The following article is from Canadian Real Estate Wealth Magazine.
Whether you are a first time buyer, looking for a bigger home, or downsizing, investing in real estate is a smart decision – but only if you do it wisely. Bidding wars, unfortunately, may be here to stay so here's some advice that may help you to secure your next property.
1. Crunch the numbers
One of the most important elements in the process of buying a home, particularly if you enter a bidding war, is getting preapproved by your bank or mortgage company so you know exactly what you can carry – and how high you can go in your offer.
It seems that the list price of a property is becoming less significant as buyers are shifting their focus to the monthly carrying costs instead. People are definitely willing to pay up to 20 per cent more for a home because the monthly payments only go up marginally, but this can be a huge problem because people are overlooking the huge sums they are paying over the asking price if they find themselves in a bidding war situation.
So, before you leap into bidding war thinking you're only paying an extra $85 a month on your mortgage, number crunch everything from groceries to your gym membership to make sure you can afford it. You may find that going up only $85 a month might be more of a stretch over the term of your mortgage, especially when interest rates go up and you're in a variable rate situation. Don't cheat yourself out of your expenses just to look better on paper.
2. Prepare and do the legwork
Buying a property is the most expensive financial decision most people will ever make in their lifetime so spending time to research the neighbourhood is so critical.
There is so much emphasis on house inspections, and there should be, but the same amount of care should also be spent checking out local schools, transportation links, parks, crime rates, medical offices, family activities, seniors programs, daycares and even future housing developments.
Before you bid, be sure you know what you are getting yourself into and if it's worth going over the asking price. If you're looking for a great school for your children – great, but if you're empty nesters, you might consider another home to avoid paying a premium for access to a school that you really don't need.
3. Timing is everything
I try to get into properties on a Wednesday so I can put in an offer on Thursday and avoid the weekend open house competition – or before they are on MLS. It's a strategy that has really worked well for me and luckily, I'm in the fortunate position where I can do a fairly extensive house inspection when I first visit the property. I'll spend two hours looking at a place on my first visit and if I'm unsure about anything, I'll bring in an expert.
By beating out the weekend competition, I might not have to enter into a bidding war. There's no law that states that you can't make an offer before the official offer date and it really bothers me that agents hold off on offers to create a bidding war situation. I'm all for putting in a good, clean offer ahead of the game. Be prepared to take a half-day off work or call in sick to go and check out properties before everyone else gets to them on Saturday and once they hit MLS. A good agent should send you properties as soon as they are available and preferably before they go public.
4. Real estate agent 101
Having an agent who has your best interest in mind is key to winning a bidding war. Your job as a buyer is not to seal the deal, it's your agent's job and they need to know what your limit it is – and respect it.
If your agent tries to upsell you on the price and encourage you to go beyond your budget, it's time to find a new agent. The job of the agent is to research comparables in the neighbourhood and advise you, but you are the one in control of your money.
An agent can access information that you might not be able to, so use them as a resource and be upfront about how much you are willing to spend on a property. If you're losing bidding war after bidding war, or you feel that your agent just doesn't understand your budget and what you're after, look around for an agent who does.
5. Stand united and strong
It's human nature to want what someone else has and to want what's in limited quantity. Accept this but don't succumb to peer pressure.
Once you've set your budget, determine exactly how much you can go over if you end up in a bidding war and stick with it. If you're first-time buyers and are spurred on by stories of friends who bought five years ago and just made a ton of money selling their home in a bidding war, don't speculate that you'll be as lucky in a few years.
The market will correct itself and you'll likely see the correction come in cottage country and the condo market before it hits urban areas like Vancouver and Toronto. Be careful not to gamble away the return on your investment in a bidding war. Do your research, crunch your numbers and prepare your offer with an agent who won't talk you into a deal that might cost you more money than you actually have.
6. Keep it clean
Surprisingly, not everyone is after top dollar when it comes to selling their home. I've put in a lot successful offers that may not have been the highest, but they were the cleanest.
A clean offer with preapproved financing, especially in a multiple-offer scenario, shows the seller that you are serious. Conditional sales and offers that are contingent on financing just don't fly when there are other offers on the table. While conditions often get waived in a bidding war, I strongly advise you not to waive the house inspection if at all possible.
Personally speaking, I think that home inspections should be regulated and inspections should be mandatory as part of the buying process. We've all heard stories and I've seen my fair share of house inspections that have missed significant problems that end up costing buyers big money to fix. No one wants to find themselves in that situation, especially if you've maxed out your budget in a bidding war, so try to keep that inspection in the offer if you can.
7. Be flexible
Winning a bidding war might be as easy as agreeing to the seller's conditions like closing dates, buying a property "as is", or even offering to move the closing date up if it works better for the seller. If a seller has already bought another property and is anxious to move on, agreeing to make the transition as easy as possible could mean winning over a more generous offer.
Accepting a property "as is" and limiting conditions such as requesting that missing ceiling tiles in the basement be replaced or the broken bedroom window be fixed might work in your favour too. If your realtor is privy to any information about the seller's situation and if you can be amenable and flexible in any way, take advantage of the opportunity and try to stand out from the others.
8. Dig deep
A significant deposit can show you mean business. A deposit should always be presented as a certified cheque. Have your agent check into the typical deposit amount in your part of Canada because it can vary from city to city.
Put as much as you can afford down, it goes towards your down payment anyway if you get the property, and you get it back if you don't firm up on the offer. A clean offer with a large deposit in the form of a certified cheque could mean winning the deal over another buyer.
9. Write it down
When I was first started investing in real estate, I once wrote a letter to a seller explaining why I wanted their property so much – and it worked. So, one of my strongest pieces of advice when it comes to winning a bidding war is to write the seller a letter explaining who you are and why you want their home so much. Buying and selling a home is an emotional time for everyone – especially if a seller has lived in that home all of their lives and raised their family there.
It's not always about the highest offer; it can also be about the most emotional plea. I can't tell you how many e-mails I receive telling me that someone was successful in securing their new home because they took the time to explain why it was so amazing in a letter to the seller. While I advise people to keep their letter to one page, one couple I know wrote several heartwarming pages describing everything about the house including memories from their own childhood about the neighbourhood, how they envisioned their family growing up in the house and even how the old pool table and blackboard in the basement would be put to good use.
Despite their offer being significantly lower, the original owners felt a strong connection to their story and decided it wasn't about the money but about the next generation who would really appreciate a fantastic home.
10. Know when to walk away
We all know that bidding wars can be ugly. With realtors who strategically set the price of a home below market value to instigate a multiple offer situation, it really is about standing firm and not giving in to peer pressure.
Your mortgage, utilities and property taxes and other debts, or what is referred to as your debt-to-income ratio, should really not exceed 30 per cent, but people are paying up to 50 per cent or more of their income towards housing – and that's too high. I will always say that real estate is a great investment but you have to be smart about it and you do need to follow the rules.
Know your limits, do your research and don't overextend yourself because it will just take you that much longer to see a return on your investment. Buying a home should not be a competition. It's not about "winning the bidding war" but about finding a great place to build memories – and equity.
Scott McGillivray purchases and renovates properties, hosts Income Property on HGTV, and launched The Lifetime Wealth Academy in 2010, where he shares his real estate knowledge with would-be property investors across North America.