The zeal of house hunters in the GTA cannot be denied. But, occasionally, buyers wonder whether the competition is really as frenzied as real estate agents make it out to be.
Consumer protection legislation coming into effect July 1 includes measures designed to protect people buying and selling real estate – especially those involved in the Greater Toronto Area’s legendary bidding wars.
The rules are designed to clear up some of the murkiness around the sale of a house or condo unit. Real estate agents will not be able to indicate they have received an offer unless they have it in writing. Brokerages will have to keep proof of those written offers for a year.
Entering the bidding fray always seems to stir trepidation, but imagine the distress of buyers who wonder if they paid a huge amount above the asking price in order to compete with a rival who doesn’t exist.
Real estate agent Chip Barkel of Chestnut Park Real Estate Ltd. calls the “phantom” offer more of an urban myth than common practice.
But sometimes a property will sit on the market for weeks or months. No sooner does a potential buyer gives his or her agent the go-ahead to table an offer than the listing agent will advise that another offer is coming in. That may prompt the buyer to increase his or her bid.
In another scenario, the listing agent calls around to agents who have shown the property and says an offer is on the way. The listing agent sets a date and time to review offers and they all rush to the table, only to find out the first prospective buyer changed his or her mind.
“The perception is that something nefarious has happened,” Mr. Barkel says. “The public sometimes thinks the selling agent is trying to inflate his commission.”
Mr. Barkel doesn’t think shenanigans happen often but believes the legislation will boost the confidence of buyers and sellers without putting too much of a burden on brokerages. Chestnut Park, he says, put the new system in place last week.
The new rules will be enforced by the Real Estate Council of Ontario, which regulates the trade of real estate on behalf of the provincial government. If a buyer or seller has a complaint about a deal, RECO has the power to investigate – now with added heft.
Under the legislation, a consumer will be able ask how many offers were received on a property. RECO will contact the selling brokerage and ask for the documents. The brokerage hands over the paper work, RECO verifies that all is in order, and then reports back to the consumer with the number of offers that were received.
“You cannot indicate that you have received an offer unless you have received a written offer,” RECO is advising agents. “Please keep in mind that written offers must be signed to be valid.”
That bit of language alone should help to quell a lot of the angst that buyers feel.
Graham Connaughton, a broker with Sotheby’s International Realty Canada, says he has at times been skeptical when a listing agent claims to have another party circling. “As an agent you always wonder yourself.” He has also had an agent representing a buyer call him the day after a deal and say “Please tell me you were at the table.” He says he was able to assure the agent that he had indeed been working with a rival buyer and they had been in a close race.
When Mr. Connaughton is the listing agent fielding multiple offers, he is open about who the participating agents are. “I always disclose who’s at the table.”
That practice is not only fair – it also helps him in arriving at a deal, he says. “You kind of get a feel for agents over the years as to how they work and how they negotiate.”
Mr. Connaughton doesn’t think that complying with the new rules will be onerous. Many agents are already keeping such documents, he says.
RECO registrar Joe Richer says it’s hard to anticipate how many consumers will be asking for an investigation. “We have very few complaints about the notion of phantom offers right now.”
Still, it could be that consumers haven’t complained to RECO because they had no way to prove that a so-called phantom existed.
It’s likely, Mr. Richer says, that consumers will feel reassured just knowing that real estate brokerages have a legal obligation to maintain those records. The legislation will likely serve as a deterrent to agents who might be inclined to make an offer sound more solid than it really is, he says. “That’s the larger point – to raise the transparency on the process and if they’re not happy, there’s a very clear process to follow.”
Mr. Richer says most prospective buyers are not concerned over precisely how many offers a property had, but if they are, they will be able to approach RECO and ask them to verify that all of the bids were on paper.
Agents will have to be diligent about preserving records – either in paper or electronically, Mr. Richer says. “You’d better make sure you’ve got something because we’re going to come knocking.”
Under the new rules, a listing agent will be able to indicate to a buyer’s agent that another party is circling, but the buyer’s agent in that case should ask for written confirmation, he says. “That seller’s representative may use some slippy language, but now the buyer’s agent will be able to press them.”
Mr. Richer says RECO has had the power to conduct investigations in the past but now the requirement for brokerages to maintain records gives investigators more tools. “We can take it to that next step – we will be looking for these details.”
RECO members who don’t comply could face a discipline hearing, a fine, and even prosecution in provincial court.
Toronto-based real estate lawyer Mark Weisleder thinks the legislation “is a complete waste of time.”
He has drawn up a clause that can be included in an offer that states that the buyer is making the bid on the basis that it is one of multiple offers. If no other offers arrive by a specified time, the seller must notify the buyer or the buyer’s agent and give them an hour to revoke or revise the deal. If the seller accepts the buyer’s offer, the seller will provide within 24 hours the name, address and phone number of the salesperson and brokerage that submitted the competing offer.
The clause neatly deals with the potential for phantom bidders, he says. “If there wasn’t another offer, you don’t have a deal,” the document makes clear.
Mr. Weisleder, who educates real estate professionals, wrote the clause in order to protect agents working on behalf of buyers.
If a potential buyer bids a large amount and then finds out later that he or she submitted the only offer, the buyer ends up angry at his or her own agent for not verifying that there was another bidder, he says, adding that “a verbal offer is not an offer.”
Mr. Weisleder points out that, in many cases in Toronto, it’s clear a bidding war is under way. If a potential buyer visits an open house and sees 75 other people there, then shows up on offer night to see 12 cars parked outside, that house hunter has no reason to be suspicious, he says, and therefore has no reason to submit the clause.
Buyers are more likely to be chagrined if they are suddenly in competition for a property that has been sitting for 30 days, for example. “That is extremely suspicious,” Mr. Weisleder says.
He adds that most sellers seem to accept the clause as reasonable.
The advantage for buyers, he says, is that they can get out of a deal before they’ve signed on and agreed to a price. The problem with the new regulations, in his opinion, is that they only allow the buyer to investigate after it’s too late.
Mr. Weisleder thinks that the practices around multiple offer situations are too sloppy.
A listing agent will set a deadline for submitting offers, for example, but then allow another bid that arrived long after. The seller can decide to look at it. “There’s nothing stopping him from doing it,” he says.
The lawyer says he’s often looking for ways to ensure the bidding process is fair. He believes sellers would benefit by asking for sealed bids, for example. The more transparent the process is, the more bidders will show up at the table, he figures, and that will result in the highest price for the seller.
“Lawyers have to try to fix things in a reasonable way that balances interests,” he says.
Under the new rules, RECO says, the brokerage will be required to keep a copy of all written offers that it receives, or at least a document that summarizes the offer and bears the bidder’s signature. The Ontario Real Estate Association has created a form that agents can use to summarize an offer instead of keeping the entire document.
The summary document, which contains essential details, such as the bidder’s name and the date and time the offer was made, may only be used when the buyer is making an offer through a brokerage, RECO says. For offers coming from a buyer directly, the brokerage must retain the offer in its entirety.
Mr. Richer points out that when the 911 emergency system was rolled out some areas years ago, operators were flooded with calls from citizens dialling 911. “People were calling just to see if it worked.”
He says a similar flurry of callers may test RECO in the early days but he hopes the organization won’t be inundated with requests from people just giving it a go.