If you want to watch a conversation get heated QUICKLY, ask a roomful of people for their opinion about bidding wars. Then put on your asbestos suit and watch the sparks fly!
In a market, like we’ve been in for the past few years, sellers and their agents expect a bidding war. If they don’t get one, they feel that they’ve done something wrong. Some sellers are surprised at how emotionally draining the process is on them. (We hear you, Buyers – “Cry me a river, you’re making off like bandits.”)
Buyers, by and large, are fed up. Some buyers have been outbid many times and have lost hope. A few are super frustrated because they didn’t get the house they wanted despite bringing the highest offer. (Because a handful of those emotional sellers actually still choose to sell to the buyer who told the most compelling story in a personal letter.) Buyer agents are working their tails off to try to secure an accepted offer for their clients.
With all the focus on getting – and winning – a bidding war, it’s important to remember the importance of CLOSING the deal. Failure to do so can have serious financial consequences.
Today, we want to share the cautionary tale of some Toronto buyers who got ‘caught up in the craziness,’ and what you can learn from their experience.
Gamoff v Hu – Just the Facts
The Gamoffs listed a Toronto property in March 2017 for $2,000,000. The market then was much like it is now, in April of 2021 – super hot.
Hu, a buyer, fell in love with the house. Hu didn’t want to get involved in a bidding war. Still, they offered $2,050,000.
The Gamoffs’ agent informed them that there were two other offers and that theirs would not be accepted at that price. Ultimately, the Gamoffs accepted an improved offer from Hu on April 2, 2017: $2,250,000.
Their offer included a $30,000 deposit on acceptance, with a further deposit of $90,000 to be made later. Problems became apparent when the second deposit never came.
Unfortunately, Hu was not able to secure financing to close the deal. They were forced to notify the seller that they were walking away from the deal. This was the notification their lawyer sent to the Gamoffs’ lawyer:
We are putting your clients on further notice to take immediate steps to start mitigating their losses by (a) immediately contacting any buyers who made offers on April 1, 2017, to determine whether they may be willing to purchase the property; and (b) re-listing the property on the market/MLS as soon as possible in order to find a suitable buyer. We trust your clients will make best efforts to sell the property for the highest price possible in order to satisfy their duty to mitigate.
So What Happened?
The Gamoffs responded to the notice right away, re-listing their property for $2,250,000.
However, the timing for both the Gamoffs and the Hus was rather unfortunate. You might remember that in April of 2017, the provincial government announced a new Foreign Buyer, or Speculation, Tax that would apply to the Greater Golden Horseshoe Area.
The real estate market tumbled a little, going down about 18% in just four months.
Before finally selling again in July 2017, the Gamoffs dropped their list price to $1,998,000, then to $1,798,000. The final accepted offer price was $1,700,000.
The Ontario Superior Court Decides
With a difference of $550,000 between the two accepted offers, the sellers decided to take the matter to court.
Typically, when a market is in decline, the courts will award the sellers damages to compensate for the difference based on the “highest price obtainable within a reasonable time after the contractual date for completion following the making of reasonable efforts to sell the property commencing on that date”
In this case, Judge Edwards – though he sympathized with Hu’s position as a buyer in a crazy market – ruled in favour of the seller. He awarded damages to cover the loss of $550,000 plus other special damages to which they were entitled under law.
How to Avoid Disaster
Needless to say, Hu suffered great financial pain in this situation. Gamoff, too, lost out on the opportunity to sell at the height of the market. We wouldn’t wish this nightmare scenario on anyone, whether buyer or seller.
So what can you do to keep yourself out of hot water?
Here are a couple of rules of thumb for a buyer to keep in mind:
Know Your Limits
For as long as there are bidding wars, it’s crucial that buyers set limits for themselves no matter what anyone else is doing. Get all the information from your mortgage provider, whether that be a broker, a bank, or another lender. How high can you safely go? What, if anything, should you consider before going to the top of your budget? (For example, condo fees will lower your purchasing power. Find out how much you can afford with fees.) Ask how much your property has to sell for to be able to offer on the property you want.
It will be nice for buyers when the market calms down enough to allow you to make offers that are conditional on financing again but, until then, do not make offers that are higher than you are qualified to make.
Stay in Control of your Emotions
More than one buyer has unraveled during the frenzy of making offers on hot properties. Staying in control of the desire to “win” is a must, especially if you have made many offers and lost out on properties you really wanted.
If you feel like you might weaken and make a risky offer in a high-stress, multiple offer situation, tell your realtor. Tell them well before the offer presentation what your limits are, and ask them to help you stay focused. You can come up with a plan to make sure you don’t get caught up, only to repent at leisure. Remember, Hu never wanted to compete in the first place. And they, at first, offered much less – probably the amount that they could actually afford. Throwing caution to the wind cost them dearly!
Sellers, too, can take steps to protect themselves when receiving multiple offers.
There is no rule saying that a seller must accept the highest offer. As we learn from Gamoff v Hu, the highest offer might not be the best offer. Once you have considered the price and conditions in the offer, there are a few, somewhat more subtle, indicators that you can and should pay attention to.
These are some things that a seller can look for to evaluate the strength of an offer:
A very low deposit could be a sign that a buyer is stretching beyond their ability to pay. Always ask for an explanation of the terms of the deposit if it seems too low for the deal.
It’s also much better if the buyer submits the deposit cheque with their offer. We’ve heard of many cases where buyers have failed to show up the next day with the deposit due to buyer remorse. This can cause legal issues and throw a wrench in your plans.
The down payment
Your agent can ask questions to find out whether the buyer has a sufficiently large down payment to compensate for any difference between the purchase price and the appraised value, if the two numbers don’t match up.
The names on the offer
If a couple is buying a house together, but only one name appears on the offer, ask a few questions. Sometimes, this happens in a time crunch when it would be difficult to have both parties sign. But once in a while, one mate is hiding from responsibility by staying off the paperwork in case of a breach of the contract. Find out all you can about the buyers – and decide if theirs is truly the strongest and best offer you have on the table.
Bidding wars are not for the faint of heart – on either side of the table! This market will not last forever. While it does, though, take advantage of the expertise of your realtor and your real estate lawyer to protect you from unnecessary stress and financial losses.
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