How to Avoid Bidding Wars When Buying a New Home

By: Nelson Smith on May 4, 2015

If you’re buying a house in a popular Canadian city such as Toronto or Vancouver, you’re most likely going to have to deal with the dreaded multiple offer situation. If this happens to you the smart thing to do is politely bow out, otherwise it could end up costing you big time.

Would you get into a bidding war for your dream home?

Bidding wars a.k.a. the multiple offer situation goes a little something like this: The listing Realtor intentionally prices a property for anywhere from $50,000 to $200,000 less than what it’s worth. Within a few days, dozens of buyers have looked through it, and at least half of them end up submitting offers. But since there will end up being 10-15 offers on the table, buyers are encouraged to go nuts and put their best foot forward.

After the sellers get presented with all the offers, they’ll generally make counteroffers to a couple of the buyers, trying to extract every last cent from buyers who have been afflicted with a bad case of house lust. All the headlines scream “Buy Now!”, and the buyers are more than happy to oblige. After all, they don’t want to be shut out of the market forever.

After the second round of negotiations, one lucky couple gets the good news. They’ve been chosen to spend $150,000 above list price and saddle themselves with a debt of close to $1 million. 16 other couples go home, disappointed, vowing to bid even higher next time.

In what kind of world is this a good way to buy a house?

It’s dangerous for your bottom line

As much as I hate the current way people in Toronto buy houses, I have to give credit to the Realtors who figured it out. So many people competing against each other is bound to bring out the worst in everyone, which is best for the seller.

But from a buyer’s perspective, it’s a terrible way to go about doing it. I understand buying a place you like, but buying a house should at least be kind of a rational process. You identify the amenities you want, and acquire them in the cheapest way possible. In a multiple offer situation, there’s no way you’re doing that. The seller is using fear and competition against you.

Have you seen the offers buyers are submitting for these houses? They’re horrible. Buyers are regularly waiving their right to a home inspection for ancient houses that are filled with knob and tube wiring, asbestos, and probably racoons in the walls. New home renos might look pretty, but there’s often nasty stuff hiding behind. Have you ever watched an episode of Holmes on Homes?

It’s the same thing with the mortgage clause. Buyers just assume that they’re approved for a mortgage because they have a pre-approval letter from the bank. Sorry, that’s not how it works. The lender approves both the buyer and the home. The pre-approval just means they’ve approved the buyer. Approving the price paid for the home is a whole different story. With no mortgage clause, the buyer can’t walk away if they’re unable to obtain financing.

For your own sanity stay away from homes with multiple offers

So what should you do if you find yourself in a multiple offer situation? I have an idea.

After confirming with your agent that there will indeed be multiple offers on the property, excuse yourself from the premises, run down the street, and keep running until you never see that property again. Maybe run towards your current house so you don’t have to find a way back home again.

Getting into a situation where you’re competing against so many other people is not a good way to buy a house. The smart way is to wait until the market cools down and then calmly make a rational decision. When fear and greed are the overwhelming emotions, I guarantee those people aren’t acting rational. Just read about the experiences Toronto buyers are going through right now. It’s obvious how emotional the whole process is.

Buying a house is emotional at the best of times. Mixing that with a multiple offer situation is practically begging for trouble. If I'm looking to buy in a city where those types of deals are common, I’d be content renting. I suggest you do the same.

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