House bidding wars
Crafting a winning strategy
By Madhavi Acharya-Tom Yew – Moneyville.ca
Jaff and Brad Robertson are brothers who are also partners in real estate. They know what it takes to buy an aging property and renovate it. They know what it takes to be landlords.
And they know what it’s like to get into a bidding war.
“It’s definitely nerve-wracking and very emotional. It’s a very stressful process,” says Brad, 28.
“There were times we bumped up our bid without any provocation. We would just think, ‘There’s other bidders now. We need to go in higher.’ “
Last year, they walked away from what seemed like the perfect house.
It drew eight offers and ended up going for about $110,000 over asking.
“We offered more than the asking but not close to that much,” said Jaff, 34. “It wasn’t worth it for us.”
Bidding wars have become the norm in many Toronto neighbourhoods. For first-time buyers in particular, it can feel like a losing battle. There are strategies to help you come out on top.
One key is to keep perspective and avoid getting too emotional, experts say. Of course, that’s easier said than done.
“Nobody ever says, I really want to get involved in a bidding war,” said real estate agent Gina Roman. “People want what they want, and that’s why there are bidding wars.”
The danger of paying a price that far exceeds the market value is that if you need to put the property back on the market in a short time frame, you may not get your money back once agent fees and other expenses are taken into account.
Comment: Everyone forgets that market value is what it sells for. If you paid $800,000 for a house listed at $700,000 then the house is worth $800,000. It was priced too low. Remember, listing price is NOT market value – selling price is. And these days, in Toronto, if you have to sell 12 months later you are likely to get 10% more than you paid – easily covering your costs.
That would certainly be the case if the long-awaited correction in the housing market comes around. Buyers often think nothing of adding $30,000 or $40,000 to a bid as they try to edge out the other guy, especially in the era of ultra-low interest rates. When you amortize that over 25 or 30 years, the added monthly cost is very little.
Comment: Not awaited, predicted by people who have been wrong for about 10 years straight now. There is no correction coming. Toronto real estate prices are not going to go down. Trust me, this is what I do for a living, every day. They may flatten out, but they are not going to drop 20% in a year. I do not want to explain it right now, but if you spend any time on this blog, you will know why prices are not going to drop – I have explained it in 20 other places.
But that’s only part of the story, said Kelvin Mangaroo, founder of RateSupermarket.ca. For instance, for a homebuyer who borrows $400,000 on a 3% five-year term, amortized over 25 years, the monthly mortgage payment is $1,892.98.
If a bidding war pushes the amount borrowed to $465,000, it adds only $307.61 to the monthly payment. But the difference over the course of the mortgage is a whopping $92,282.83 – and that’s assuming mortgage rates remain unchanged, which is unlikely.
“The total interest cost is huge, but people don’t tend to think of it that way,” Mangaroo said.
Comment: But that is moot when we are talking about $200,000 in interest paid over 25 years. It is the $300 a month that matters.
The danger for young couples is that they become cash-strapped, and are unable to save for emergencies, their children’s education, or their retirement, said real estate agent Nick Horton.
Sit down with a banker or mortgage broker and make sure you understand how much you’ll be able to borrow, and how you would carry the monthly payments.
Comment: And then take less than they will give you. I bought a house for $200,000 less than the bank would have given me. But that gives me money to play with, not having to spend EVERY cent on my mortgage. I may not live where I want to, but I am not stressed out about making my payments.
Get a pre-approval, but keep in mind that it doesn’t mean you are guaranteed to get a mortgage, especially if you’ve overpaid on a property and are up against your upper limit for borrowing.
Comment: Can we please stop using the word “overpaid”? It has no meaning. If you paid more than listing, that just means the house was under priced, not that you over paid.
After a couple bidding wars, Brad and Jaff took a new approach.
“We got to the point were we tried to take emotions out of it, give an objective valuation of what we thought the house was worth to us and if we didn’t get it, we didn’t get it,” Brad said.
Contact the Jeffrey Team for more information – 416−388−1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
- House sellers, buyers balk at bidding wars In a market where listings are down significantly compared with…
- Stop Toronto’s bidding wars Want to stop bidding wars in this city? Don’t get…
- Young couple squeezed in ‘crazy bidding wars’ Buyers now find themselves house-hunting during the most volatile market…
- Real estate bidding wars heighten pressure for buyers Buyers are not only paying a premium to win houses,…
- Five things we learned about Toronto’s real estate bidding wars from the Globe and Mail A recent Globe and Mail feature delved into Toronto’s bidding…