July 06 2022
A special guest post from our friends at Loans Canada.
Housing markets across Canada have become so competitive that bidding wars are not the norm in many areas. Not only are homeowners in large cities getting multiple offers but so are those living in the suburbs. One controversial tactic that could help buyers avoid these highly stressful situations is the "pre-emptive bully offer". Buyers can avoid the bidding war by presenting an over-the-top offer to sellers before any other buyers can get in on the action. Let's go into more detail about pre-emptive bully offers along with their perks and drawbacks.
A 'bully' offer is an offer made before the offer presentation date and typically expires within a short period of time, usually only a few hours. The idea is to push other prospective buyers out of the process and essentially eliminate the competition.
When a listing is positioned for a multiple offer situation — which typically involves setting a date when offers will be accepted and presented — buyers will need to put in their best offer. To avoid this situation, buyers may choose to preemptively make an offer before this offer presentation date at a price that is well over the listing price. The seller may be impressed with such an aggressive offer price and accept it without going through the bidding war process.
To illustrate how a bully offer works, let's say you find a home you want to put an offer on. According to the listing, offers will be accepted on Friday evening at 6 pm. That means the listing brokerage is not taking or reviewing any offers until that time.
If you want to make a move before the competition enters the picture, you can make a bully offer for a price that's substantially higher than the listing price. For instance, if the listing price of the home is $700,000, you could make a bully offer for $775,000 on Wednesday, a couple of days before the official offer acceptance date.
Your offer will expire at midnight that same day, so there are only a few hours for the seller to consider your offer. There is no guarantee that the other offers being presented on Friday evening will match or be higher than your offer. They may be weaker than the offer you've presented. By the same token, there's a chance that the seller could see even better offers Friday night. Either way, the seller will be gambling whether they accept your offer or not.
Before you choose to make a pre-emptive bully offer, consider asking for a time slot to have the home inspected by a professional. Home inspections are customary in a typical real estate transaction, but they're not always possible in a bully offer situation.
If you choose to make a pre-emptive bully offer, there are a couple of different ways to approach it:
One way to present a bully offer is to submit it without asking for permission or waiting for a response. Keep in mind that this strategy might make you come off as arrogant since you're essentially ignoring the request to wait to submit your offer until the specified date and time. The seller may be annoyed with this aggressive approach. There is also the risk that the seller will still want to see what other offers there are, so going in too early could risk your offer being tossed if the seller chooses to wait for the actual offer date. It's a risk for both sides, but it could be a risk worth taking if your offer is accepted.
Unlike an aggressive bully offer that lacks discussion with the seller and listing agent, this strategy opens the doors to some dialogue. This may be the better approach in a hot seller's market where the seller has the upper hand. Ideally, you should listen to what the seller wants so you can check off all the boxes and make your offer hard to resist. Get a feel for what the seller is looking for and give it to them, within reason. Be open to negotiating if the seller is willing to entertain your bully offer, which could go a long way at the end of the day and may produce the outcome you desire.
There are some notable perks to making a pre-emptive bully offer when you find a home you love:
If you make a sizeable offer that's substantially higher than the listing price, you might be making an offer the seller cannot refuse. The seller may worry that they're giving up a really solid offer and might want to pounce on it.
Your chances of having your offer accepted are even higher if you come in with a 'clean' offer, which means you've excluded all or some conditions. In this case, the seller is more likely to accept your offer.
Being involved in a fierce bidding war can be incredibly frustrating and stressful for buyers. The odds of getting beat out of a bidding war can be pretty high, especially if there are many buyers who are offering sky-high prices. But with a pre-emptive bully offer, you can avoid these stressful situations and get an answer from the seller — whether good or bad — without dealing with other competing offers.
While there are some perks to making a pre-emptive bully offer, this tactic doesn't always give buyers the result they're looking for. These are a few drawbacks to consider before making a pre-emptive bully offer:
Perhaps the biggest risk to a pre-emptive bully offer is that you could be paying way too much for the home compared to what it's truly worth. It's possible to bid too high to get the seller's attention, only to find out that the home isn't worth what you promised to pay and hasn’t even attracted many other offers. In this case, it may have been better if you had waited for the evening that the offers were being accepted and reviewed.
If you choose to make an offer that's void of conditions — including a home inspection condition — you’re risking being stuck with a home that's fraught with problems. A home inspection will give you a chance to examine the property and uncover any hidden issues with it, and give you a way out of the deal without consequence. But when you scrap this inspection to make your offer more attractive, you could be taking a big risk.
If you're considering making a pre-emptive bully offer, keep the following tips in mind:
Even if you chose to wait until offer night and compete with other buyers for the same home, you should still go over your finances and come up with a maximum offer price that you're absolutely unwilling to exceed. Bidding wars can be emotionally-charged, which means you might make a decision that you may regret later. But by establishing a clear limit when it comes to how high you'll go, you can protect yourself from committing to a much more expensive purchase than your finances can comfortably handle. More specifically, a budget will help ensure that you get approved for a mortgage, prevent you from scrambling to come up with a larger down payment and avoid becoming "house poor".
What if you make your pre-emptive bully offer that's accepted by the seller, but your mortgage lender won't approve you for a loan? In this case, you should have a backup plan. Before making your offer, consider speaking with a handful of alternative lenders to see if you can get a mortgage based on your financial and credit profile. Alternative or private lenders generally have less stringent lending rules (albeit in exchange for a higher interest rate) that can make mortgage approval easier.
Perhaps making an unconditional offer may be less risky for a conventional home that's newer and in good shape. But leaving out important conditions on an offer for a more unconventional home — such as an older rural property — could be very risky. Use your better judgment and get your real estate agent's professional advice about how to approach an offer on the specific home you're interested in.
If you're comfortable making an offer that's substantially higher than a home's listing price and are feeling a little bold, you may consider making a pre-emptive bully offer to see if the sellers will bite. But before you do, be sure to discuss your strategy with your agent and come up with an offer that won't put you in a risky position.
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