We get asked quite a bit about how bidding wars work and although it’s not technically fought like an actual “war”, it can be a serious issue for Canadians who are eager to buy real estate and are facing steep competition. For them, the housing market really can feel like a battle with not-so-great odds.
Bidding wars are even more severe in today’s seller’s market where some buyers have been forced to tender offers far above the listing price in order to come out on top of high demand. In fact, due to recent conditions, the practice of bidding wars has come under fire for helping the market value of real estate to shoot up. However, bidding wars are not all-out chaos – there are some rules that should be noted.
What do bidding wars look like?
Bidding wars are not to be confused with multiple offers on the same property.
Multiple offers are simply just that: when multiple potential buyers put up competing offers to buy a property. The sale then usually goes to the buyer offering the highest amount. Bidding wars escalate from multiple offer situations when the seller or selling agent encourages the potential buyers to compete with one another in order to put in the highest bid.
In a bidding war, buyers are attempting to outbid each other incrementally in a sort of auction-house-like fervor. Often, this situation is brought on by the listing agent, who encourages other buyer agents to raise their offers after receiving the initial bids.
Properties selling for far above the asking price
There are also situations where a bidding war arises organically without assistance from the agent. This is happening more often in today’s very tight market where desirable properties are seeing high competition for purchases. Whether incited or organic, bidding wars are largely responsible for houses that sell far above asking.
Are Bidding Wars Legal?
There is no law in Canada that prohibits a bidding war from occurring. This doesn’t mean that they are a free-for-all, however, as there are guidelines on how they should be conducted as well as ethical concerns to keep in mind.
Ethics of Bidding Wars
For most people, buying real estate is not an everyday purchase and can have a lot of emotion and heavy financial concerns placed upon it. Because of the high importance, real estate purchases have for most people, there is a level of ethical obligation that real estate agents have to their clients.
The Canadian Real Estate Association (CREA) has its own official Code of Ethics that agents in the real estate business are subject to. Regional real estate associations may have their own codes as well.
Under the CREA code, realtors have a duty to protect and promote the interests of their clients. This is why if a client wants to incite a multiple offer situation or even a bidding war, it is the realtor’s obligation to do what is best for them.
There is also an obligation to disclose if a realtor is representing multiple clients on one sale, and not use any private information to give anyone buyer a competitive edge.
Bid Disclosure Rules Vary by Province
There is also a legal obligation that a realtor cannot disclose information on competing offers, though this rule will vary between provinces. In some areas, realtors are permitted to disclose the existence and number of competing bids, while others allow the disclosure of actual values with the consent of the seller.
As a seller, you may be interested in encouraging competition for your property. However, there are some rules a realtor needs to follow. These rules may vary by province so be sure to check with your region’s real estate association.
For example, under the rules of the Ontario Real Estate Association, an agent may not claim to have offers unless an official written offer has been received, and they must disclose the number of signed offers to a buyer when asked.
If you are an agent facilitating a bidding war, it’s important that you clearly outline the bidding process that buyers must follow, and remain communicative about new or changing offers to all parties involved in the bidding. This is not only a courtesy to clients and buyers, but it also helps you stay organized in the rapidly changing bidding environment.
How Do You Win a Bidding War?
The question for some home buyers who are looking to buy a home now is how to come out on top in a competitive sale. Ideally, it is best to avoid a bidding frenzy altogether, as you will often end up paying more than you planned to.
Short of that, it essentially comes down to offering more than other buyers, but you can also help yourself in other ways. For example, conditional offers do not do as well in competitive sales, so unfortunately you will often have to forgo options like a home inspection to maximize your chance of closing a sale. You should also do your best to stay on top of the bids and put in your offer in a timely manner, to avoid falling out of the running.
Ultimately, despite your best efforts, you can still find yourself on the losing end of a bidding war. Many Canadians have faced the situation of putting up multiple offers without being able to close a sale. Overall, just temper your expectations, buckle your seatbelt, and be prepared to shop around.
Criticisms of the current bidding process
The practice of bidding wars, particularly blind bidding, has come under fire recently as Canadians grow frustrated with the home buying process. Critics in the real estate industry say that the blind bidding process allows for manipulation by realtors acting in bad faith, as well as out of control bidding situations that drive up prices. Ultimately, they say blind bidding does not benefit the consumer. These critics often call for a move to a more transparent open bidding system.
To counter these criticisms, proponents of the current system argue for the seller’s right to choose how their property is sold, as well as the fact that in countries that practice open bidding, the situation of out of control prices and bidding wars is not particularly more tame than in Canada.
To discuss our strategies about bidding war situations, reach out to the TRB team anytime – we’ve been on both sides of the coin here and have some tried and tested methods that help out both our buyers and sellers in today’s market.