How to Win in a Bidding War

Who would have thought a global pandemic would light the real estate world on fire? At first, I thought it would be short-lived, but more than a year later, that was certainly not the case.

As a real estate broker and investor who built my portfolio in a seller’s market, I have developed some tried and true strategies to help buyers achieve their real estate goals.

There is a lot of hype in the media about how challenging this market is for buyers (and how much sellers are benefitting). What is less often talked about are the ways buyers benefit in a seller’s market. Firstly, you are buying in a market that is going up (win). Next, one of the main drivers of a seller’s market is often low interest rates (double win!). Personally, I’d much prefer buy at a low interest rate in a market that is headed upwards than in a depressed market with high rates.

Despite potential benefits, the process of buying in a hot real estate market can be overwhelming, discouraging and downright exhausting.

Here are some tips and strategies to navigate the current real estate market in a way that minimizes frustration and unintended risk. The goal should be to feel at peace with what you offer on a home, whether you get it or not.

1. Accept the market for what it is. A seller’s market is not for the faint of heart. If you are only willing to buy a home if you can get a ‘deal’ on it, this market may not be for you. Expectations are half the battle. If you are prepared to sharpen your pencil and come to the table strong, you will fare much better. This doesn’t mean you have to give up all control, it just means that you have to be realistic about what it will take to successfully have an offer accepted. For example, if you are not comfortable purchasing a home without a home inspection, consider having the home inspected prior to the offers date so that you are able to write without a home inspection condition.

2. Identify your risk tolerance. There are all kinds of consumers out there. There are buyers who are afraid of the market crashing and buyers afraid to not get into the market before it goes up any further. The truth is, there is no way to eliminate risk when purchasing any investment. Embracing this fact will take some pressure off. What is most important is to honour your own risk tolerance – and not be upset if that risk becomes reality.

3. It’s okay to pay a premium - As long as you do so knowingly and it is within your means. If nobody ever paid more than the price historical data predicts, the real estate market would never go up. If the market continues to go up, you will recapture any overpayment as equity relatively quickly. If the market goes down, you understood that risk and are willing to hold on to your investment through the slump, knowing eventually the market will go back up.

4. Ignore price and determine value. Good, bad or ugly, in a seller’s market, many homes are priced below market value to drive as much traffic through the home as possible. Underpriced homes can fool buyers into feeling like the winning bid paid far more above market value than they actually did. This type of pricing strategy can cause conservative buyers to write too low, knocking down their chances in competition. In order to avoid losing because of a misleading pricing strategy, it is best to create a formula to determine your offer price – and the formula should be based on market value, not list price. It is as simple as deciding what percent over market value (if anything) you are willing to bid.

Here is an example: House is listed at $499,900. Your REALTOR® determines a fair market value is closer to $585,000. If you decide you are willing to pay a 5% premium to secure the purchase (585,000 x 1.05) that would mean an offer of $614,250. While that is $114,250 over list price, it’s actually only 5% over market value.

To put this into perspective, my local market increased 14% the first quarter of this year. For anyone who was willing to pay 5% or even 10% over market value earlier in the year, they are ahead of the game for having been willing to pay that premium. The market increase has already recaptured the premium they paid. Not to mention, they are happily planting their garden in their new home rather than looking at home after home, chasing the market.

5. Steer clear of impulsive decisions. Many buyers win bidding wars by impulsively offering more than they are comfortable paying. This can lead to buyer’s remorse and a difficult situation if you need to sell before the market catches up. The method described in number 4 can also help avoid impulsivity at the offer table.

6. Know your limits. It should go without saying, but purchase within your means. If you require a mortgage in order to purchase, always secure a pre-approval with your lender to inform yourself of your financial abilities and limitations. Your mortgage professional should have from you all of the documentation they will need for your application (with the exception of an accepted offer to purchase) and have pulled your credit bureau in order to provide you with an accurate budget to stay within.

Pro tip: avoid looking at under-priced homes that your REALTOR® predicts will go out of your price range. These homes will distract you from homes you could be writing a successful offer on and they also make your true price range look worse than it is.

7. Write a letter to the sellers. I have personally seen sellers accept offers of less money to sell to people they feel will cherish their home as much as they did and be wonderful neighbours to the friends they have on the street. A heartfelt letter telling the sellers a bit about you/your family and what you love most about their home can go a long way. Including a photo is a nice way to help the sellers feel a connection with you and see your offer as more than just dollars and cents.

A well informed, prepared and confident consumer is a force to be reckoned with in a competitive real estate market. Happy house hunting!