Illustrated are cases where multiple buyers bid up the cost significantly over asking price.  The increases range between 6.8% and 17.8% (see dotted line). Quite a spread, I'm sure you'd agree - and all this during a reported downturn in the overall real estate market (June/July 2008).

Micro Markets

Notice that I specifically mention Toronto's "midtown housing market".  By that I mean to suggest that micro-markets can behave in ways that may seem to contradict the real estate news about the market at large.  No doubt you know this intuitively as you sit in the comfort of your home or office reading these words with a cool head.

Wherever desirable locations and quality building structures are in play, if asking prices seem low buyers can count on the price being bid upward to a more realistic level. Yet it is interesting to see how quickly first time buyers shy away from considering realistic upper bounds.  Instead, they cling to a hope that the final price will vary minimally from asking price.  But this strategy is a path to certain disappointment.

Successful Home Buying Strategy

The path to success begins when you work with your real estate representative to determine the positioning of a seller's asking price.....Is it towards the bottom, middle or top of the range for similar homes in the area?  Your agent, by consulting the MLS database, can quickly retrieve a range of recent selling prices for the area and provide an opinion on price positioning of the property under review.

It's been my experience these days that prices are set low relative to expected final price. From the seller's perspective this is a desirable tactic because more people are likely to be drawn into bidding process. The seller hopes that prices will be elevated to excessive heights by frenzied buyers.  Buyers, therefore, need to protect themselves by being well informed about the positioning of asking prices and anticipating the behaviour of competing buyers.

Which Type of Buyer Are You?

Buyers fall into three typical categories: 1) Property Virgins 2) Impulsive; and 3) Well-informed and action oriented.

Property Virgins [PV]

The Property Virgins, a novice, has limited knowledge of homes and home buying.  The PV has done some homework on real estate, but doesn't have a good grasp of the bidding process and tends to believe the asking price is very close to the final value that should be paid.  The PV's objective is to achieve a deal near the asking price, sometimes bidding slightly below or above it, but never intending to move very much from the opening bid.  The PV will spend a great deal of time seeking highly desirable properties, but without a grasp of the realities of the real estate market will inevitably see opportunities lost to higher bidders.

Impulsive Buyers [IB]

The Impulsive Buyers are driven by emotion.  The IB feels determined to win the game and sometimes will be driven to excessively high bids to reach that goal.  If other buyers can determine that an IB is in bidding game, they should consider backing out of the bidding process.

Well-informed & Action Oriented [WIAO]

The Well-informed & Action Oriented buyer understands the facts and knows how high bids might have to move in order to win.  By working with a real estate agent, the WIAO understands the seller's price positioning and how far upward it is reasonable to bid the price.  The WIAO and real estate agent can decide the starting place for the bid based on signals from the seller's representative, such as the attitude of the seller and the number of bidders expected.

A WIAO buyer will appreciate the table above. Understanding that a home in good condition within a desirable area and priced low relative to the market, they can work with their agent to develop a bidding strategy that maximizes the probability of winning.  Based on the example, for homes listed under $450,000 the buyer would understand the real possibility that final prices are likely to exceed asking by a range of 6.8% - 17.8%.  Given the home's condition, additional investment required for desired upgrades, and the WIAO's finances, an upper limit can be determined for the bid.

If the Price is Bid Up, Can You Afford It?

Agents must ensure that buyers don't lose sight of the real cost of financing the higher bid - a factor that often leaves buyers unnecessarily apprehensive.  Often, though the additional amount is affordable in terms of monthly mortgage payments, buyers can lose sight of this and become discouraged by the thought of the lump sum value.  The agent can help the buyer understand the financial burden from moving to the higher cost by focusing on the equivalent mortgage payment over time.  For example, in the table below the last column indicates the additional mortgage payments required to cover the gap between asking price and the bid-up final price, based on 5% variable interest for 35 years.

Based on chart "The Realities of Housing Sales"above

If the incremental mortgage payment is affordable, the buyer can feel confident about moving towards the higher bid and thereby increasing the probability of winning the right to buy the property.

There's no place like home....