Bidding War Rules for Openess, Fairness and Transperancy
Bidding wars are just not fair. They only help one person and that’s the seller.
If there are 31 bids, then there are 30 prospective buyers who went home, dissatisfied with the system.
This is due in part to the fact that there is no system. It’s still the “wild west” out there. Each seller can make up his own rules, and everyone else will just have to live by them.
Could there be a fairer system? Of course there could, it’s just a matter of sitting down and writing up some rules.
Let’s consider a major construction project, perhaps worth $ 1 Billion. This would likely be some kind of government infrastructure project. There may only be 5 large contractors with the funds, experience and know how to bid on the project. In order to have an effective system, you need all 5 contractors to bid. You want them to take the project seriously and to give it their best shot. That’s how you get the lowest price on this deal and the next 9 deals, by having everyone bid.
If your system was viewed as unfair, then the number of participants would drop for future jobs. You don’t want that, you want full participation.
Also, you must appreciate that it has cost the individual bidders $1million or more just to be there and bid.
So, what does that have to do with bidding wars in real estate deals? Well, it’s much the same thing!
Sellers are governed under the Vendors and Purchasers Act and the Conveyancing and Law of Property Act when it comes to real estate deals. Bidding wars are not covered, so technically we still have the “wild west”.
Why not establish a system that is open, transparent and fair?
Now, let’s switch over to organized real estate. The real estate industry which owns the MLS (Canadian Real Estate Association), educates the agents (Ontario Real Estate Association) and operates and controls the computer driven listings service (Toronto Real Estate Board) could easily post some basic rules.
In addition, the Real Estate Council of Ontario could do so too. But, its mandate would be restricted to real estate registrants and not the public. The Ministry of Consumer Services when functioning under consumer protection legislation might do so too. But, so far, no one has taken up the challenge.
Here are some of the issues:
- Condition of the premises
- Acceptable conditions
- Closing date
- Amount of deposit
- Bid process and timing
- Opportunity to respond and participate
- Seller’s agent’s own buyer
- Commission reduction disclosures
- Third party oversight
1 Condition of the Premises
This is always a risk, but at least when there’s no pressure, there’s enough time to have a home inspection undertaken. So, let’s have a complete inspection undertaken by a reputable inspection company. Have the report posted as an attachment to the listing, and permit sufficient time, perhaps a day or two to allow prospective purchasers to have their own inspections completed at their own expense.
Make sure that the seller’s inspection will be assignable to the buyer. Here, a fee would be paid, perhaps $75 and the buyer would be entitled to an assignment of the report. This means that the buyer now has privity of contract with the inspection company.
If we solve this issue, then the buyers will have less risk, and they will be able to submit higher bids with more certainty.
Another matter here, would be any specific warranties that the seller might provide concerning the swimming pool or the possibility of leakage in the basement. If the seller would provide such a condition to one buyer, why not all? Then, that would add confidence and the prospective buyers could increase their bids.
The same provision would hold true for appliances etc. If they are all 10 years old, and really don’t contribute measurable value on a million dollar home, just eliminate them. If they are worth $30,000 and the seller wants real money for them, why not include an appropriate warranty? These can be purchased from third party insurers. The intent is to increase the number of bidders and the size of the bids by eliminating some of the risks.
2 Acceptable Conditions
Let’s consider some standard conditions: sale of the buyer's own property, mortgage financing, insurance placement, and satisfactory appraisal. It would be helpful to know at the outset whether any conditions would be acceptable, and if so, which ones.
The sale of the buyer’s own property is unlikely to be a condition in a bidding war. Mortgage financing is the provision that everyone wants to include but often, it’s too risky.
The property will indeed be insurable. That should be something which could be determined and known. If the property has recently added to its claims history, there could be a new factor.
To include such a provision would not be onerous to a seller and could possibly improve the bids, assuming that everything is clear.
What if I outbid everyone else, but the appraisal doesn’t come through? Well, that means that the buyer has to come up with more equity to close the deal. This places a cap on the bid price. If the seller agreed that such a clause could be included it might encourage even a few more higher bids.
3 Closing Date
Why say 60 to 90 day closing when the seller really wants 30 days? Give everyone the same date. Make it a Wednesday near the middle of the month. Once all the buyers are working with the same date, the “time is money” equation does not have to be worked out to equalize all the offers. That matter is already resolved. Everyone now has the same date.
4 Amount of Deposit
This is something that may get bid up and increased. It’s not basically money in the pocket. So, why not select the right number. Say that you are looking for a $100,000 deposit. When the bidder wants to improve his offer, he will have to look at the price of his bid and not whether you might perceive additional value in a $150,000 deposit.
You would have to specify the rules. The $100,000 deposit is expected. There will be no offers with $150,000 deposits considered any more favourably than the ones which have the requested $100,000 deposits.
Naturally, that would not apply in the case of a $50,000 deposit. That would be less favourable than the requested deposit.
5 Bid Process and Timing
Let’s have some “fair rules” and this would be the place. What about some of the following rules:
- All offers are assigned a number from the time of registration
- All offers will be presented in order of their assigned numbers
- All offers received by fax will be placed in a sealed envelope
- All offers delivered will be placed in a sealed envelope
- All buyers' agents will have the opportunity to present their respective offers in person, should they choose to do so
- All offers must be submitted with an irrevocable time acceptance being no earlier than 10:59 pm on the specified date
- The least favourable 20% of offers will not advance to the next round
- The most favourable 80% of offers will be invited to re-submit and advance to the second round
- Only the most favourable 20% of offers will advance to the third and final round
- No offer may be withdrawn prior to its irrevocable time unless it has been rejected
6 Opportunity to Respond and Participate
Just for clarification:
- All bidders will have the opportunity to participate
- Only those bidders who have advanced to the next round will be invited to participate in the second and third rounds, as the case may be
- No pre-emptive offers will be entertained or considered, since clear and specific instructions from the seller have confirmed that offers with shorter irrevocable times will not be presented and reviewed
- The intention of the above rule, is to ensure procedural fairness for those prospective buyers who have chosen to follow the rules
7 Seller’s Agent’s own Buyer
From time to time, the seller’s agent will have a buyer and such a potential buyer may have an unfair advantage. The purpose of the procedural rules is to eliminate, to the extent possible, such unfair advantage.
Sometimes, buyers will work around their own agent in order to deal directly with the listing agent. We all appreciate that isn’t fair. So, here are some rules:
- In such cases, the listing agent will secure the services of his broker of record or office manager who will oversee the fairness of the procedural rules as “bid supervisor”
- The broker of record or office manager may appoint another delegate, provided such delegate is not receiving any referral fees in the subject transaction
- Only the bid supervisor will communicate, contact, meet, or discuss in any way the offers with the seller
- The listing agent will refrain from contact with the seller during the bid process
- This is not a rule that applies to the brokerage and multiple representation, this applies only in the case of the individual listing agent and the individual buying agent, being one and the same person
8 Commission Reduction Disclosures
On occasion, a party may wish to secure an advantage by not accepting the full commission as offered by the brokerage to the co-operating brokerage. So, they will try to leave some money on the table. But, it’s not free, they want to secure another financial advantage. They just are omitting the part going to the brokerage and attending to the payment of various taxes. The problem is how to assess the value of the reduced bid and give it an “artificial bump up”.
I am suggesting that we simply leave the playing field level. Take the full commission, pay the brokerage and pay the appropriate taxes etc. Here are some additional rules:
- All commission reduction disclosures by the listing brokerage shall be made as required by law, prior to submission of the offers
- Commission reduction arrangements by other registrants are not encouraged
- Participants are encouraged to accept the commission as offered, process the payments and attend to the payment of the necessary taxation on the gross amount of the commission
9 Third Party Oversight
You will appreciate that one of the most significant features to ensure fairness is third party oversight. If this is the way ABC Realty handles all its bidding wars, then that’s fair, and I would participate again. The system is open, fair and transparent.
Consider these rules:
- The bid supervisor is to receive and consider the offers, meet with the seller and negotiate any further offers and counter-offers with the buyer.
- The bid supervisor shall comply with the requirements of REBBA, 2002 concerning the validity of offers and identity of buyers and/or their agents as required
- The bid supervisor will communicate any disclosures and advise all participants, from time to time as to the number of registered offers, the number of registered offers withdrawn, and the current number of registered offers.
If we have a system which encourages procedural fairness, discourages the “end run” by the listing agent, eliminates bully offers and respects the integrity of the buyers and the bid process, we should have a better system than we do now.
Brian Madigan LL.B., Broker