Banning Blind Bidding

Should Blind Bidding Be Banned?

Bruce Brown Buying And Selling Leave a Comment

Should blind bidding be banned? The Liberal Party of Canada seems to think so. Justin Trudeau created quite a stir when he announced the party’s plan to ban “blind bidding” in real estate transactions at a campaign stop recently. When I heard the news, I thought it likely an exaggeration or other form of “fake news” because real estate transaction management is under provincial jurisdiction and covered by the Real Estate and Business Brokers Act – recently transformed into the Trust in Real Estate Services Act, in Ontario.

You can read this objective of the Liberal Party in their housing plan here: Liberal Party Plan to Ban Blind Bidding or download a copy of the complete plan here: Liberal Party Housing Plan.

According to news sources (CTV & The Globe and Mail) follow-up inquiries to the Liberal Party about this agenda item revealed they plan to enforce it in the Criminal Code of Canada to supersede real estate sector regulations.

There is drama on both sides of this issue. Making it a criminal offense for a home owner and/or their licensed real estate broker to employ a closed offer process in selling their home, a practice which is mandated under Ontario Regulations, seems more than over-reach – it seems irresponsible. On the other hand, the reaction by two of Ontario’s real estate associations were disingenuous and misguided, and communicated in hysterical fashion.

OREA (the Ontario Real Estate Association) took to social media to express their concern, but images of home owners in handcuffs were pretty ridiculous, as well as disingenuous. Presumably the government action would target Realtors, not home owners. The impact of the ban would be felt by home owners, to be sure, as they would not benefit from the current offer system if they use the services of a Realtor, as the Realtor would be obligated to use an open auction process.

You can read OREA’s full statement on this issue here: OREA’s Statement on the Liberal’s Plan

The Toronto Regional Real Estate Board’s response focused on privacy issues: TRREB’s Statement. You would think after unsuccessfully challenging in court the publication of sale (sold) prices using a privacy argument, TRREB would learn something. I said it then and I’ll repeat it now: there is no privacy issue related to the offer process nor to publication of final sold prices of properties. Sale prices are a matter of public record, available to view at your local land registry office if you don’t have online access by virtue of your vocation. An open offer process can easily be conducted in a way that shields the identify of the participating buyers; but even if buyer identities were known it would be nothing new. Prior to widespread use of electronic signatures and offers by email, buyers would routinely attend the subject property or the seller’s agent’s office to present their offers and be on stand-by to make improvements. Furthermore, the Australian model often lauded by proponents of the open offer process, involves buyers attending a live auction on the front lawn of the subject property. Privacy?

In this article I’ll break down the closed offer process and the alternative, and we’ll apply what seems glaringly lacking on all sides of most real estate issues: critical thinking.

Before I start, I want to state my positions up front, so you don’t have questions about my biases swirling through your brain, detracting from the critical analysis:

  1. This is not a politically motivated article. I opened by stating that the Liberal Party’s proposal is irresponsible. I say this because it is irresponsible on its face, not because I think it is too liberal nor because I have any animosity toward the Liberal Party. I have not decided yet which party I will vote for in the upcoming election. I have voted for different parties in every election, based on my assessment of their plans to address the issues of the day.
    Mandating an open offer process via the criminal code, especially when provincial regulations governing realtors currently mandate the opposite, is irresponsible. If the Government of Canada wants to change this practice, it needs to consult with the Provinces, and with people who understand and take a holistic view of the real estate transaction process, and form new regulations. “Banning blind bidding” is lazy pandering to popular (or at least, “most vocal”) sentiment without the slightest attempt to explore the implications of current or proposed regulations.
  2. I am not one to defend the status quo in real estate. There are problems with current real estate regulations and practices. I’ve developed a framework for a comprehensive overhaul of real estate practices that most in the industry would consider radical – far more so than the simpleminded idea of “banning blind bidding”.
  3. Real estate practices should be transparent; my own ideas are founded on several principles, including transparency. Simply “banning blind bidding” is not the right approach and does not in fact lead to much greater transparency when you break down the whole process.
  4. An open offer process may seem more “fair” to buyers, but it will not decrease average property values over time. I’ll explore in this article whether it is in fact more fair to buyers.
  5. I may soon publish my framework for real estate transactions that would increase transparency and solve many other key problems with current real estate practices.

Let’s begin with the current offer process. Ontario regulations governing Realtors set clear rules concerning the sale process when competing offers are received. The rules are (I’m re-phrasing):

  1. The Realtor must disclose to every person making a written offer, how many written offers have been received.
  2. The Realtor must not disclose to any person the substance of any of the written offers.

Given there are only two rules, it is fairly easy to figure out what they are designed to achieve. The obvious purpose of the first rule is to ensure every person making an offer on a property knows how many buyers they are competing against. Presumably this information helps buyers refine their assessment of the value of the property, and thereby the highest price they are willing to pay for it.

Often forgotten in the “analysis” of the “housing crisis” in Canada, is that there are two sides to every transaction. The second rule is designed to protect sellers. Every buyer values a property differently. This is true regardless of market conditions; it’s true for any commodity, and the more complex the commodity the greater the variance. If you think there is an “objective” value for each individual property, you should study the stock market and retail sales, and start price shopping for cars or computers or renovation contractors or artwork. Our entire economy is based on give and take, and subjective valuations. The current rules force each buyer to perform their own diligence and make an assessment of the value of the property to determine the highest price they are willing to pay for it. Sellers expect the opportunity to sell for the highest price the market will bear and this process ensures each buyer brings their best offer based on their own assessment, not influenced by how much other buyers might pay for the property.

There are two primary complaints about the current system:

  1. It is commonly the case in an intense seller’s market that the winning offer in competition is significantly or even grossly higher than the next highest offer. Many people feel that this is a driver of increasing house prices. This is the crux of the argument that blind bidding is a culprit contributing to rising home prices.
  2. Many buyers are frustrated that they are unable to acquire a property in such a competitive market, and some of them feel they could have acquired a property if they’d only known the highest offer in advance – because they would have paid more.

The first thing you should notice about these two widely expressed concerns is that they contradict each other. The first complaint blames rising prices on blind bidding, while the second complaint comes from hordes of disappointed (often repeatedly) would-be buyers who feel they unnecessarily lost in competition and would have been willing to pay more than the final sale price.

The reality of the competing offer process today is that often the highest price offered is quite a bit higher than the second place offer; however, more often, it isn’t. Very often, two or more offers are close in price. Yes, over the past year with additional downward pressure on supply (fewer people listing their homes for sale during lockdowns) and steady or modestly rising demand, we have seen a higher number of extraordinary cases than usual, with sale prices grossly exceeding all other offers for a property. But taken on the whole through market cycles over the past 16 years as I have experienced working for hundreds of buyers and sellers, these extraordinary cases are the exception. Even over the past year the extraordinary cases have been the minority. Any solution to perceived problems with the process needs to be formulated to work well and fairly in all market conditions. And it needs to be fair to buyers and sellers.

A Critical Look at Open & Closed Offer Procedures

I think the best way to analyse and understand how the current closed (blind) offer process impacts home prices and whether an open offer process would achieve the stated goal of moderating prices is to walk through the offer process and look critically at how buyers and sellers behave at each step of the process. We’ll also look at popular complaints or objections to each aspect of the process.

Step One – Listing The Property

Let’s start with the current process. A Realtor lists a property for sale on the local MLS System and in order to give as many interested buyers as possible an opportunity to consider the property, the listing states that the seller will not review offers during the first week of the listing. A date and time at which the seller plans to review any submitted offers is set.

Complaint #1 – Holding Offers Is All About Realtors Gaming The Market

A very common complaint, ranted by thousands in online forums, is that the whole concept of the seller delaying the consideration of offers is a devious, unethical ploy by Realtors to game or manipulate the market. I don’t mean to demean people who are simply frustrated by rising house prices, but the bottom line is that this is a ridiculous complaint because:

  1. Not allowing time for as many interested buyers as possible to consider the property is unfair to the seller, who has a right to sell for full market value (the highest price the market will bear).
  2. Not allowing time for as many interested buyers as possible to consider the property is unfair to buyers who can’t necessarily run out on the day a property lists, view the property, do their diligence, and frame an offer.

What would step one look like if the Liberals ban blind bidding? Using an open offer process, the terms (or at least the price – more on this later) of any written offer will be made public. Is this the case immediately when the first offer is received, or only once the second offer is received? Is the price made public, or is it only told to parties who make an offer? Does the fact you’re using an open offer process change step one? Will sellers now not delay the consideration of offers? Absolutely not: with an open offer process, it’s even more important for the seller to delay offers. The whole concept of open offers is to create an auction atmosphere. You can’t sell successfully if you don’t set a date for the auction.

Step one conclusion: banning blind bidding has no impact on the practice of delaying the consideration of offers.

Step Two – Pre-Offer Diligence

Our property is now on the market, with prospective buyers booking showings and having the opportunity to perform their diligence before the offer date. In some cases, the seller does not allow sufficient time for buyers to perform home inspections prior to making an offer.

Complaint #2 – Buyers Aren’t Given The Opportunity To Inspect The Home

The Liberal Plan includes mandating a buyer’s right to a home inspection. This may be a good idea because there are some Realtors who, when working for the seller, do not allow sufficient time for buyers to conduct a home inspection prior to making an offer. That’s another topic I could cover in a future article. There is nothing inherent in an open or closed offer process that impacts a buyer’s opportunity to conduct a home inspection. In either case, for each prospective buyer to have the opportunity to inspect the home before or after making an offer, the seller would have to give permission and the seller’s agent would have to ensure enough time is allocated.

Some people advocate sellers providing a home inspection report rather than each buyer hiring their own home inspector. There are arguments on both sides of this suggestion that I will leave for a future article.

Step two conclusion: banning blind bidding will have no impact on a buyer’s right or opportunity to conduct a home inspection.

Step 3 – Offer Day

The property has been on the market for one week, and because we’re in an intense seller’s market, dozens of buyers have viewed the property in person and some have engaged home inspectors to examine the property and provide a detailed home inspection report. Each buyer has done some financial diligence – some will be essentially fully approved, others partially approved, and others perhaps have done little diligence and assume they can afford the property. Some buyers do not require financing.

The date set for offers arrives, and this is where the open and closed offer processes differ. This is where the Liberal Plan to ban blind bidding is intended to help moderate the escalation of house prices. This is the day the Liberal Party’s Home Buyers’ Bill of Rights says is based on “predatory, high-pressure tactics designed to take advantage of prospective buyers“.

Blind Bidding – The Closed Offer Process In Action

Let’s look first at the current process on offer day.

The home is listed for $450,000. Mary (home buyer) has done her research and feels the house is worth about $500,000 based on many other homes she’s viewed and a couple she’s made offers on and lost in competition. She knows it’s an intense seller’s market and there is competition for every desirable property, especially when they are priced below perceived market value.

Mary submits an offer for $450,000 on offer day, several hours before the time set by the seller to review offers. A couple of hours later, Bob, another buyer, not knowing whether there are any other offers in play, submits an offer for $460,000. The seller’s agent notifies Mary that one other offer has been received, and also notifies Bob that there was in fact already one offer in hand prior to receiving Bob’s offer. Over the next couple of hours leading up to the time set for the seller to begin reviewing offers, 7 more offers are received from other buyers. As each offer is received, the seller’s agent notifies every party who has already made an offer, including the latest buyer who just submitted an offer, how many offers in total are currently in play.

When the time set to review offers arrives, the seller’s agent reaffirms the total number of offers in play, notifying all buyers who made an offer. In this case, that is 9 offers (Mary’s offer, Bob’s offer, and 7 more offers from other buyers.)

Each buyer may have decided at any time to improve their offer in writing as they learned of the increasing number of offers in play. Generally buyers mark up their original offer and re-submit it, but they could choose to submit an entirely new offer to replace their previous offer. Many buyers decide to wait until the seller’s agent provides the final count of the total number of offers in play before submitting an improved offer. Mary and Bob both decide to wait; they each figure they may as well wait to know how many offers there are in total before deciding on their final offer. The seller’s agent when communicating the final number of offers will normally, at a minimum, invite all buyers to resubmit within a short time period (perhaps 30 to 60 minutes) if they choose.

Having received all offers including any revisions to those offers based on the number of offers received, the seller’s agent then reviews the offers with the seller. Because no buyer knows the content of any other buyer’s offer, there is no reason for each buyer to re-submit after they have submitted their best offer based on the number of offers. They have no idea whether their offer is the preferred offer at this time. For this reason, the seller can assume that most of the buyers will have submitted their best offer and therefore sellers often do not try to negotiate further with the buyers. However, if two or more of the offers are very similar, or if the seller wants to simply try to get more, the seller may counter any one or more of the offers.

In our sample story, Mary decides with 9 offers in play (including hers) to submit her best offer of $517,000. She decides that it is worth paying a reasonable premium over her assessment of objective fair market value. The market is escalating rapidly and paying a little more than her highest assessment seems prudent as opportunities to buy in this market within her budget are infrequent.

Bob also submits his best offer at $526,000. It turns out that one of the other 7 offers (from Tatiana) came in at $527,000, while all the other 6 offers were below $510,000. The seller feels that because Bob and Tatiana’s offers are so close, it is worth finding out if either of them might pay more. There are several ways the seller can attempt to increase the sale price:

  1. the seller can counter one or both of the two highest offers, with an amount the seller hopes one of the buyers will accept (I won’t go into the logistics and offer clauses required to implement this; suffice to say, it is one option)
  2. the seller could direct their agent to inform the two agents whose clients have the best offers that the seller is working to decide between two offers, and if they want to improve their offer further it could make the difference in their offer being accepted or not
  3. the seller could simply choose one of the offers to accept.

In my real world experience about 75% of sellers choose option 3, whether of their own accord or at the recommendation of their agent. In the vast majority of the remaining 25% of cases, the seller chooses option 2. Based on my experience, option 1 is infrequently used in the Ottawa market.

In our story, the seller’s agent recommends option 2 and the seller agrees. Upon being told their offer is one of two under consideration by the seller, Bob decides to increase his offer to $536,000. Tatiana raises hers to $531,000.

Blind Bidding Isn’t Really Bidding

The story describes how the current “blind bidding” system works in Ontario. There are minor variations but the story captures the essence of the process. Each buyer submits what they feel is their best offer based on the number of competing offers, and there are opportunities for negotiation within the framework.

Does this process look like a “bidding war” to you? The reality is that a closed offer process, like a silent auction, is not really a bidding process at all. When buyers do not know the competing offer prices, there is nothing to bid against.

There are two primary complaints about the closed offer process.

Complaint #3 – Blind Bidding Results in Buyers Paying More Than Necessary

When buyers don’t know the price of competing offers, they may offer more than necessary to exceed the second highest offer. In our story above, Bob could potentially have purchased the property for $532,000 instead of paying $536,000. And yes, there are times in the real world when Bob’s offer may have been much higher. Bob could pay grossly more than necessary to “win”.

Undoubtedly there are times when the final price paid is higher than it needed to be. It’s important to remember that this is by design. Competing offer rule #2 in the real estate regulations helps ensure the seller is able to sell for the highest price the market will bear, from a buyer acting based on his or her own assessment of the value of the property. If this bothers you as a buyer, ask yourself: when you sell your home, do you want rule #2 there to help you sell for maximum fair value? Keep in mind that at any given time, while your property may attract competing offers, there may not be more than one buyer active in the market who values the property at it’s highest potential.

The Realtor must disclose to every person making a written offer, how many written offers have been received.

The Realtor must not disclose to any person the substance of any of the written offers.

Current Regulations governming management of competing offers (ontario)

Some people extrapolate from the fact that the highest offer may exceed the second highest offer by a wide margin, to conclude that this has the tendency to drive up average sale prices on the whole, pushing the market out of reach for many buyers. But this argument is proven false by three observations:

  1. if many buyers do pay more than necessary for homes for a while based on sale prices of similar homes, eventually demand is satiated and the remaining buyers in the market will not pay or more likely cannot pay prices at the new level. As long as there are enough buyers who will pay the newly elevated prices, by definition that is market value and the market is functioning freely and properly. When prices rise enough that no buyers can or will purchase properties, prices start to fall. This type of over-heating of the market is temporary.
  2. it is a minority of properties that receive offers grossly exceeding all other offers in competition. It is a significant number in some cities during intense sellers’ markets, but statistically it is a small minority and therefore not a principal driver of increasing home prices over the long term.
  3. we are not always in an intense seller’s market. Banning blind bidding, even if it were to have some moderating effect on home prices, would only do so during the brief periods when the majority of homes receive competing offers. In some Canadian cities, strong sellers’ markets have prevailed for extended periods of time. Toronto and Vancouver are probably the only two markets where competing offers represent a large enough portion of sales over the long term that one could argue that a particular competing offer methodology has a lasting impact on property values. In Ottawa where I work, from 2010 through 2018, the lion’s share of property sales involved single offers, without competition. Most local markets in Canada rarely experience intense sellers’ markets in which supply falls critically short of demand. In Ottawa, the market is already turning back toward balance; it still favours sellers but not strongly enough to be driving prices ever higher. Prices have been gradually declining since April.

Complaint #4 – Blind Bidding Means Some People Lose When They May Have Won

It is crucial to remember when contemplating banning “blind bidding” as a method of moderating house prices, that there is another side to buyer disappointment in an intense seller’s market when offers are managed using the current closed offer process. By it’s nature, the closed offer process leaves all but one buyer for each property disappointed. If there are 12 offers on a property, 11 buyers are not successful in purchasing it.

Many buyers who “lose” in a competing offer scenario where the terms of the competing offers are not shared with all parties, feel they would have paid more if they had known how much it would take for their offer to be accepted.

While prices rise due to the imbalance between supply and demand, the first pool of disappointed buyers – those who truly cannot afford to purchase the type of home they want in the location they desire – may be a large pool, but they almost certainly will find themselves in the same situation regardless of the competing offer process employed. Open auctions are not going to stop prices from rising, as demonstrated in the continuing story of Bob, Mary, and Tatiana below. However, the pool of buyers who move from one property to the next, making offers on potentially 5, 10, or more properties before finally having their offer accepted, are going to face the same level of competition regardless of which offer procedure is used.

If a buyer faces 11 other buyers competing for a property, while they know up front in an open offer process what price they will need to pay to be successful, the other 11 potential buyers also have this information and only 1 of the 12 buyers will purchase the home. The unsuccessful competitors move on to the next property. Each buyer has his or her limit. It is entirely possible that by knowing what price is required to “win” that some of these buyers will push themselves harder on each specific property; armed with knowledge of the next highest offer they may decide to exceed their pre-determined and well-reasoned limit. If numerous buyers active in a specific market do this, it could easily have the effect of driving sale prices just as high, or even higher than the closed offer process.

Let’s walk through the original story, but with an open offer process in place instead of the closed offer process we used the first time around.

Open Bidding – The Open Offer Process In Action

Offer day arrives and Mary is still Mary, keen to get things rolling. She submits an offer at $450,000 several hours before the time set by the seller to review offers. A couple of hours later as in the original story, Bob, again not knowing whether there are any other offers in play, submits an offer for $460,000. The seller’s agent notifies Mary that one other offer has been received and lets her know that the offer is $460,000, beating her by $10,000. The agent also notifies Bob that there was in fact already one offer in hand prior to receiving Bob’s offer, that it was at $450,000 and therefore Bob’s offer is currently the highest offer.

What happens next? Well, Mary wants the house and we know that she is a person who has diligently calculated the maximum price she is willing to pay for it. She therefore immediately increases her offer to $465,000. The seller’s agent notifies Bob, who very quickly increases his offer to $470,000. We know that Mary and Bob each have a long way to go before reaching:

  • for Mary, her well-reasoned maximum of $517,000
  • for Bob, at least the final price we already know that he is willing to pay, $536,000, because that is what he paid under the closed offer process

We also know that 7 other buyers, including Tatiana who finalized her blind offer at $531,000 last time, are all interested in buying the property and will come in with offers in the time leading up to the time set for the seller to review offers. It might look something like this:

  • Mary: $475,000
  • Ten minutes later: Bob: $480,000
  • Five minutes later: Mary: $485,000
  • Simultaneously, Buyers 3 & 4 submitted offers at $440,000 and $455,000. Both are immediately notified of Mary’s offer and Bob’s offer and the current amounts.
  • Buyer 3 opts out.
  • Buyer 4: $490,000
  • Tatiana arrives with her initial offer of $460,000, only to learn of the current amounts offered. She immediately increases her offer to $505,000
  • Buyers 6 & 7 also enter the fray.
  • Bob: $515,000
  • Mary: $517,000
  • Buyers 4 & 7 make marginally higher offers.
  • Buyer 6 opts out.
  • Tatiana: $523,000
  • Mary opts out.
  • Bob: $529,000
  • Tatiana: you may recall that last time, she stood firm at $527,000. Well it turns out she thought that $527,000 would be high enough to be accepted based on 9 offers in play. She would certainly have offered more if she’d known how much the highest offer was. She increases her offer to $537,000.
  • Bob was of the same mindset as Tatiana. He topped out at $536,000 last time thinking it was enough, and it was. But this time it isn’t, and he knows it. So he increases his offer to $540,000.
  • Tatiana: $541,000
  • The remaining buyers all opt out.
  • Bob: $542,500

At this point, 4:00 has come and gone, and the buyers are still bidding.

  • Tatiana: $550,000
  • Bob: $554,000
  • Tatiana: $556,000
  • Bob: $561,000
  • Tatiana opts out.

Bob’s offer of $561,000 is accepted by the seller.

Advocates of banning blind bidding will point out a couple of things about this process:

  1. The winning offer was only $5,000 higher than the next highest offer. In an open offer process, the gap between the two highest offers will not usually be very large. In a “blind bidding”, closed offer process, that gap can be very large sometimes if one buyer values the property much higher than other buyers, especially in light of the number of offers received. However, it’s important to realise that in most market conditions, extremely large gaps are the exception, and secondly, only in the most intense sellers’ market conditions does this occur with any regularity.
  2. As a corollary to point #1, it is entirely possible that the scenario would play out differently. In a closed offer scenario, the highest bidders may offer much more than they did in my story, and potentially considerably more than in an open offer scenario. However, it’s not possible in cases where buyers hesitate to “go all in” without full knowledge of the competing offers. In version 2 of our story we have such buyers. The story illustrates what will very likely happen in an open auction with many typical buyers.

Step three conclusions:

  1. the decision to employ a closed or open offer process has no predictable impact on final sale price.
  2. an open offer process creates a bidding environment. If you don’t like bidding wars, you can only advocate for a closed offer process.

The decision to employ a closed or open offer process has no predictable impact on final sale price.

An open offer process creates a bidding environment. If you don’t like bidding wars, you can only advocate for a closed offer process.

The Bottom LINe(s) about A closed (blind) vs. open (auction) offer Process

The Root of the “Blind Bidding Problem”

The stories above are intended to illustrate that the method used to manage the offer process when more than one buyer is interested in purchasing a property is not the force driving average home prices higher. Either process, open or closed offers, will result in some properties selling well above established market value. In the closed offer system, sometimes the final sale price is much higher than the second highest offer received. That does not mean that the successful buyer necessarily paid more than they “should have”. It just means that the next highest buyer either didn’t value the property as highly, or underestimated what other buyers might be willing to pay.

In the open offer process, because buyers know what price it takes to “win”, they may well go where they wouldn’t have gone if they didn’t have this information. On an individual property basis, depending on how many buyers are active in the market at the time, the asking price, the diligence each buyer performs and the strength of their will pitted against their desire not to miss out, either process can result in a sale price much higher than established market value.

Neither the open nor closed process is inherently unfair to buyers or to sellers, and certainly when run professionally, neither process is unethical as the Liberal Party and many members of the public, the media, and even the real estate industry suggest.

Clearly there is a problem, given the level of discontent in society about rising home prices. What then, is the root of the problem, and how are we to protect consumers? Keeping in mind that buyers and sellers are all consumers, and should be treated ethically and fairly in all market conditions, however unbalanced or unfair those conditions may seem to one side of the transaction or the other at the time.

Open Offers Aren’t the Answer – Buyer, Seller, & Agent Practices Are

Without introducing major changes to the real estate representation business, there are clear steps every buyer and seller can take to ensure they are treated fairly and do not over-pay for a home or under-sell their property. Buyers and sellers can learn to do this themselves, or they can hire an excellent Realtor to walk them through the process. But at the end of the day, these are the most important things for buyers and sellers to do to ensure that the competing offer process treats them both fairly.

Be warned – you may not like these strategies because they do nothing to change the impact that a dramatic imbalance between supply (sellers) and demand (buyers) has on the market. The government can institute measures that impact the market, but knee-jerk changes to regulations seldom have the desired effect. Until the market changes, whether prodded by government or not, the solution to market woes is to manage your behaviour and expectations:

  1. Do your diligence on price. If you are trying to buy a home in an intense sellers’ market where there are very few homes on the market relative to the number of people looking to buy, then you know that you will face competition when you make offers. When you are considering making an offer on a home in this environment, do your diligence and heed the results. This means: carefully analyse recent sales, price trajectory, and your budget to set the maximum amount you should prudently pay for the property. Don’t exceed that price whether the process is closed or open. Don’t make an offer if you feel your maximum price will be exceeded in a closed offer system, or if another buyer exceeds it in an open offer system. Don’t make offers on properties you have no chance of “winning” – you are only adding to the frenzy and helping drive prices higher, working against yourself as you contribute to temporary or permanent price escalation.
  2. Do your diligence on the property. In either a closed or open offer system, smart sellers allow several days for buyers to view the property and do their diligence prior to making an offer. Some weak agents counsel their seller clients to be open to pre-emptive offers, which can negate the set offer date and potentially eliminate your opportunity to do your diligence if the seller then responds to a pre-emptive offer and advances the consideration of offers. If you are not given the opportunity to inspect the home, don’t make an offer. Inspect the home prior to making an offer so you are in a position to be competitive and so you know what you’re buying and how the condition of the property should impact your assessment of it’s value and the maximum price you’re willing to pay.
  3. Be patient. There is no point groaning and begrudging the facts. If there is much more demand than supply, you may be in for a long journey through many multiple offer situations before you are successful in acquiring a property. If you are not up for the work and time required, wait for the market to cool. It always does. Always. The duration and amplitude of each phase of the market cycle varies but it always cycles. The market may only cool briefly and it may only cool moderately, but it will cool. Watch for homes over major holidays like Christmas, when fewer buyers are likely to make offers.
  4. If you are selling, take advantage of the sellers’ market. You have the leverage in these conditions. If you hire an agent rather than sell your property yourself, if that agent cannot articulate clearly and confidently why you should delay the consideration of offers and not consider pre-emptive offers, interview other agents. What is the point of hiring an agent who does not understand when they have all the leverage and how to apply it to your advantage? Be sure to allow buyers time and access to the property to do their diligence. This will increase the number of unconditional offers you receive and buyer confidence will likely increase the price of some of those offers.
  5. When you make an offer in competition in the closed offer (“blind bidding”) process, make your initial offer early and set it to expire shortly before or after the time set for the seller to review offers. Most agents counsel their buyer clients to wait until the last minute to submit their offer. This accomplishes nothing other than frenzy for the seller and seller’s agent, and annoyance for buyers and buyer’s agents who were more organized. Once all offers have been received, there is always an opportunity to improve your offer based on the total number of offers in play. If you decided to make an offer but you felt that you would only be competitive if there were fewer than say, 5 offers, but 10 offers are received, you can let your offer expire and inform the seller’s agent that your offer has expired and they must communicate to all buyers whose offers are still in play that the number of offers has been reduced by one. By submitting your offer early, you may deter one or more other potential buyers from even making an offer. Some buyers decide only to make an offer if there is no competition. I’ve had clients submit early, deter the one or two other buyers who were considering making an offer, and have their offer accepted as is.
  6. If you are selling in a competitive market – or frankly, in any market – don’t let your agent work directly with any buyers. Don’t hire an agent who has team members who will bring offers. Agents or teams working both sides of a transaction create skepticism and doubt among buyers, and that can only hurt your bottom line as a seller. Whether or not your agent or team of agents acts with integrity, the appearance of favouritism is as bad as acting on it. My proposed changes to the real estate industry include banning agents or teams from working with both parties to a transaction. I’ll go into this in more detail in future articles.
    For more on this topic, check out my article from 2017: Sellers: Dealing With The Agent Who Already Has A Buyer
  7. Always win. Understand that when you perform your diligence and act with patience and prudence, you do not “lose the bidding war” when your offer is not accepted. If you’ve set the highest price you will pay, and someone else pays more, you have not “lost”. You’ve won. You avoided over-paying for the property. Whether your offer is accepted or declined, out-bid by another buyer, if you act intelligently you “win” either way.

Takeaways

This was a long article, and I hammered a couple of the points more than once. Here I will summarize some key ideas to take away from this analysis, including a few additional points I didn’t make in the main narrative.

Open Offers Create Bidding Wars

When buyers have no idea what price other buyers are offering (current system) they simply make their best offer. There are no bidding wars today. In fact, there is no bidding today. Buyers each make their best offer based on the level of competition. You can’t bid when there is nothing to bid against. With open offers, buyers bid against each other. Open offers create an auction by definition. Hence, they introduce what we do not have now: bidding wars.

Consumer Protection – What About Sellers?

In all the angst about the housing market, people usually forget about the other party to a home sale: the seller. Whatever system and rules we create to manage the process, it must be fair to buyers and sellers. Sellers have a right to sell for the highest price the market will bear, where buyers are not acting under unfair pressure. Market forces do not constitute unfair pressure; an agent’s job is to help a buyer or seller understand the process, their rights, how to properly assess property and protect themselves from imprudence.

Open Offers Will Not Impact Housing Affordability

Whether an open offer or closed offer (“blind bidding”) system is employed, buyers can get caught up in the moment if they do not approach the home purchase process and decisions factually and with a level head. Agents can help buyers avoid over-paying for a property by bringing an objective perspective, an abundance of detailed market data, and coaching patience and prudence. Don’t work with an agent who acts like they want to “win” at all costs and “make the sale”. If your Realtor’s terminology includes “winning the bidding war”, consider hiring a Realtor who is more interested in helping you acquire a property on sensible terms.

Market Cycles

All housing markets cycle, despite what you might read about never-ending price escalation. With patience, there always comes a time that you can purchase a property wisely.

Price is Not the Only Term

A takeaway that I alluded to but didn’t cover in the article is that price is not the only term in an offer. This is especially important to keep in mind when considering the idea of banning closed offers and moving to an open auction process. In the current closed offer (“blind bidding”) process, the seller receives all offers for review beginning at a set time. At that time, the seller will look at all terms in all the offers, potentially negotiate with one or more of the buyers on some terms, and ultimately select an offer with the combination of terms most favourable to the seller. Closing date, deposit, inclusions & exclusions, warranties, work items, conditions, condition duration, and any number of other terms come into play.

In an open offer process, there is more focus on the price to the exclusion of other terms. Buyers will increase their offer throughout the bidding process in order to exceed offers from other buyers. But they are explicitly only bidding on price. There are many cases in the real world when the seller in the current closed system accepts an offer with a lower price because it has no conditions, while declining a higher offer that has one or more conditions. In an open offer process, you could easily pay much more than necessary because you do not know that the offers you are bidding against have conditions. The seller may well have chosen your offer before you bid it up another $25,000. In the current closed system, you’ll never be caught in this trap.

Phantom Offers

Another important concern people raise about the “blind bidding” system is whether or not you can trust agents regarding the number of offers in play. People suggest that agents “make up” the existence of another offer, or more offers. This point is particularly frustrating to agents who work daily in the market an know that in an intense sellers’ market we face incredible numbers of offers on each property and while that is a boon for sellers it is painful for buyers and therefore painful for us when we are working for buyers.

There is nothing about the open offer process that fixes this perception. The seller’s agent is going to relay to all buyers updates on every new bid received. There is no way to know that each new bid is from a “real” buyer any more than there is in the current closed offer system.

What would help alleviate this perception is if the identity of each agent was published for each offer or improved offer received. There is nothing in the current regulations that prevents this, and it should be mandatory. Imagine an online offer reporting system that showed each received offer along with the name and credentials (registration number, brokerage affiliation) of the agent representing the buyer. Any buyer could contact the other agents to confirm they really did submit an offer, during the offer submission period. Checks and balances would be built-in.

How the offer process is regulated increases integrity, not whether it is open or closed.

Increasing Regulation

The Liberal plan to ban “blind bidding” comes under the banner of “increasing regulation” in the real estate industry. The closed offer process is mandated by current regulations to protect buyers and sellers. Banning this process literally reduces regulation.

Advocates of an open offer (auction) system are hypocrites when they call for banning blind bidding when they say that sellers should have a choice. I agree that the system employed should be, or at least could be, the seller’s choice. They could have the choice whether to use an open or closed system to sell their home. In fact, they do have that choice today as anyone can choose to sell their home themselves without the services of a real estate agent.

There are online auction services and unrepresented home sale services that sellers can use that do not fall under the regulations. Sellers are free to employ any form of offer process they like. It is Realtors who are regulated and currently those regulations mandate a closed offer process.

Real Transparency

Finally, those who advocate that an open offer process is more transparent are missing the boat. I believe I’ve shown in this article the impact an open auction process would have on buyers and sellers. Knowing the price of competing offers provides the illusion of transparency. If you don’t know whether other offers have conditions, you can’t make a competing bid intelligently. Even with knowledge of all the terms of competing offers, this level of transparency wouldn’t fundamentally impact the housing market. It would not lead to lower average home prices over the long term.

The limited increase in transparency created by an open offer process does nothing to improve real estate industry practices that are cause for concern. Real transparency would deal with:

  • seller and buyer agent fees
  • representation of parties
  • number of offers in play
  • expiry time of offers in play
  • richer property data
  • sale prices

Real estate practices that must change in order to solve industry problems, both real and perceived, include banning Realtors (individual agents, teams, and brokerages) from working on both sides of a transaction.

I address the above and many other issues in real estate representation and sales in a new model for real estate that I am developing and may write about in a future article.

Leave a Reply