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Why You Shouldn't Sell Your House In A Bidding War

03/18/2016 09:58 EDT | Updated 03/19/2017 05:12 EDT
Shutterstock / Andy Dean Photography

In recent years, as the housing market in Toronto has become more heated, there have been many news articles about houses selling in bidding wars for several hundred thousand dollars above their asking price. This certainly sounds exciting and profitable for the home seller. However, upon further examination it becomes clear that for many of these home sellers, they may not have chosen the best strategy to maximize their profit.

First, let's define what a bidding war means. This is when the seller will list their house at an artificially reduced price, show buyers the house over a period of about a week, and then have an offer date where all interested buyers present their offers. The expectation is that they will sell for well over the asking price, and have multiple buyers bidding against each other.

Something that I find surprising is that for most people who sell through a bidding war, they never seriously consider other options. They just follow the advice of their listing agent, and don't do a thorough analysis of what has worked best for other similar properties in their neighbourhood. When I help people to sell their homes privately, we always look at all relevant sales and get a market valuation through the help of an appraiser. We look at homes that sold through bidding wars, and also homes that sold using a more traditional method, which can be described as listing the house at the price the seller wants to sell for, and accepting offers at any time.

In almost all cases, we've found that on average, houses that sell using the traditional method have a higher success rate, and they also sell for a higher price. That's right, homes that sell using a traditional strategy will often sell for a higher price than bidding war sales that sell for several hundred thousand dollars above asking price. Some of my clients find this very surprising, as it seems like we hear nothing but good stories about bidding wars. However, when you break down the bidding war process, it becomes clear why the bidding war strategy might yield worse results.

The most important thing to consider is that by relying on a single week of exposure for a property, a seller is definitely missing out on potential buyers. What if their ideal buyer is on vacation that week, or focusing on a different property, or is a week away from starting their search for a new home? These are all buyers a bidding war doesn't target, but a traditional home sale would. Something else to consider is that many buyers dislike the bidding war process, and after losing out on a few homes that list through bidding wars they focus on houses selling using the traditional method. Bidding wars are very stressful, and the process of submitting an offer, waiting for hours in the car outside the house on the offer day, then finding out it was all for naught is a very unpleasant buying experience. In the end, fewer potential buyers means a smaller chance of finding the one buyer willing to pay top dollar for a house.

Another misconception we hear is that when houses are selling for so much higher than the asking price, people assume that every bidding war sale must be a record price for that neighbourhood. This is rarely the case, and something to remember is that there is a built-in safeguard that prevents buyers from significantly overpaying for a house in the form of a mortgage. If there is any question about the purchase price of a home, the mortgage broker will always do an appraisal, and if the appraisal doesn't match up with the purchase price, then the financing won't be approved.

So if there is data that shows the bidding war strategy doesn't necessarily benefit home sellers, then why have they become so prevalent? If you consider the nature of a bidding war, which is largely based around arranging a quick sale, then it is clear the person who benefits the most from this strategy is the listing agent. They do less work when coming up with the listing price than they would in a traditional sale, the house is only listed for a week, and then there is one very busy evening as they review offers. Then after just a week of work, they get to move on to the next house.

Whenever someone is selling their home, they should treat it as they would any large investment and do a thorough analysis, consider all options, then make an informed decision. In some cases, especially if a quick sale is desired, then a bidding war can be a viable option. In many cases though, using a more traditional method will result in higher profits for home sellers.

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