There are strategies to help you come out on top
Madhavi Acharya-Tom Yew, Toronto Star
Jaff and Brad Robertson are brothers who are also partners in real estate. They know what it takes to buy an aging property and renovate it. They know what it takes to be landlords.
And they know what it’s like to get into a bidding war.
“It’s definitely nerve-wracking and very emotional. It’s a very stressful process,” says Brad, 28.
“There were times we bumped up our bid without any provocation. We would just think, ‘There’s other bidders now. We need to go in higher.’”
Last year, they walked away from what seemed like the perfect house.
It drew eight offers and ended up going for about $110,000 over asking.
“We offered more than the asking but not close to that much,” said Jaff, 34. “It wasn’t worth it for us.”
Bidding wars have become the norm in several Canadian cities. For first-time buyers in particular, it can feel like a losing battle.
There are strategies to help you come out on top.
One key is to keep hold of your logical perspective and avoid getting too emotional, experts say. Of course, that’s easier said than done.
“Nobody ever says, I really want to get involved in a bidding war,” said real estate agent Gina Roman. “People want what they want, and that’s why there are bidding wars.”
The danger of paying a price that far exceeds the market value is that if you need to put the property back on the market in a short time frame, you may not get your money back once agent fees and other expenses are taken into account.
That would certainly be the case if the long-awaited correction in the housing market comes around. Buyers often think nothing of adding $30,000 or $40,000 to a bid as they try to edge out the other guy, especially in the era of ultra-low interest rates. When you amortize that over 25 or 30 years, the added monthly cost is very little.
But that’s only part of the story, said Kelvin Mangaroo, founder of RateSupermarket.ca. For instance, for a homebuyer who borrows $400,000 on a 3 per cent five-year term, amortized over 25 years, the monthly mortgage payment is $1,892.98.
If a bidding war pushes the amount borrowed to $465,000, it adds only $307.61 to the monthly payment. But the difference over the course of the mortgage is a whopping $92,282.83 – and that’s assuming mortgage rates remain unchanged, which is unlikely.
“The total interest cost is huge, but people don’t tend to think of it that way,” Mangaroo said.
The danger for young couples is that they become cash-strapped, and are unable to save for emergencies, their children’s education, or their retirement, said real estate agent Nick Horton.
Sit down with a banker or mortgage broker and make sure you understand how much you’ll be able to borrow, and how you would carry the monthly payments.
Get a pre-approval, but keep in mind that it doesn’t mean you are guaranteed to get a mortgage, especially if you’ve overpaid on a property and are up against your upper limit for borrowing.
After a couple bidding wars, Brad and Jaff took a new approach.
“We got to the point where we tried to take emotions out of it, give an objective valuation of what we thought the house was worth to us and if we didn’t get it, we didn’t get it,” Brad said.