Bidding wars: 6 tips you should know
Multiple offers on your dream house? Take a look at these tips before heading to a bidding war.
Bidding wars can be total madness. Sellers take advantage when there are multiple offers on their home. They want the best offer they can possibly get and will even let a bidding war happen for it.
When there is a shortage of affordable houses in competitive markets (like Vancouver and Toronto), house bidding wars are the next step. About 55% of home buyers in these areas were in a bidding war at the time of purchase according to the Canada Mortgage and Housing Corporation (CMHC).
Here are 6 tips for bidding wars you should know.
1. Know when you are being tricked
Avoiding a bidding war is the wise thing to do from the start. You can know if a fierce fight is upon you by looking at the listing price.
A typical red flag is when a listing price is too good to be true. Some sellers set the listing price lower than the market value to attract multiple buyers and get the highest possible offer. Consult your real estate agent and research the average market value of the neighbourhood.
2. Get a pre-approved mortgage
Know your limits before going head-to-head with your competitor. In a bidding war, a mortgage pre-approval can be a great advantage.
A pre-approval lets you know a couple of things: you know how high you can go and you have the guarantee that your lender has agreed to it. With that, you are ready to make an offer even before the bidding begins and show that you are a serious buyer.
When you make the offer, you have two options. Either give the highest offer or leave some room to raise the bid if another buyer has a more attractive proposition.
3. Focus on your budget
Try to prevent “ignorant bidding.” This is where you raise your bid without grasping how it will affect your month-to-month finances. You don’t want to break the bank.
Your home buying budget should not be the only thing to consider. Your monthly payments should be the first thing on your mind. Mortgage, utilities and property taxes should not be over 30% of your income. There should always be room for other expenses. When considering a higher bid, think about the impact it could have. An extra $70 a month might not seem much, but it can add up in the end. Getting a mortgage, you can’t afford is more stressful than the bidding war itself.
Calculate the impact of a higher mortgage loan and its interest rate can have before raising your offer. And remember that you also need to pass the new mortgage stress test.
Avoid thinking that your higher offer will return a higher return on investment. The market corrects itself, and your home might not be worth what you paid for down the road.
4. Be ahead of the game
Here is a tactic to win before the war begins.
Before the open house, make an offer they can’t refuse. Get a head start by booking a house visit before the usual weekend open house or “offer night.” The trick is to be ready with a clean offer. You have to show that you are a serious buyer. Have pre-approved financing and a certified check ready to be cashed in. No need to keep your fingers crossed if you act first.
5. Send some love
When facing another buyer for your dream home, sometimes going for the seller’s heart and not their wallet is a better tactic.
There have been situations where buyers win the bidding war by writing a letter. They explain to the seller why they want the home, how they see their family grow up and what they will do to take care of it. After all, selling a family home can be an emotional process.
6. Learn to walk away
Letting go sometimes is the best action to take. If you can’t afford it or your offer simply got rejected, you can also search for homes the next day. Homeownership might take more than one attempt, but it is an investment worth not giving up.