Hi there. In this post, I go over the basics of a bidding war in real estate in a blog-style post. This post is motivated by a recent move into a new home with the family after winning a bidding war back in March. I am now just outside the Toronto area.
Disclaimer: Do manage finances responsibly. This is one person's experience in the real estate market in Toronto. Your experiences with house hunting may vary. Prices in your area may be cheaper or more expensive than in the Toronto area.
The house screenshot pictures are from the Royal Lepage real estate website.
Toronto housing nowadays is out of control (during lockdown or not). Factors include many people (including newcomers) wanting to be in Toronto, low interest rates, housing with high-end furnishings, and more buyers than sellers. A detached home that does not look good and is old in the Toronto city is pretty much one or two million dollars (CAD). Houses that are near downtown or closer to the lake are much more expensive compared to the Toronto suburbs and cities just outside of Toronto.
This listing is east of downtown Toronto. It is priced at 1, 049,000 CAD. It does not look great from the outside and is not a detached home.
Townhomes and condominiums are cheaper than their semi-detached and detached homes in Toronto but they are still pricey. This Toronto condo listing is just over half a million CAD and is located northeast of Downtown Toronto.
A condo listing more in the downtown Toronto area such as this one is listed at $789,000 CAD.
Some Cities Just Outside Toronto Are Expensive Too
The surrounding cities outside Toronto are not as expensive as Toronto but the prices are crazy inflated too. The city of Mississauga is west of Toronto and is near the Toronto Airport has insane prices too. This semi-detached home listing has a price of $799,900. It does have some nice furnishings if you check out the pictures.
Some more affordable houses are found east of Toronto and farther away from Toronto.
When there are more buyers than sellers the real estate market becomes a seller's market. Buyers will have to compete in price to buy houses. It is like musical chairs where the chairs are the sellers with their houses and the players are the buyers.
Having more buyers than sellers allows for the existence of bidding wars. Those who want to buy the house have to compete with other people who want to buy the house. Willing participants will put in a bid for a chance to purchase the house. Bidding prices could be below the listing house price (low-ball), at the listing price, or above the listing price. The seller(s) of the house will look at the bids and choose their best offer.
Winning bids are usually the highest bids. In some cases, the winning bid may not be the highest price. It could be a second highest bid but with less restrictions (i.e. no inspection, cash only).
With bidding wars, you do not know if you have won the bidding war until after the bidding is done. The winner of the bidding war is notified and those who did not win are not notified. Winning offers are then shown as public information. You do not have to be a part of the bidding war to obtain the winning offer prices. The real estate agent can deliver that information to you.
You can use past bidding war results to get an idea what the real estate market is like. In March 2020 in the Toronto area (pre-lockdown), many winning offers in Toronto (and in Mississauga west of Toronto) were above the asking price. It was common to see listing prices be priced low to invite bidding wars. In addition, the Toronto & surrounding area housing market was super insane to the point that the metagame was to have offers with no inspection. Our real estate agent was mentioning that it is a seller's market. Sellers won't take offers that have home inspections. It is irrational yes but that was the market.
Many of the winning offers were at least $50000 CAD above listing prices of $500,000 to $1 Million. To be competitive, we had to put in offers above asking. When the family and I saw any listing prices we assumed that the actual purchase price would be at least $50000 to $70000 above the asking price.
At that time the previous family home was sold so when we put in our (first) bid on a house we liked, we wanted to put a strong bid above the asking price of $599,000. Our real estate agent's suggested bid was something like $670, 000. My mom's idea was to put in $681, 000. Putting in $680, 000 was a previous bid idea but putting the extra $1000 was to beat out those who liked nice numbers. It turned out that our bid of $681, 000 won beating out the second highest bid of $680, 000! The extra $1000 trick was effective.
How Much To Bid??
There is no exact science when it comes to bidding. You could use the mathematics and economics field of game theory to increase the likelihood of winning the bidding war. Losing the bidding war may not be that bad if the winning offer is something as crazy as $120, 000 over an asking price of $500,000. If you lose the bidding war, you have to move on, possibly think over some things and try again with different areas, regions and houses.
It is also a good idea to consult with a bank to determine credit limits. This can help in finding a maximum amount for bidding.
After winning the bidding war there are some extra costs involved. These include real estate broker fees, taxes, moving costs, paying for extra appliances and maybe future renovations (on an unfinished basement).
Thank you for reading.
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