With few exceptions, the Canadian real estate market has shown resilience and strength for more than a decade. In the largest property markets, it’s now common for buyers to face tough competition, particularly for the most desirable properties. In recent years, this situation has been made worse due to persistent low resale inventory. For homebuyers, this situation has meant having to compete in heated seller’s markets, which leads to purchase offers that are over asking prices and bidding wars.

Bidding wars are not new. Anytime there is rising housing demand there’s an increased possibility of more than one buyer competing for the same property. This can turn into a bidding war, where each buyer increases their purchase price or sweetens their offer in an attempt to outbid the competition.

However, not all bidding wars are equal and, depending on what side of the negotiation table you sit, some types of bidding wars are either more beneficial or more damaging, than others.

The drawbacks are one of the reasons why blind offers came under recent scrutiny when the federal Liberal Party promised to ban blind offers if re-elected.

To understand why blind offers are the current target for potential government legislation, it’s best to take a step back and examine both the advantages and drawbacks of bidding wars, as a whole, and blind offers, specifically.

Standard bidding war

In a standard real estate bidding war, a property is listed for sale with the prices, details and an offer due date as part of the listing package. This due date is the final deadline for buyers to submit an offer. In many jurisdictions in Canada, every offer submitted is then registered, meaning that the formal offer to purchase is recorded and that information is now available to the public, should they require it. Many buyer agents can use this information to help their clients; some will suggest putting in an offer early on a highly-desired property, in the hopes it will scare other potential buyers off, while others will wait to the last minute to find out how many offers have been submitted before submitting their proposed terms.

Thing is, with a standard bidding war, the initial offer submission isn’t the last word. Every buyer has the opportunity to amend their offer — to up the ante — or to step out of the competition. This back-and-forth competition continues until there is one buyer remaining and the price and terms are agreed upon by the buyer and the seller.

Bidding wars and blind offers

The blind offer is similar to the standard bidding war, except it does not give competing buyers an opportunity to amend their offer. Instead, the listing will identify a specific date and time when all potential buyers (and their agents) must be in attendance to present their offer. In this situation, the competing buyers only get one chance to present their best and final offer.

This is called a ‘blind offer’ because there is no way of knowing ahead of time how many other buyers you are competing against, nor do you get a chance to sweeten your proposal.

For the Federal Liberals, not only do they want to ban blind offers but eliminate blind bidding completely. According to the Liberals, blind bidding has been blamed for contributing to the spike in home prices, by creating conditions where a winning bid can be much higher than a second-highest bid. As such, the Liberals’ proposed “Home Buyers Bill of Rights,” would require that sellers and their agents disclose the precise bid prices to all potential buyers. This disclosure would eliminate the urge for prospective buyers to blindly increase their offer and, in theory, eliminate a run-up in sale prices on resale homes.

Disadvantages of blind offers

For a buyer, blind offers are the riskiest scenarios, since you don’t know what you’re getting into. This lack of transparency can prompt a sense of panic or lead to inflated sale price offers.

The increased chance of paying more for a property and a lack of transparency are the biggest drawbacks to blind offers — drawbacks that are primarily felt by the buyers.

Advantages of blind offers

While a buyer could get lucky during a blind offer and win the competition to buy a desirable property, the primary recipients who benefit from blind offers are home sellers.

A blind offer introduces a sense of competition and this often leads to higher sale prices and better terms, at least from the seller’s perspective.

The obscure nature of blind offers means a prospective buyer can offer tens of thousands of dollars over the property’s list price in order to win the bidding war. As a result, the primary beneficiary of this system is the seller.

Are Bidding Wars Coming to An End?

Although blind bidding is growing in popularity across Canada, some senior economists are concerned that the real estate market is overheating and becoming unsustainable, in part, due to processes like bidding wars and blind offers.

An exuberant market like the current one may be beneficial to sellers, but it is emotionally draining for first-time home buyers. Tim Hudak, CEO of the Ontario Real Estate Association (OREA) says “as a hopeful buyer competing with dozens of bidders for properties they can barely afford and continuously losing out [on], [it] can be discouraging. Most home buyers have been up at night worrying about whether their own bid is uncompetitive or more than they need to spend.”

According to Global News, the idea of removing blind bidding from residential real estate transactions is gaining traction among those looking for a quick method to cool down Canada’s red-hot housing market.

For example, in British Columbia, the provincial government is investigating blind bidding as part of a larger attempt to improve homebuyer rights.

“If we’re going to have an auction process, we think it should be transparent and open to all bidders,” said Douglas Porter, the Bank of Montreal’s chief economist.

A report from CTV News also stated that some senior economists have proposed taxing profits on home sales, even for primary residences, or boosting the minimum down payment requirements, while others say governments and other policymakers should focus on growing housing projects to enhance the market supply.

How to win a bidding war

Here are a few steps you can take to enhance your chances of winning a bidding war:

Work with a local agent and mortgage lender

Working with an agent that understands the type of market your property is in can help you craft an offer that gets the right attention. A professional real estate agent will be adept at assuring the seller that you’re capable of closing at the price on your bid. The seller’s agent will often verify the lender and pre-approval letter. If your lender has a terrible rep for undermining transactions, it may affect your offer getting accepted.

Get loan pre-approval

The next best thing to a cash offer, loan pre-approval provides the advantage of improving the attractiveness of your offer. So before dropping off your bid for the listing agent, be sure to have your pre-approval letter in possession. Since mortgage lenders only provide a pre-approval letter after your finances have been verified, having one ready demonstrates that you’re a genuine buyer.

Write a letter

According to Wall Street Journal, “one of the most effective ways to win a bidding war is to write the seller a letter.” While not always effective, a letter about the reasons you want to buy the house can add a personal angle to your bid and help the seller consider your offer even if you’re not the highest bidder. It’s important to be candid and sincere about why you’re interested in the home and why you believe yours is the best bid.

Increase your cash offer

The surest way to win a bidding war is to offer more money. There is the risk of going higher than is necessary. Hence, it is necessary to go into a bidding war with a maximum bid based on the initial home

Can I outbid an accepted offer?

Yes. It’s quite possible to outbid an accepted offer before the purchase contract has been signed and becomes legally binding. It is just as possible for another buyer to outbid your offer, even though it has been accepted.

In the scenario presented earlier in the article, it is possible for there to be a third buyer, Kelvin. Kelvin sits out the bidding war and presents the seller with an offer, His bid is the same price Joseph offered but he includes terms that are more favourable to the seller. Kelvin then proceeds to close a deal on the house. There are several ways to increase the attractiveness of your offer. Some of these include increasing your down-payment, removing seller requirements, altering the closing date, and excluding movables from the contract.

Final Thoughts

Blind offers have been decried by some as unfairly favourable to sellers but rejecting blind offers in bidding wars can make you miss out on some great deals. If you have strong bargaining power, stick to your bidding cap and refuse to budge from it.

However, bidding wars may be a very emotional experience. Unless you have the stamina and resolve to deal with your anxiousness, walk away and keep looking! You will find your dream home somewhere at some point.