Multiple offers have long been a reality in the Toronto real estate market, with sellers holding offers until a certain day in an attempt to create a bidding war. Over the past 12-18 months this situation has started to become more common in other markets, with properties in Oakville selling last spring at tens of thousands over list price due to multiple offers.
So if you have seen a home that you want to purchase and find yourself in a multiple bid situation, how should you handle it?
The answer to that question is very dependent on how risk averse you are. The unfortunate reality of multiple bid situations is that an offer with no conditions is more likely to be accepted over one with conditions (even if the offer price is less). This is leading to buyers removing all conditions in a desperate attempt to beat out the competition. There are huge risks associated with this approach.
The risks associated with removing the home inspection condition are fairly obvious. It is possible to complete an inspection prior to offer date, or sometimes the seller already has an inspection ready for potential buyers to view. If the latter is the case, then make sure that the company who have completed the inspection are a well known, reputable company, not the Sellers brother in law! The risk with the first approach is that, if you are unlucky in the bidding, then the money spent on the inspection is wasted. Repeat this a few times and you could pay out for a lot of inspections before you finally succeed in purchasing a house. Sometimes leaving the condition in, but shortening the time in which you have to meet the condition can be successful, particularly if the rest of your offer is strong.
Probably the most common condition in offers to purchase is the financing condition. Buyers often feel that as they are pre-approved for more than their offer amount then they will be sure to get their mortgage on this property and are safe to remove the financing condition. Not so, the pre-approval is an assurance that, given your income and debt load then the financial institution will be prepared to lend you up to a certain amount, but it is no assurance that they will lend that amount on the property you are offering for. The lender needs to approve the property that their money is being spent on, not just the borrower. It is this process that the financing condition covers.
If you do not have the financing condition, and then pay way over the asking price then there is a definite possibility that the lender will refuse the loan based on appraisal value of the property. If that happens, and you cannot find another lender prepared to advance you the cash then the deal will not close and you are in big trouble. This situation is not helpful for either the buyer or the seller, and is something that listing agents should be advising their clients about before they accept an offer at massively over the list price with no financing condition. This situation can be mitigated if the buyer has a large down payment, as the risk to the lender is reduced.
So, if you are planning on taking out your financing condition, then speak to your lender about the property before you put in the offer. I have had clients who have managed to obtain a lenders agreement for a loan up to a set amount for a specific property before the offer was prepared.
Having decided what you are going do about your conditions, you then have to decide how much to offer. You want to beat the competition but not overpay for the house. Its a tough call, the other offers are invisible to you, although the listing agent has to inform all interested parties of the number of offers they have received, they cannot reveal the details. This is the part where you need to park your emotions. Have a good hard look at the recent sales and decide on a price that you think would be a fair price for this home. Then decide how much above this fair price you would be prepared to go to, and that is your offer price.
Ideally it should be a price where, if you miss out by even a small amount, you are OK with it because you really would not have paid more. AND the price where, if you get it, you don’t lose sleep for the next year worrying that you paid too much.
If you can’t find a price that is true for these two statements (particularly the second one) then you are in a no win situation and it may be better to save yourself the stress of putting in the offer and move on to the next house.