Three Models for Bidding in the Real Estate industry
Essentially, there are three possible models to choose from for the real estate industry:
1) Open Bidding System,
2) Closed Bidding System,
3) Cheating Bidding System.
The Open Bidding System
This system works relatively efficiently. This is the “open auction” approach. All the potential buyers are aware of the last bid, so if a buyer is prepared to pay more they simply “raise the bid”. This system is quite fair to buyers and encourages their participation. The fairness of the system itself encourages participation.
Closed Bidding System
This system is similar, except for the fact that no bidder knows any other bid. The bids themselves are all submitted in sealed envelopes and all opened in sequence of submission. Confidentiality is the key. Everyone interested will submit their very best bid once. The high bidder is successful. This system is also fair, it encourages the bidder to stretch right at the outset, since his bid might not otherwise be the highest. The fairness of the system itself encourages participation.
The Cheating Bidding System
This is something of a hybrid. This is the system of “unfair rules”. This is the system which has been selected by the real estate industry in Ontario for adoption.
In this situation, the Seller is “King” and calls “all the shots”. The reason for this, is simply to get all the negative press off the backs of the real estate agents.
The Seller, coached by his real estate agent might do a number of things to encourage and motivate buyers. The Price might be ridiculously low, so as to really be no price at all. So, a Seller wants to sell for $1,000,000.00, they list at $749,900.00. However, there is no chance that they will ever accept any price anywhere near that number. Who’s interested? Anyone who has $$750,000.00 to $1 million! If this were any kind of a business, this would not be allowed. It would be contrary to the Competition Act. The sale of private real estate is exempt from the Act.
Offer times might also be placed in issue. The date for Offers to be submitted might be Tuesday night at 8:00 pm. But, the Seller might take an earlier Offer. This strategy places the Buyer “offguard”. If the Buyer waits until Tuesday at 8:00 pm, the property may be long since sold. So, should a really serious Buyer take a chance, follow the rules and wait? Probably not! The Buyer likely has one or two experiences where waiting was foolhardy. This is why we have “pre-emptive” bids.
Additionally, the mere fact that we actually are talking about pre-emptive bids in any particular case illustrates the fact that we do in fact have “hype”. So far, there’s nothing here, that’s fair for buyers!
Let’s open the bids! It’s Tuesday at 8:00 pm, so we’ll have a look at all the bids. That’s fine, but we’re keeping it all secret, we’re not going to tell anybody (well, maybe somebody).
You know what? They were all close. Way too close to figure out. We have decided to send everyone back for a second round. Bring your best, just like we told you last time.
You know what? They were all close. Way too close to figure out. We have decided to send everyone back for a third round. Bring your best, just like we told you last time. It’s getting late, so it’s time to shoot for the stars, you don’t want to keep everyone up late do you?
Now, there are effectively a few things going on here. The number of participants is likely dropping round to round. A Buyer knew that there were 11 potential buyers at the outset, but how many are there now? Who knows the correct number? The Seller and the Listing Agent both know.
Bob, the Buyer could actually have the highest bid. He could have had the highest bid on the first, second and third rounds. Basically, 15% above the second highest round one, 18% round two and 25% round three. This means that all this time Bob was just bidding against himself. But, no one told Bob! Who knew this? The Seller and the Listing Agent both knew this fact, but they thought: “why tell Bob?”
The Listing Agent met Bill at an Open House on Sunday and decided to “sign him up to a deal”. Bill had an Agent for several years, but one thing that he had come to learn was that the successful bidders for this Agent’s houses were ALWAYS buyers represented by this Agent.
The next step is the phone call: “Bill you need to get you Offer in here”. “Ok, what should the price be?” You know, I can’t tell you that?” Does it have to be over a million”. “I would not start at any lower than that.” Is, $1,010,000.00 enough?” My inclination would really be a little higher than that.” OK, I’ll go 1,025,000.00”.
And, in the new round four, Bill is the winner. He just outbid Bob by a little bit. The Listing Agent was out there “working the bid”, trying to keep technically onside. The Agent’s conversation with Bill ended when Bill suggested a number which was enough money to win.
If Bill was short of cash, the Listing Agent might have reduced the co-operating portion of the commission, just enough to assist Bill.
The Seller has to move into his new home on 29 March. No one set that as a closing date, other than Bill. How did Bill know that?
Last year, CBC Marketplace aired an expose of certain real estate agents breaking rules, and “working the system”. Sign up with them, you will win, go with someone else, you don’t have a chance.
This is simply the cheating bidding system. This is what we have in Ontario now. RECO suggested that Brokerages could not act on both sides of the same deal. OREA countered and said that the real problem was the buyers. They didn’t understand what they were doing. So, let’s get them to sign one more Form. They already sign a CCR. Let’s get them to sign it twice and the second time they sign it, there is one more statement which says: “I really, really understand what I’m signing this time”. The Ministry agreed, and said: “that’s the perfect solution”.
Obviously, this new and improved cheating bidding system will get rid of all the cheaters.
Why not consider a system which is fair from the outset?
* ADDENDUM: Cheating is the exception. There are over 80,000 registered real estate practitioners in Ontario. 52,000 are members of TREB. Those who fall into the cheating catergory would be less than 1%. The system we now have "enables" the cheaters. The system itself requires improvement.
Brian Madigan LL.B., Broker