The Multiple Offer Trap

When offering real estate for sale, some brokers will suggest to clients that they set a low selling price, open the property for showings for a short time, then set one day for offers. The brokers are attempting to create multiple offers which they think will result in a price higher than market. The broker is trying to simulate a silent auction where bid prices are not known. Staging a property for multiple offers is very risky to everyone except the real estate agents involved. We advise against ever being involved in a potential multiple offer situation, either as a buyer or a seller, especially for a principal residence.

As a seller, one risk is that all the offers you receive will be above your list price, but below the price you expected to sell your property. You do have the choice to decline all offers (provided they all had conditions), but then are faced with having to re-launch the sale of your property. This can be a big issue if you have committed to purchasing a new property, but not included the sale of the existing property as a condition. There is also the risk that you get only one offer, but that one is at, or only slightly above, your list price. If that offer comes with no conditions, Canadian contract law technically requires that you accept the offer. I have never known a real estate agent to explain this risk to sellers. An additional risk is that regularly buying and then selling property using a multiple offer process could be deemed by the Canadian Revenue Agency (CRA) as a business and result in taxes being paid on the difference between the list price and the selling price.

As a buyer, there are many risks associated with multiple offer situations. In one situation, buyers, desperate for a specific property, bid 15% higher than the list price. They won the bid, but their bank, after getting an appraisal well below the bid price, declined the pre-approved financing. The buyer was placed in a situation where they had to forfeit a $10,000 deposit in order to get out of the sales contract. In another situation, the bid was successful, and the financing squeaked through, but a number of other costs such as land transfer tax, which is based on a % of selling price, proved too burdensome and the deal fell through. Most concerning was a client of ours that became involved in a multiple offer situation where the other prospective buyers turned out to be shadow numbered corporations of the seller! The broker who represented the seller advised that if we had concerns to complain to the real estate association. We knew that was a waste of time. Instead we swore out a criminal complaint against the seller and their agent. There are also insurance coverage issues that come into play. We are not insurance experts so we advise anyone who goes into a multiple auction sale to discuss insurance issues with their insurance advisor.

There is one situation where we advise that it might be ok to be involved with multiple offers. That situation is where there is a legitimate open auction, and all bids are known by all bidders. And only where conditions with respect to pre and post auction inspection and disclosure are accepted. Even then, there are still risks especially if a property is not fully completed or there are disputes about the actual definition of the property.

If a client insists that they want to offer in a multiple offer situation then we recommend this approach:

Put the offer in a sealed envelope and deliver the envelope with a contractual letter attached that reads - "opening the offer envelop will cost the seller $20,000, an amount to be waived in the event that the offer is accepted. " This approach is standard in other businesses where multiple offers are used.