Is it time to openly embrace housing auctions?

Critics in the real estate industry have lampooned multiple-offer bidding because it lacks transparency and, some believe, contributes to untenably rapid home price appreciation. As a result, a growing chorus is suggesting housing auctions, which are popular in other parts of the world, not necessarily in lieu but as an alternative.

In May, the Ontario Real Estate Association (OREA) threw its weight behind auctions, citing affordability woes as a consequence of low housing supply and multiple offer bidding—the latter because it often comprises as many as 20 blind offers that inevitably drive sale prices to exorbitant levels.

“Unfortunately, for too many, the current real estate market is a frustrating game of musical chairs, with more and more people circling a fewer amount of chairs,” said OREA’s CEO Tim Hudak. “The experience can be discouraging: a hopeful buyer competing with dozens of bidders for homes they can barely afford, and repeatedly losing out. They’ve lost sleep wondering whether their own bid is uncompetitive or more than they really need to pay. It’s not surprising some may wonder whether there’s a different way.

“The current landscape of bidding wars in Ontario’s housing market is emblematic of a much larger issue: there is simply not enough supply to meet demand, leading to multiple offer situations and higher home prices.”

Hudak warned, however, that in jurisdictions where auctions are commonplace, “auction fever” has led to higher bids.

In Toronto, On the Block Realty offers housing auctions to its seller clients, although according to Daniel Steinfeld, broker and co-founder, the brokerage vets them first to ensure an auction is appropriate for the circumstances.

On the Block has only been conducting auctions since 2018, with 15 or 16 in the GTA under its belt, and Steinfeld describes the process as similar to an offer date bidding war situation.

“The only glaring difference is the process involved with offers themselves on auction date. How that works is basically everybody gets to see what everybody else is bidding, and people can register at any time the listing is active, but the idea is to make everything available for viewing so that people make offers they’re comfortable with,” he said. “One of the key things is there are so many other factors beyond price, like conditions, and our auctions are all built on the premise that everyone is operating on an even playing field. All bidders are subject to the same terms, which could include financing conditions that everyone receives, and which they don’t have to waive. The only variable will be price. Anyone who’s bidding will see in real time a figure, so they can always see the leading bid and where they stand.”

Much like a multiple offer situation, On the Block’s starting auction bid is no more than 5% below market value, but it’s proving vastly more popular. Steinfeld noted that recent auctions in Kingston and Burlington had north of 40 bids and another had more than 60.

“It’s impossible to say that it outdid a closed bid, in terms of sale price, but it blew it away,” he said. “I don’t look at auctions as something that would make prices go higher or lower, but what I see is this market needs options and consumers are getting more sophisticated because information is readily available and they can do research on their own. Prices going up is more a function of limited supply and way too much demand, and demand will go up as immigration continues.”

Although On the Block Realty has held fewer than 20 auctions, it receives around a couple of inquiries a week. Steinfeld says sellers who want to auction their house as a sales gimmick are flat out denied the service by the brokerage, while serious inquiries are greeted with education, including inculcating the expectation that the selling price is realistic. (If a reserve price is not met by any of the bids, the seller is not obligated to sell.)

Multiple offers still have their place, says Ron Sally, owner of RE/MAX Millennium Real Estate, who doesn’t buy the argument that buyers should be prohibited from tendering excessive offers.

“Multiple offers and auctions are basically the same thing, but the only difference is transparency,” said Sally. “But what if a buyer really wants the home in question? Multiple offers allow fair market bidding and somebody who really wants a property can put in the price they want. No matter what, you’re competing against other people and you pay a premium to be there in the first place. A lot of realtors may undervalue a home to get competitive offers, but if a buyer really wants that home and wants to be in that area, and they can afford it, it’s their right to put in whatever offer they want.”

Steinfeld says On the Block had critics early on but most of them have since changed their tunes.

“The only opposing arguments we get today is from seller agents who say auctions won’t get the biggest price because if we’d instead do blind bidding, people would go in and make crazy high bids and outdo everyone by a lot, whereas we’re transparent and people know they need to spend, say, $1 million instead of $1.2 million.”

2021-07-12 13:05:03

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