Investing in real estate is a smart move- but only if you do it wisely. The reality is that bidding wars are not going away anytime soon, so here are some insights and advice that may help you secure your next property.
Crunch the numbers
Before you enter a bidding war or even try to buy a home, you need to get pre-approved by your mortgage company or bank so you know what you can carry and how high an offer you can make.
A property’s list price is apparently losing significance as buyers focus on the monthly carrying costs instead. People are willing to pay up to 20% more for a property because the monthly payments only increase slightly, but this can be a big problem because people are overlooking the big amounts they are offering over the asking price if they end up in a bidding war.
So before you jump into a bidding war assuming that you will only end up paying an extra $85 on your mortgage, crunch the numbers on all your personal expenses to confirm that you can afford it. Going up only $85 a month might be problematic over the term of your mortgage, especially if you’re in a variable interest situation and the rates go up.
Don’t compromise your ability to cover your expenses just to look good on paper.
Be prepared: do the legwork
Purchasing a home is one of the most expensive decisions a buyer will ever make, so it’s important to research the neighborhood first.
There is a necessary emphasis on house inspections, but care should also be taken to check out schools, transportation links, medical offices, crime rates, and other particulars, even future housing development.
Before you bid, do your research and ask yourself whether the house is worth going over the asking price. If you have children and the nearby school is perfect for them, that’s great. But if you don’t, it might not be worth paying a premium for access to a school you don’t need.
Timing is everything
Experienced investor tries to visit properties on a Wednesday so that he can make an offer Thursday and avoid the typical open house madness on weekends- or before the house is on MLS. This strategy works well for him and he is in the enviable position of being able to do an extensive house inspection when he first visits the property. He’ll spend two hours during the first visit and if he is unsure about anything, he brings in an expert.
By beating out the competition, he can avoid a bidding war. There’s no rule against making an offer before the official offer date, and he finds it annoying when agents hold off on offers in order to ignite a bidding war. He believes in putting in a good offer ahead of the game, and advises people to take a half-day off work to go review properties before Saturday and once they hit MLS. A good agent should send buyer properties as soon as they are available, and ideally before they go public.
Real estate agent 101
Key to winning a bidding war is a real estate agent who keeps your best interests in mind. It’s your agent’s job to seal the deal, not yours, and they need to know and respect your limit.
If your agent tries to get you to exceed your budget, it’s time to find someone else. Their job is to research comparables in the vicinity and advice you, but you are the one controlling your finances.
Because an agent can access information unavailable to you, use them as a resource and be clear about how much you are willing to spend. If you keep losing bidding wars or you suspect that your agent doesn’t understand your budget and your goals, find someone who does.
United in strength
It’s human nature to desire what someone else has and what is in limited quantity. Understand and accept this but do not give in to peer pressure.
Once your budget is determined, decide how much you can go over in a bidding war and stick with that amount.
If you’re a first time buyer encouraged by stories from friends who bought their homes five years ago and made a ton of money in a bidding war, don’t assume that you will be just as lucky five years from now.
The market will correct itself and you’ll likely see the correction appear in cottage country and the condo market before it hits urban locations like Toronto and Vancouver.
Be careful not to lose the return on your investment in a bidding war. Crunch your numbers, do your research, and go through an agent who doesn’t try to talk you into a deal that costs you more in the long run.
Keep it clean
Strange as it sounds, not everyone who sells their home wants top dollar. Many buyers have made successful offers that weren’t the highest, but they were clean.
A clean offer with pre-approved financing shows the seller that you are sincere. Conditional sales and offers that depend on getting financing don’t stand up when clean offers are on the table. Conditions are sometimes waived in a bidding war, but do not waive the house inspection if you can avoid it.
Many real estate buyers believe that home inspectors should be regulated and mandated as part of the purchasing process. Horror stories abound about house inspections that missed big problems that later cost the purchasers a lot of money to fix. So if you’ve reached the limit of your budget in a bidding war, keep the house inspection in if you can.
Winning a bidding war might be as simple as agreeing to closing dates, buying a house ‘as is’, or even moving the closing date up to accommodate the seller.
If the seller is anxious to move, agreeing to facilitate a smooth transition could place your offer over a higher one.
Accepting a house ‘as is’ and limiting conditions such a replacement of ceiling tiles or fixing a broken window could work for you too.
If your realtor has any inside information about the seller’s situation and you can be flexible or accommodating in any way, you could stand out from other potential buyers.
A considerable deposit shows that you mean business. Always present a certified cheque. Have your realtor research the typical deposit in your area, as it can vary from city to city in Canada.
Put down as much as you can afford. It goes toward your down payment anyway if you obtain the property and is returned if you don’t. A clean offer with a substantial deposit in the form of a certified cheque can win you the property you want.
Put it in writing
One real estate investor sent the seller of a property a letter explaining why he wanted it so much. The tactic worked. He strongly recommends writing the seller a letter that tells them who you are and why you want their home. If a seller has lived in their home for years, maybe even raising their family there, it’s an emotional time for them and an an emotional plea can make a difference.
The investor says that he’s heard countless stories about how buyers have gotten the property they coveted because they took the time to enthuse about it to the seller. He advises people to limit the letter to one page, but tells a story about one couple who wrote several pages about growing up in that neighbourhood and admiring that house. Their offer was significantly lower than other bids, but the owners were moved by the letter and wanted their place to go to someone who would cherish it and, in this case, raise the next generation there.
Know when to let it go
Bidding wars can be ugly. With agents who deliberately set the price of a property below market value to trigger multiple offers, you have to stand firm and not cave in to peer pressure.
Your debt to income ratio (which factors in mortgage, utilities, property taxes, etc) should not exceed 30%, but people are spending upwards of 50% of their income on housing, and that’s too high. Real estate is an excellent investment but you need to be smart about it and follow the rules.
Does your research, know your limits, and don’t overextend yourself because it will just prolong the time before you see a return on your investment. Buying a property should not be a competition. It’s not about winning a bidding war, it’s about finding a place where memories -and equity- can be built.
You can call me at 647-459-9459 and I will show you the examples of how we won the bidding war without raising the price, and very often even reducing the price. I have more tips which I can share with my clients. You also can sign on top-right corner on my website to receive more information on how to be successful in real estate.