketplace. I don’t write fiction, and I don’t make this stuff up.
Lastly, I talk about “great” properties that sell in multiple offers, as well as “good” ones. The houses that are over-priced, listed with Realtors from out of town, with no photos, incorrect/incomplete data, and rot on MLS for months, do not count in my view, because I don’t even acknowledge those listings exist. Propeties that are listed by reputable brokerages, by sellers that actually WANT to sell, at market value (or less – when they’re looking for multiple offers), with ample marketing/advertising, with work done in advance (staging, home inspection, cleaning), WILL sell in multiple offers in this market climate if they’re in the $500-$600K range, which is the range most house-buyers are in.
Gypsy
at 2:50 pm
So this years spring market won’t get as crazy as last year’s.
http://www.theglobeandmail.com/life/home-and-garden/real-estate/this-toronto-bungalow-sold-for-421800-over-asking-yes-really/article4092559/
Ralph Cramdown
at 6:17 pm
The more I think about this post and the comments, the more tragic it seems. First, I don’t believe that by beating 11 other amateurs with borrowed money in a blind auction, you’ve won anything except the distinction of having paid too much. Perhaps if it was open outcry, or the bidders were all professionals, or even if they were using their own hard earned cash. But previous discussions on this blog have established that any group of 11 bidders will likely contain one lowballer, one or two who will bid only the list price, and one moron who will outbid the next highest by four or five percent.
As David and Geoff point out, many bids come not from cool rationality, but from time and family constraints, being fed up with having lost several other properties or even the irrational desire to beat that other couple they don’t like the look of. Alas, those winning bids don’t go into MLS with an asterisk. Once the deal is firm, agents all over the city look at them and tell their clients “that’s what people are paying for properties like these right now.” — The market has spoken, and the irrational bid becomes the new standard.
Given those beliefs, I blame agents like David’s colleague for the problem. Why bid against 11 others when the two possible outcomes are winning by paying too much, or losing, helping drive up the winner’s bid by your presence, thus indirectly driving up the price of the place you eventually DO buy?
Nuttiness like this never goes away gradually. Vancouverites were telling themselves the same stories about limited SFH and unlimited immigration up until last year (some still are), but the bloom is sure off that rose. This won’t end well.
Appraiser
at 8:37 pm
@Ralph Cramdown: “This won’t end well” ?? Still reading Garth are we?
For a renter who has never owned real estate and doesn’t know what an agreement of purchase and sale even looks like, you sure pretend to know a great deal about real estate.
P.S. How’s the “waiting-for-a-crash” working for you Ralphy?
Ralph Cramdown
at 9:39 pm
You again? I’ve told you enough about my situation that you know I’m sitting pretty. Things have only gotten better since I last apprised you. And you know I’ve transacted in real estate, so don’t bother with the tales.
Geoff
at 8:53 am
Oh save me jebus, the two of you. Not all people who own are ignorant jerks, and not all renters are poor losers. Ralph, the market did speak – people pay what they paid. You never quite know the full rationale was simply my point. Appraiser, no need to attack Ralph personally (that’s a Garth move hahaha). Renting is an entirely viable choice for many people, just it’s not for all people (just like owning isn’t). At Ralph, I’m not sure what you’re suggesting people do when you say ‘why bid against 11?’. So seriously asking, what would you do if you were me in June 2007. I have a one room loft that’s in a 3 story walkup, and a 6 months pregnant wife. (Loft bought before meeting wife). What I did was sell the loft, and then buy a house in a compressed timeline, against six other bidders. From what I can tell you’d have advised me not to bid. But then what?
Ralph Cramdown
at 10:24 am
I’m a father too, Geoff. My mother-in-law used to nag us about buying a house. I had my wife send her our local public school’s test scores and Fraser Institute rankings along with our budget, and told her to have at it on the public MLS. Haven’t heard a peep from her since.
Geoff
at 2:33 pm
Umm ok. Still not sure what you’re saying here – you think I bought a house because my mother in law nagged me? (In truth, they wanted us to buy anywhere but in the city, so like pickering and the like, as ‘you get better value out there’ – though as retirees they don’t know what the commute is like). Or are you saying I should have rented the last 6 years? I could have, it’s true. I just don’t know if I’d have been happy being a renter, to be honest.
Ralph Cramdown
at 7:40 pm
I’m not ‘happy’ as a renter — it’s strictly a financial decision and, in a perfect world, I’d own. We’ve got clear financial goals, and we’re not yet rich enough that we can put a Toronto residence on the balance sheet without being fairly sure it’ll pull its weight (or at least break even) given those goals. We might pass that threshold in the future, in which case I’d seriously consider buying even though it might cost me money.
lui
at 11:06 am
logic is to buy into neighborhood not into a house.A house can always be renovated but a good area will always be a good area unless they find some toxic waste under the soil.I rather buy a average house in a great location than a mansion in a so-so area.Bidding wars for condo seems to be as rare as DODO bird,but the rare hardlofts are still selling well.
Geoff
at 12:59 pm
Can’t continue a nested thread so hopefully Ralph will respond (so it seems clear his answer was renting, a valid albeit not a perfect choice – as if my wife and I had rented, we couldn’t afford the very house we have now as easily as we do).
He did mention a good idea for a future blog — when you invest in a house, should we even expect it to break even when we sell? You expect a stock to return funds, because it offers no other utility. But a house offers shelter, physical security, emotional benefits (home vs house/condo), and other benefits. ‘Breaking even’ doesn’t mean you broke even like in a stock sale, it means you lived for free. Is it reasonable to expect to live for free? We don’t expect the cars we buy to break even on sale, why houses I wonder…
Joe Q.
at 2:40 pm
Once you start going down this road and talking about “breaking even”, you also have to talk about opportunity costs, interest charges, taxes, etc. and things get very complicated.
Ralph Cramdown
at 5:04 pm
The classic study on long term house prices is “Long-Term Perspectives on the Current Boom in Home Prices” by Robert Shiller, PDF here http://goo.gl/4CVUx
My views are also informed by Paul Krugman’s thoughts on “Flatland and the Zoned Zone,” here http://www.nytimes.com/2005/08/08/opinion/08krugman.html
Typically, land appreciates while structures depreciate, so the price trajectories and maintenance costs of a small house on a large lot, a large house on a small lot and a condo are going to be quite different.
When somebody buys an investment property to rent out, he hopefully expects to realize a profit in addition to recouping his costs, to compensate him for his risk. When you live in your own property, the rent that you’re saving would include that profit component.
Devore
at 8:22 pm
“3) Competing.”
Really? How is this competition? To see who can spend the most money? Shouldn’t competition be to who can get the house by spending _the least_ money, automatically making the winner of a multiple bid scenario a loser? Maybe my sense of competition is different, but when I go to buy a car or an iPad, I don’t brag about how much I overpaid.
“That buyer has a new house, and they’re done looking. Your client is still out there, and they’re homeless!”
This is also BS, because I don’t see a whole lot of homeless people buying houses. It’s just a rather transparent tactic to introduce or heighten emotion where there should be none. It’d a cheap tactic… aren’t agents supposed to look out for their clients best interests, including financial? How does egging them to win a bidding war fit into this?
Geoff
at 10:42 am
@ Devore — I was homeless in the sense that in March 2007 I sold my loft with a closing date of June 28th, and my wife was 6 months pregnant at the time. I felt very homeless, and very underpressure to find a suitable home by June 28th. I included renting on the table, although moving twice wasn’t high on my list of things to do.
Kyle
at 12:29 pm
It is pretty clear that when one is in multiple offers, they are not trying “To see who can spend more money”, nor does anyone “brag about how much they overpaid”. So question – what’s with the hostile spin? Why so angry?
Greg
at 12:30 am
Simple: multiple offers is not a sign of an imminent crash these renters have been longing for.
Geoff
at 9:32 am
And just on that last point… when we bid $40,000 over asking, I was literally sick and puking about spending that much money on a damn house. Now 6 years later, I feel like we stole it. But at the time, bragging about this was about as far as possible from reality.
LJ
at 3:47 pm
We bought our house two years ago for what I think was a lot of money. We “won” in multiple offers. I’m still not sure if I think we overpaid or not. We probably did.
However, I now see similar houses selling in our neighbourhood for 10-20% higher than what we paid, which suggests to me that my house is quite possibly worth 10+% more than I paid for it.
If (and yes, that’s a big IF) Toronto house prices continue to climb, then it’s possible that getting into the market, even if you are overpaying at the time, might work in your favour.
Never “winning” a bidding war may mean that you spend more time looking for a home, and who knows where prices might be when you finally buy.
Of course, everyone has their own perspectives about the market, but this has been my (fortunate) experience thusfar.