4.6.2 Lack of Transparency in Real Estate Transactions Involving Multiple Offers Puts Prospective Buyers at Financial Risk
This is from the Report of the Auditor General on RECO:
“Under the Act and its regulations, when there are competing offers on a single property, a brokerage that represents the seller must disclose the number of competing written offers to every person making a competing offer.
However, it is prohibited from disclosing the substance of competing offers on the property, which includes the offer price, closing date and conditions, to any person, including other salespersons or brokers that represent prospective buyers.
This results in buyers submitting offers to purchase a property without knowing the amounts of competing offers from other buyers, an industry practice known as blind bidding.
This practice increases the risk that buyers can be encouraged or feel compelled to offer a price that far exceeds the next highest offer.
The Ministry advised us that recent legislative changes that are scheduled to come into effect on April 1, 2023, will allow for an “open-offer process” where the substance of offers, which includes the offer price, closing date, and any conditions placed on each prospective buyer’s offer, could be disclosed to competing prospective buyers.
However, the use of this open-offer process will be at the sole discretion of the property seller, who will be able to decide whether to direct their representing brokerage to disclose to prospective buyers the substance of written offers received.
The likelihood of sellers consenting to an open-offer process is unknown. At the time of our audit, neither RECO nor the Ministry had plans to collect information on the percentage of sellers that consent to an open offer process and its possible benefits or unintended consequences.
We note that no Canadian jurisdiction has a full open-offer process whereby it is mandatory for offer amounts to be disclosed to all prospective buyers. However, in places such as Australia, there is an option to sell real estate using an open-bid and closed-end auction format. When a property is sold by auction, all interested buyers are present at the time of the auction and are aware of the amount of each bid as it is made
Before the auction, all interested buyers are responsible for completing property inspections and arranging financing and all other matters in advance.
In this auction process, because all other details such as home inspection and financing are already agreed upon, the highest bid is accepted through an open-offer process.
At the time of our audit, in May 2022, the British Columbia Financial Services Authority (BCFSA), which regulates the real estate industry in British Columbia, released a report comprising research and consultation results with stakeholders on alternatives to the current blind bidding process.
The report concluded with advice to the government of British Columbia to further explore open-bid and open-end auction formats (these differ from closed-end auction formats such as that used in Australia, which have a defined closing time), including their implications for sale prices and housing affordability.
The BCFSA also advised the government to consider implementing a disclosure requirement in multiple-offer situations where prospective buyers are asked to compete directly against another buyer’s offer following an initial round of offers.
The process was described as follows: “an anonymized disclosure of the number of legitimate offers and the price of competing offers could be provided to the prospective purchaser on invitation to submit a second offer or on counter-offer from a seller that is intended to solicit a higher price in reference to a competing offer.”
At the time of our audit, the BCFSA was awaiting further direction from the government on its advice relating to blind bidding.”
Brian Madigan LL. B., Broker