Can an Open Bidding Process Really Serve Everyone's Best Interests?
Open bidding can actually put the seller, and even buyers, at a disadvantage.
Those of you that know me know I'm a huge poker fan. I used to be a pretty big poker player but unfortunately I hardly get to play any more. Maybe it's because it's almost impossible to find a poker room anywhere close to the city anymore. But that's a whole different rant I won't get into.
Ever since I got into real estate, it reminded me of my days at the poker table. Trying to figure out what another player was holding, whether they'd call a small or big bet, whether they'd fold to a raise, and trying to work out the most amount of value I could get when I was holding the nuts. Math plays a very big part in how the best players in the world play, but without true poker instincts - the ability to study how a player has been playing and what he's been saying at the table - you just can't be world class. That ability to fish information from your opponents can sometimes be the difference between being a good player, and being a great player.
Which brings me back to real estate. Every agent always says "you should hire an agent because we know how to negotiate". Well, let me tell you from first hand experience dealing with hundreds of different agents, most are horrible negotiators. It's almost like watching an amateur poker player on TV trying to pull a bluff on Phil Ivey. You know it won't work, you know Phil sees right through it, and yet the amateur has no idea. It's usually because the amateur's story doesn't make sense. Why would he call and not raise? Why would he check? A good poker player can put the pieces of the story together and figure out the best play. This is how great agents negotiate. They find out all the information they can and figure out how that can be used to help their clients land the best deal.
This finally brings me to the point of this blog post, and whether or not an Open (or Transparent) Bidding Process can really work in the Toronto housing market.
There are a few different variants of the Open Bidding model but it effectively means that all parties in a multiple offer situation (ie, a bidding war) are told what the highest offer is and can then make a decision if they'd like to improve their bid. Pretty much like a typical eBay auction. You know the highest bid, you know the minimum bid increments, and you can decide if you want to out bid the highest bidder.
Sounds simple. Sounds like this should work for real estate in TO, right? Well, I'm going to play devil's advocate here and play both sides of the argument:
First, here's what's wrong with the Open Bidding Process:
1 - Just because an offer is the highest, doesn't mean it's the best. Not all offers are created equal. Imagine an offer on a $499k condo that comes in at $600k. Sounds good, until you dig deeper and realize the offer in conditional on financing, status certificate review, a sale of the current owners house, and a home inspection. You've all heard stories of that buyer agent who got his/her client's offer accepted on offer night without being the highest offer, yeah? Well, I bet you 99.9% of the time it was because the actual "highest" offer was full of conditions. Check out more on one of my previous posts - "Top 5 Ways To Guarantee You Lose A Bidding War".
2 - There's more to an offer than just price. This ties very closely in to #1 above. If all offers submitted in an Open Bidding situation had to be firm, have the same deposit, and the same closing date then yes, price would be the only thing for a seller to consider. But often times, closing dates, conditions, and even the deposit amount can be the difference between a winning and losing offer. In this Open Bidding situations, is the listing agent obligated to disclose the highest offer, or the best offer? Those can be two very different offers. Which leads me to #3...
3 - Agents are not allowed to disclose the contents of a competing offer to any other agent. This is the one that really gets me confused because wouldn't disclosing the price of a competing offer (ie - in an auction-style Open Bidding Process) be in violation of the very regulations we, as agents, are forced to abide by? I'll leave this one to some legal experts but if I ever disclosed the price, conditions, or any other material aspect of a buyer's offer to a competing buyer agent on one of my listings, I'm pretty sure I'd be in for some pretty hefty fines from RECO. Just saying.
4 - An Open Bidding Process only helps buyers. Look, there will be arguments that Open Bidding or auctions helps determine the true market value of a house but the reality is, if a seller is looking to maximize the sale price of their house on offer night (and they all are) then giving buyers the opportunity to "blow each other away" is exactly what you, as a seller, want. Proponents of the Open Bidding Process will give examples like "oh, if the other buyer knew they were only X dollars away from the highest bidder, then would have offered more, driving up the final sale price, helping the seller". But I strongly disagree. In the real world, there is almost always one, very motivated buyer, who will do anything to win the house or condo, whose offer is far enough from the competition that it's the clear winner. This is what you want as a seller. It's the whole point of holding back offers and setting up for a bidding war. In an auction-style Open Bidding Process, this will never happen. Why would anyone "blow away all the other offers" if they knew they only had to bid $1000 or $2000 more than the current highest offer? As a seller, your leverage to get that "one amazing offer that blows everyone away" would be gone.
5 - In a seller's market, the seller holds all the leverage. Think of a poker tournament, where the big stack keeps raising and re-raising, forcing all the shorter stacks to fold until they pick up a really big hand and can go all in. The seller is that big stack who hold all the leverage and can't be pushed around. As frustrating as it is for buyer and their agents to deal with the current blind bidding process, it's the seller that calls the shots. So why would a seller ever want to do anything to give buyers leverage? Maybe in a buyer's market, the process will shift towards open bidding - but then again, in a buyer's market, the chance of multiple offers and bidding wars is no longer viable, so the whole concept becomes moot.
6 - In an Open Bidding Process, why would anyone offer more than list price? Think about this for a second. If every buyer was going to be given the opportunity to improve their offer on offer night, which is exactly what an Open Bidding Process advocates for, then why would anyone start their bid at anything but the list price? If there's a condo listed for $499k and it's clearly worth $600k based on all the recent comparables, why would anyone bother offering more than $499k? I mean, it's not like you'll be told "thanks for your offer, but we're going to work with another higher offer". Everyone will be able to keep bidding. Imagine a buyer who was willing to pay $610k for this condo, sitting back and realizing the highest bid on on the condo, after multiple rounds of bidding, was only $550k. All the Open Bidding Process does is allow this buyer to scoop the condo for $551k (or whatever the minimum increment was set at). In today's current blind bidding process, I'm sure that motivated buyer would have shown up on offer night with a firm offer of at least $600k as soon as he found out there were 4 or 5 or 10 other offers. Because the idea of being up against 4 or 5 or 10 other offers will force that motivated buyer to go all in, right off the bat. That'll never happen in an Open Bidding Process, which is bad news for a seller.
7 - As a buyer, why would you want your offer broadcast to other buyers? If you, as a buyer, held the highest bid on a property, why would you want other buyers to know what your offer was? If your offer is the highest, would you really want to give another buyer an opportunity to outbid you? Even buyers lose leverage in an Open Bidding Process by being forced to show their hand to other buyers in the middle of a bidding war. That just doesn't seem right. Sure, every buyer would obviously love to know what everyone else's offer is, but when it comes down to revealing your own offer, I'm sure buyers will feel differently.
Honestly, I have to cut myself off here because I have a bunch of other reasons why an Open Bidding Process just can't be good for everyone and this post is already super long. So in summary, as a listing agent advising a seller, I would never recommend an Open Bidding Process. Even as a buyer, you can lose your advantage against other buyers. So how is this idea actually a good thing?
Oh yeah, so here's what's good about an Open Bidding Process (and this is all I could think of):
1 - It let's buyers know what they're up against.
But this doesn't actually help the seller or the highest bidder. So how does the Open Bidding Process serve everyone's best interests? In my opinion, it doesn't.
Real estate is like poker. Why show your hand when you don't have to?
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