Bidding on Real Estate is Not a Salary Negotiation
Your skills might work on Craigslist and against your manager, but winning bids with sellers requires different tactics
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– Fullstack
When I chose the name Fullstack, I always anticipated a time when I would branch beyond the topic of software engineering to also write on my other interests.
Like a stack of books, not every book needs to be on the same topic.
After popular request, that day has come.
Going forward, there will still be regular posts on software engineer career mastery: getting hired, promoted, step–1 maxing so you can hit that KVM switch and build wifi-money during your day job.
But, sprinkled in between will be perspectives on finance and other topics, including today, perspectives from observing the bidding process in Canadian real estate.
In recent months, I’ve shared some short RE takes on X, and this post will go deeper.
Today, we explore some background on the bidding process, how it is different from negotiating your W2 salary, and how to make a successful RE bid, whether this is your first house or your 7th rental property.
How Not to Make a Bid
I knew a friend who for any house he’d would walk in, look around, and intuitively come up with a price that it’s worth.
“I just felt it wasn’t worth more than $420k, man.”
He never bid above it.
He lost every bid, by a lot.
While it helps suppress his anxieties of a big purchase with a sense of control, this tactic is nothing more than LARP-ing as an RE expert.
The seller could care less what you think their house is worth if you don’t submit the winning bid.
Making a successful bid takes more tact, self-awareness, and market knowledge than the above failed LARP-ing strategy.
The Real Estate Bidding Process
Whens some think about a RE purchase, they jump to negotiation tactics they tried last time they asked for a raise.
When others think about bidding, they think of a live auction, an auctioneer calling:
“Who’s got ten, can I get a ten?
Seven, eight, nine, ten.
Do I hear a ten?
Ten! Do we have eleven?
One more and it’s yours.
Nine, ten, eleven.
Who’s got eleven?”
Note what the setting implies:
You can see the other participants.
You can sense who might soon put up their hand.
You can feel the vibe if people are getting emotional and you might want to sit this one out.
You can see if the room is empty and let your bid sit.
You can put your card up multiple times, and keep upping your bid until you win.
Except for the odd live bank auction of a bankruptcy repo, this scene doesn’t show up much in real estate anymore.
Instead, bidding in many RE markets is blind.
Blind Bidding
Blind bids in RE mean that you have a process that looks more like this if you’re the buyer:
Seller sets an offer deadline.
As the deadline approaches, you come up with a price to bid and tell your agent.
Your agent drafts an offer contract which you sign, including your price and any extra conditions.
The offer is sent to the seller agent before the deadline.
After the deadline, all offers are reviewed. The seller agent will notify all bids if they won or lost.
Throughout the entire process, you have no idea of how hot the listing is, the competition, the other bidders.
And in some jurisdictions, it’s even illegal for the selling agent to hint at any information to prospective buyers since that could skew the process.
Bidding Wars
Without the realtime excitement of a live bid auction, RE agents have found other ways to induce bidding wars between a subset of buyers.
Buyers submit offers.
Selling agent discards all but top 3 bids, notifies them that they were “very close, so close, is this their final bid?”
Buyers have the option to submit a new offer at a higher price.
And this process can repeat on and on, if bids keep moving up until the seller chooses a winning bid.
While potentially advantageous for sellers, this process can be frustrating for buyers.
Bully Offers
One way that buyers can try and avoid bidding wars is through a bully offer.
A bully offer is when you submit your “final offer” long before the deadline, with your own offer expiry.
If the deadline is Friday, you might submit your offer the previous Sunday with an expiry on Tuesday.
This pushes the seller back on their heels.
They can either accept your offer early, or reject it and hope that a stronger offer comes in closer to the deadline.
This tactic can put more power in the buyers hands, but it isn’t anything new or surprising to sellers in hot markets.
Sellers will push back as much as they can asking for expiry extensions last minute or otherwise stalling for time for more offers to come in.
Offer Conditions
While in hot markets, unconditional offers may be expected, in more balanced markets offers often come with conditions.
Financing Condition
A financing condition lets the buyer back out of the offer if their mortgage or other financing falls through prior to close.
Home Inspection
A home inspection condition gives the buyer power to demand a lower price or improvements to the property before sale, if a licensed home inspector finds faults in their report.
Inclusion of Auxiliary Items
A house may have a hot tub, nice furniture, or other items which would not by default be included in the sale. Offers can include a condition that the bid if accepted will include additional miscellaneous items in the final sale contract.
Choosing a Price
So how do you choose a price?
As noted in the earlier example, trusting your “vibe” as a buyer might not be sufficient.
Most agents will pull out the line, “Try and go as high as you can afford, you don’t want to have regrets that you missed out by just a little bit.”
Obviously, that helps pump their commission, but does it really help you; the buyer?
The better tactic is to ask your RE agent for comparable sales data.
Lazy agents will push back and say: “the market has changed, there aren’t comparables for this gem, etc.”
Get a new agent.
If they want the sales commission, make them work for it.
You ideally want 5–10 comparable listings which recently sold and are similar in square-footage, location, finish, size, frontage, and property tax assessed value.
From that list, you can then generate ratios and averages for at minimum:
Sale Price / Property tax assessed valueSale Price / List Price
Apply these ratios to your target property, and you should start to get a more accurate sense of what the winning bid will be.
If your RE agent is reasonably honest, they should be able to say whether they’d adjust it up or down from the ratios, and what ballpark for the first offer should be.
Once your offer is signed and submitted, it’s up to you and your agent to navigate what push back the seller has, whether to change your conditions, price, closing date, or when to walk away.
What about negotiation tactics?
Some push back to relying on ratios after reading a negotiation tactics book.
“But the book says I should start with 65% of expected sale price, then 85%, then 95%. Why won’t that work? It worked on Craigslist and to get a higher salary.”
While for extremely illiquid niche properties or in buyer markets, underbidding can lead to effective price discovery.
In regular or hot markets, underbidding will not get you very far.
For example, if you submit a 65% offer to the seller, their agent will be well justified in throwing it straight in the trash.
A 65% offer simply isn’t serious in any normal market, let alone a hot one.
Disagree?
You’re telling me it’s a serious move to offer $325k on a house that is listed for $450k but expected to sell for $500k?
Feel free to stop reading.
Keep bidding this way and you’ll never buy. But honestly, there’s probably more satisfying hobbies than underbidding RE on your weekends.
Besides, in a blind bid process, there is no guarantee of any back and forth to be able to improve your bid.
There’s a decent shot that the seller takes the winning bid, or sets up a bidding war among the top 3, and moves on with their life.
You and your tactics will be left in the dust.
Your initial bid realistically should be not more than ~5–7% short of the max you would offer on the property, if you want to leave margin for a potential bidding war.
Your market may have different dynamics, but don’t shoot the messenger if your low bid flops.
Given in recent years the hot market in many parts of Canada, all of this will sound like common sense to any who have seen how transactions have played out.
Save yourself the heartache, and ground your bidding process in reality.
You know how to bid, but should you?
As BowTiedBull often says about RE, everyone focuses on the rate, but the price you pay is what you’re stuck with.
Get too emotional about your “forever home”, bid too high, and doesn’t matter where rates are if prices drop 30% next year and your downpayment equity is wiped out.
You need to evaluate the market. Find experts. Figure out what a reasonable price is.
Maybe the market is too hot, and you choose to sit and wait. Maybe the macros show it’ll continue to run and you choose to get in.
Here’s an easy rule of thumb: plan to be stuck with any RE purchase for 30 years.
Sound extreme? Consider the following scenarios.
Going to buy a fixer-upper and renovate from the HELOC next year?
Banks cut credit and you’re stuck.
Planning to do a quick renovation and flip in two years?
Markets tank and you’re stuck.
Buy a small 1-bedroom “starter home”, plan to upgrade when you have kids?
You get laid off, new job pays less, and you now have bunk beds for your twins in the master suite.
RE decisions can end up sticking to you for years and years.
Be prudent. Plan accordingly.
Markets swing. Prices tank. Layoffs happen.
Think through these scenarios before your submit your offer. Stress test your price. Avoid getting wiped out or stuck.
Up Next
Bit of a different theme than usual, but I hope this was helpful.
Maintaining composure and executing under pressure is how you will stand out in your RE purchases, but also at work.
When everyone else is running around like a chicken with their head chopped off at the latest bug, outage, or SEV, people will remember how you step up calmly to get things under control.
Even if you ship a bug which breaks the user experience for 30 million customers, you can still flip that into a win on your next promo packet.
I did, and in an upcoming post you’ll get the tactics so you can too.
Until then, get hired, get promoted, then hit that KVM switch and build wifi-money during your day job.
You best believe that’s what I’m continuing to do this week.
If you want to achieve BowTied Bull Step 1 (high income from your career in tech), then you’ll probably want to subscribe.
A coffee a month for proven tactics and strategies to land your next promo faster… that sounds like its worth the price of admission.
My colleagues smiling at their bigger paychecks after following my advice and getting early promotions certainly seem to think so.
There’s a lot more we need to cover if you’re going to make it.
Stay toon’d.
– BowTied Fullstack
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