Desperate times call for desperate measures. Sometimes, a bully offer is the way to go. Although, one must proceed with caution...
Anarchy, betrayal, and tragedy. No, I’m not talking about the hit TV series Game of Thrones. I’m talking about Toronto’s housing and condo market in early to mid 2017.
A bully offer is when a buyer says “I’m skipping to the front of the line and submitting an offer today.”
All one needs to do is look at the migration numbers to metro Toronto to understand why the real estate market can be so competitive.
As demand continues to outpace supply, I’ve observed a number of interesting evolutions in the market. And one of the most prevalent is the “Bully Offer.”
No, I’m not saying bully offers are new. They’re not…
However they’ve become quite a trend since about the beginning of 2015, and now occur about 30% of the time a property has a set offer date.
When a seller knows they have a high-demand property, they’ll put it on the market with a set offer date, usually about a week after the list date.
The logic is simple: if they list ‘without’ an offer date, someone will buy it before many of the other interested buyers have had a chance to view it themselves.
It’s in the seller’s interest for all interested buyers to see the property.
Why? Because it’s only fair to the buyers and yes, to you cynics reading this, because it’ll likely result in a higher selling price for the seller.
If there are 5 interested buyers, they will all have a different opinion of the property value. Can you guess which buyer the seller wants to do work with?
A bully offer is when a buyer says “There’s no way I’m waiting a week until the offer date, only to compete with a bunch of other buyers…. I’m skipping to the front of the line and submitting an offer today.”
Yes and no. It depends on the seller, the strength of the bully offer and timing.
1: The offer is submitted within 24 hours of the property being is listed.
The fewer the number of buyers who’ve viewed the property, the better for the buyer with the bully offer. Very few buyers would submit an offer on a property without having actually viewed it.
2: The offer must be strong on price and have no conditions.
The seller and listing agent may list the property for $500,000, while knowing the value is actually around $550,000 and expect a selling price in that ballpark.
If the bully comes in at $550,000, it’s unlikely they’ll accept. If it comes in at $570,000 however, the seller will likely accept the offer.
3: The buyer’s agent must convince the seller and their agent that the buyer submitting the bully will absolutely not participate on the offer date — this is the seller’s only chance to entertain their offer.
This puts the listing agent and seller in a pickle.
Should they turn down the offer and risk settling for a lower offer on the set offer date? If the listing agent advises the seller to turn down the offer, it’s their neck on the line if the seller ultimately gets a lower price on offer night.
It’s worth noting that at least 50% of the time, the buyer is bluffing and would participate on the set offer date (tail between legs).
1: There’s a greater chance the buyer will secure the property.
For buyers who have submitted offers and lost out to other buyers many times before, this is a very attractive reason — even if it means paying a above market value.
2: The value of a property isn’t an exact science. Ask five appraisers the value of a property and they’ll likely give you five different numbers, within about a 2% - 4% range.
In other words, the buyer submitting the bully offer may actually pay less than what the property would sell for on the offer date, with many other buyers competing.
This is exactly why bullies would give sellers and their agents such anxiety. They don't know if they're accepting the best offer, but terrified of the prospect of losing out if it is in fact the best offer.
3: If you asked ten buyers who have submitted a bully offer why they were willing to risk overpaying, I'm guessing eight of them would tell you that in a hot sellers' market, 'market value' is quickly changing, and not in their favour.
So they may have overpaid in April, but by July standards, they got a good deal.
4: Perhaps less important than the other reasons, but if successful, simply expediting the process and allowing the buyer to move on with their life, rather than being in limbo for a week before the set offer date, is attractive to a lot of people — especially those who have already lost a couple times.
Agents have different philosophies on bully offers. Personally, if I know with certainty my seller client will receive more than four or five offers, I note explicitly on the listing that we will absolutely not entertain any “pre-emptive” offers.
That way, buyers won’t waste their time submitting a bully and will instead submit their offer with all the other interested buyers on the offer date.
If the market is only moderately favouring sellers and it’s not clear if we’ll receive more than 1 offer, my recommendation is usually that we be open to looking at bully offers.
When representing buyers in a strong sellers' market, I always bring the subject of a bully offer up initially so they understand all the options available to them, but it usually isn’t discussed with any seriousness until (or if) they’ve either lost out on a couple properties to better offers, or lost out on a property due to a bully offer from another party.
Whether it’s the right course of action or not really depends on the circumstances. One must weight all the pros and cons before deciding if it’s in their interest to participate on the offer date or in advance.
There’s a lot more to the process, but I hope this has given you a good primer!
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