Bully Offers, Bidding Wars, and Auctions

Now that some sanity has returned generally to the housing market it seems prudent to take a deep breath and try to make some sense of the frenzy we all just witnessed. Prices are finally retreating and how far they go will only be known to you who have an infallible crystal ball to consult.

The writer in his 45 years at this game has now seen four of these events unfold and, as you expect, there are always winners and losers. Jim Flaherty, in 2013, saw the dark clouds on the horizon and tried, with some success, to apply some brakes on the runaway train, but some would argue that greed trumped reason, and now four years later some real financial hardship awaits some persons who believed the market only had one direction and that was up. For others who sat on the sidelines new words and phrases were coined and used in the media some of which were completely foreign to the spectators. 

With a rising market the practice of bidding wars developed where offers were held back until the “offer day” and then were presented at the same time with the highest bid usually winning out. Offers with no conditions whatsoever were submitted (very scary in itself) to get a leg up on the other interested parties and many, who were the successful bidder, paid many, many thousands of dollars over the next highest bid. I have heard of one local bidder who left over $120,000 on the table. The latest on the GTA numbers indicate that prices have fallen generally by over 8% in the last month. Where does that leave that successful bidder now?  With hints of interest rate increases I have reminded my own kids of the 18% mortgage rates we faced in the early 80’s. The conditions are quite different now than then but 2.9% may soon become a fond memory. Time will tell. 

In order to try to beat the bidding war, some resorted to a “bully-bid” which, for the uninitiated, is an offer submitted before the designated offer day in the hopes that a pre-emptive strike might lead to success. Sometimes this strategy worked and sometimes not.  I have been of the opinion for sometime the way to administer a boiling real estate market, which would be fair for buyers and sellers alike, is through a true auction. If there are 5 persons interested in a property put them all in a room, set the terms of the sale (reserve, what conditions seller is prepared to accept etc) and then let the bidding begin. Everyone then knows where they stand as to the last highest bid and the end price will usually reflect the real as opposed to some inflated market value. I have my reservations whether the industry or governing bodies would be amenable to such a process but in the long term I believe it would be healthier financially for all the players including the lenders and ultimate consumer. 

This article is not to be construed as legal advice. You are encouraged to consult a professional.