The wages of war

If you haven’t tried to buy a house lately, don’t bother. It’s a war.

For example, there’s the 5% Rule. Realtors are goading their clients into adding 5% to the price a seller is asking for every other bid that is registered. So on ‘offer day’ if eight other desperate buyers materialize, the idea is to revise your price so it’s 40% above the ask. Suddenly that $960,000 townhouse turns into a $1.344 property. Add in double land transfer tax (in Toronto) and the price swells to $1.392 million.

Oh, and then there’s the escalator clause.

This nuclear weapon is being detonated more often lately by buyers who have no intention of losing a bidding war in a blind auction. Their offer simply states they’ll pay $5,000 (or $50,000, or whatever) more than the highest bid from another party. No conditions. The upside price is therefore unlimited. Yikes. But they ‘win.’

Lately the media’s bristled with stories of jilted bidders, and also of sale prices up to $1 million more than what the vendors asked. Without a doubt, price escalation has been fueled by slimy realtor tactics, wink-and-smirk real estate boards and dozy, incompetent regulators.

It’s common now to list a property up to a third below market value, which whips up FOMO among the plebes. Then an offer date is established and buyers must submit their bids with no knowledge of what others are prepared to pay. It’s a pure guessing game. In order to be successful, buyers need to strip their offers of protective conditions (a home inspection and financing approval are the biggies) and throw as much money as possible on the table. These days in markets like the GTA, these poor wrenches also have to attach a cheque for as much as $100,000, certified, to the offer.

Realtors love blind auctions. They’re commission goldmines. Sellers adore them. Properties fetch unheard-of prices. Neighbours on the street is happy. The amount just paid in a blind auction sets the standard for every other property in the hood. The real estate board is smug. The market hits new pinnacles as blind auctions extract record amounts. The city and the province get to collect vastly more transfer taxes. More joy.

Meanwhile the winning bidder pays a premium. The losers become desperate and frustrated, likely to act more extreme on the next offer. Affordability crashes as prices inflate. Average income-earners can no longer afford average homes. More and more net worth is concentrated in one asset. Household debt climbs to new levels of absurdity. The economy becomes more dependent on a single sector. And realtors grow more insufferable.

Well, this can’t last. And it won’t.

Days ago the Bank of Montreal called for an end to the blind auction. “We think that if we’re going to have an auction process that should be transparent and open to all bidders,” said the chief economist. Then the CEO of the National Bank echoed that sentiment. Now a slew of realtors, understanding how this practice discredits the entire industry, are starting to backtrack, fast. “Offer transparency can be simple: Mandate (or at least allow the option) for the disclosure of the best offer on the table to all competing offers,” says iPro broker Philip Kocev. By forcing prospective buyers into making hyper offers when flying blind on offer night, we push the entire market farther into bubble territory. That builds the risk of a collapse. Smart people get that, like these guys…

“We have to do right by the consumer and it is very apparent that they want reform when it comes to blind bidding,” says top ReMax poohbah Chris Alexander. Actually I’ve known Chris for a few decades. Years ago he even hired me (a few times) to come lecture hundreds of agents on macroeconomics and market trends. The company has over twenty thousand reps and, yes, an army of them have been engaged in the morally-offensive and socially-destructive practice of blind auctions. It’s impossible to know how many clients have been led to buy properties at inflated prices with no protection.

But now we’re witnessing a come-to-Jesus moment. Open up the process, Alexander urges provincial regulators. Let all bidders know what others are putting on the table. And ban the common practice of agents ‘sending back’ offers during the auction process, to be ‘sweetened’ by bidders who still have no idea how much they need to pay to buy the property.

This is an easy fix for provinces. It wouldn’t gag the market nor break privacy rules. Letting some sunshine in could merely temper price inflation, hobble unethical, manipulative agents and slap down vendor greed. It would cost taxpayers nothing, could happen immediately and give hope to the kids. Imagine.

We’re waiting.

About the picture: “This is the neighbour’s Great Pyrenees, Prince,” writes blog dog Randy. “He’s always happy to see me when I walk by. A friendly bark is rewarded with a vigorous ear scratch and chest rub!”