MULTIPLE OFFERS - SHOW, DON'T TELL

Let’s talk about multiple offers. I’m likely to go on longer than usual, so bear with me. And I need to start by going back a bit.

Real estate in Kingston changed dramatically about four years ago. For several years leading up to 2017, the market was relatively balanced. And by that I mean that there were roughly enough listings to satisfy demand; there was rarely a real glut or a dire shortage. And that balanced market meant that multiple offers on a property were quite rare. As a seller, unless it was an extraordinary sort of place, or a badly underpriced sort of place, one offer was all you expected. That and about three months on the market, on average. Offers were conditional too, and buyers put financing in place over the course of a week or so, and completed a house inspection too. I was involved in competition only about five or six times each year. And prices went up a reasonable 3.5% to 4% each year.

But no more. We haven’t seen this few houses on the market for 30 years. Which makes for very high demand, and rapidly rising prices. The economics aren’t particularly complicated, even for a film major like me. From 2017 to 2019, prices in Kingston rose about 25% in total. And this year we’re up another 13% or so; it depends on the day. Instead of competing for a house half a dozen times each year, we now do it more than 50 times each year. And if you need to sell a house in order to buy the next one, don’t even think about putting that down on paper. 

The reasons for this shortage in recent years are many and complicated, the subject for another article on another day, but involve low interest rates and overseas investment in our stock of new-builds, folks fleeing Toronto, and homeowners suddenly reluctant to sell their homes, even for great money, if they can’t be sure what they might have to pay for the next one. The market has worked well for those moving away, into a quieter market, or into a rental situation, but for the rest of us it has felt risk-laden, and more than a bit mad. 

Buyers are often frustrated and downright sceptical about the market. They feel helpless, and many of them will lose several times in competition before they secure a house. 

To my mind, the biggest single challenge in our industry at the moment is how best to deal with all that competition. What sort of offer do you counsel a buyer to write when you have half a dozen others eager to win the same property? How do you strengthen your offer? What will weaken it? What patterns are we seeing? And most importantly of all - is the way we deal with competing offers fair? Or do buyers and sellers deserve better? 

A friend of mine a week ago asked whether all this secrecy, and the fact that a buyer doesn’t know the details of the competing offers, is part of what’s driving up prices, and whether it is in fact a self-serving practice from us in the business. A way of artificially inflating prices (and therefore commissions). Good reasonable questions, every one of them. 

I could write chapters here. And boiling it down to a few paragraphs makes me nervous. Cheri would probably write a different piece, for example; we all have our own take. This is mine alone.

The first thing to know is that the Real Estate and Business Brokers Act forbids us from releasing the details of competing offers. This is not a decision made at a local level. Buyers have to be told how many offers are being presented, but the actual contents of those offers must not be revealed. 

So if disclosure and transparency are your beefs, it’s the legislation you want changed. The provincial government was asking for input on this exact issue just last year. There was talk that more openness was desirable and that the Act may be amended. Submissions were invited. But then it got real quiet.

To my mind, there is no doubt that houses do sometimes sell for more money than they would if some details of competing offers were revealed. Here’s how things often play out.

Let’s say there are five offers on a well-located property priced reasonably at $300,000. Recent experience suggests that the house will sell for comfortably more than the asking price. (And it’s also quite likely that the majority of the offers presented will be free of any conditions at all - no financing, no inspection.) The rule of thumb last year was that any house attracting two or more offers would likely sell for at least 5% above the asking price. This year it’s not at all uncommon to see the selling price at 10% (or more) above the asking price. So a house well-priced at $300,000 will likely see an offer at around the asking price (You never know, I suppose, is that buyer’s rationale), and a few between 305 and 320, but the winning offer is quite likely to come in at 330 or slightly more. 

To that extent the process has been sorta predictable. And even without knowing the contents of the other offers, it’s been possible for a buyer, if the budget allows, to submit an offer that has a reasonable chance of success, and also one the doesn’t spend too much money unnecessarily. 

The trouble is, as the market feeds on its own frenzy, buyers become more desperate and offering patterns become more fuzzy. We saw a winning offer a few weeks back that was nearly $100,000 above the next-best offer. And there has been a weird trend the last few weeks wherein someone will offer around $60,000 over the asking price. We’ve no idea what’s feeding that. The effect of all this is to put a damn big grin on the seller’s face, but also to distort the local market, which suddenly has to reckon with a sale price out of line with recent history or any sales data. Whether it’s an outlier or not, it nudges up the average selling price of a similar house in the same area.

There are all sorts of consequences when this happens. Worryingly, if houses regularly sell for inflated prices, rents in the area tend go up in the long term as well (because investment properties also sell for more, which makes for bigger mortgages and therefore higher rents), and good people are forced further from the downtown core we often work in. 

But the biggest problem with the present system - aside from the general dissatisfaction expressed by buyers (which I reckon is only a hair’s width from distrust) -  is that all that secrecy really does leave in place the potential for unfair behaviour.

Imagine that the best couple of the offers on that same $300,000 house are very close to each other -  one at $330,000 and another at $332,000. In all other respects the offers are the same. Common practice (and decency?) suggests that both of those buyers will get a chance to improve their offers. Perhaps both will add some cash to the pot, or perhaps both will stand firm. Either way, a clear winner usually emerges at this point. And fair enough.

But what if the gap between those two offers is already huge? What if the listing agent and the seller, protected by the fact that the contents of the losing offers will remain secret, send back for improvement two offers of say 330 and 375? The people offering 375 will assume that they are in a tight battle for the house. They’ve already shown themselves to have significant resources. Perhaps they will improve their offer to $400,000. Who knows? The people offering 330 are largely irrelevant at this point. The listing agent’s aim was merely to drive up the eventual selling price. Is that still a fair way to do business? Consider for a moment too that the seller and buyers in that example may all be represented by the same brokerage. Shouldn’t the buyer be protected from such a strategy? Shouldn’t that protection come in the form of transparency?

(I need to point out that it is a highly unusual way for a multiple offer presentation to unfold and that office managers and brokers would frown mightily on such behaviour. As would most agents. But it does happen. It’s possible. I’ve seen it. And that possibility - and the fact that there is no rule to prevent it - is enough to make me think there must be a better system.)

And so what would that system look like? Well I think you could accomplish wonders with one fairly simple change, one extra step.

I don’t think it’s as simple as having all offers visible to all offering parties right from the start. If everyone is going to get a second chance then no one will show their true hand immediately. Perhaps instead, the seller could review all the submitted offers and, if there isn’t a clear winner, she could send the most promising offers back to those buyers for possible improvement, much as we do now. The important change comes at this point: the pertinent details of those best offers are made known to the buyers still involved. I’m not talking about releasing names and actual copies of the offers, home addresses and favourite sports teams. Rather, just the salient facts would be shared: the offering price and closing date and any conditions etc. An hour later, those best offers - perhaps amended, and perhaps not - would be reviewed again by the seller. If a winner wasn’t clear even then, the process could always be repeated.

There would be details to iron out. There are always details. And small print. This is still real estate, after all. Buyers and sellers, for instance, would presumably have to agree in writing to such disclosures. Or perhaps it’s easier even than that -  you simply build it into the legislation; it just becomes part of how one goes about buying a house. One of the applicable rules of fair play. 

Maybe I’m missing something here, but the disgruntlement in the marketplace over how we deal with multiple offers is very real. And this change in the routine would make most people happier. What you’d effectively be doing is building both an extra safeguard and improved transparency into the offer review process. I would expect that to lead to an increase in consumer confidence in general (which may, I suppose, loosen a buyer’s purse strings in a negotiation). At its root, though, this is simply a way we can act more openly, more accountably, with other people’s money than we do at present, and how in the world can that be a bad thing?