And the bidding wars begin...

With the real estate market picking up momentum, the spring promises to be a busy one for the GTA market. Good for me, good for real estate agents, good for the economy, good for sellers, but is it good for buyers?

I caught a bit of the Mike Stafford show this morning on AM 640. He was talking about bidding wars in the real estate market, and some of the hazards that buyers face in this type of market. A number of callers called in about their experiences with bidding wars, financing and home inspections. You can listen to the show here:

It raises some great issues and I found it very informative. I would have liked to call in myself to put in my two cents, but I was between meetings and did not have the opportunity. Instead, I’ll weigh in here.

Bidding wars are definitely good for the sellers, as they often get more than the list price on their home. Its great for real estate agents as their commission is based on the sale price. So what is the upside for buyers? There isn’t one. A couple of the downsides that concern me:

  • I have seen buyers go thousands of dollars over the list price in order to secure the home of their dreams. This can be dangerous depending on how much higher they go over the list price. Once you have secured the offer, it is time to get financing. When the lender does an appraisal, your loan application may get denied because the property is valued at much less than the purchase price. If you put in a firm offer with no condition on financing, which often happens in a bidding war (people are encouraged to take out conditions so the offer is firm, therefore more attractive to the seller) and your mortgage application is rejected, you have a big problem. You can shop around, and may find another lender willing to go out on a limb for you but every time you put in an application, it affects your credit rating. You may also end up paying a higher interest rate because you went with a “B” lender. 
  • The show this morning also touched upon home inspections. As stated, if you put in a firm offer with no conditions, you do not get the opportunity to do a home inspection. After the deal closes, you may get alot more than you bargained for. Knob and tube wiring, insulation issues, problems with water leakage, and the list goes on. You may have a cause of action against the vendor, or you might not. Even if you do, you’re looking at $15,000-$20,000 just to start a litigation unless its a minor issue that can be resolved in small claims court.

There are so many issues to consider when buying a home, and conditions in the agreement protect you to some extent and gives you time to make sure you are prepared to go through with the purchase. Removing conditions for a more attractive offer means you will be signing firm, which means you are contractually bound no matter what and liable if you aren’t willing or able to close for any reason. Buyers beware. As always, best to consult a lawyer to review your agreement before it is firm.