Bidding Wars – High Bidder and Property Appraisal Issues

There is a relatively new phenomenon involving the failure of a property to meet appraisals standards, following bidding wars.

So, let’s look at a scenario. Bob puts his property on the market at $540,000. That really doesn’t make that much sense, since he paid $600,000 for it last year.

The market has moved up 15% since that time, so, doing the calculations that should mean about $690,000. Bob did nothing to the property, no improvements whatsoever.

The “marketing efforts” associated with the $540,000 listing are designed to create a bidding war which will suggest that this property is heavily sought after.

The problem at the present time is that in Toronto this strategy seems to work, or at least it works on enough people. If he were to list at $640,000 he might only get 10 Offers, but at $540,000 he has another 10 hopefuls, all assuming that they are going to be the lucky ones. Of course, you appreciate that likely it is only the top 10 who can really afford it anyways.

Bob gets 20 Offers for the property, and as the game is played sends everyone back to improve their Offers.

Bill is getting anxious, he and his wife have been looking for three years and to this point in time have lost out on 9 properties, all in competition. So, what does Bill do? Bill stretches and offers $800,000, that’s $110,000 over market and $260,000 over asking. His Offer is attractive to Bob since there are no conditions.

Naturally, he gets the “good news” he is the successful bidder. Bill pays over the $75,000 deposit and looks forward to the closing in 45 days.

What’s the problem? Within a few days, he gets the “bad news”, he doesn’t qualify for a mortgage which will allow him to close this deal. The appraisal came in at $700,000, and that was generous. The appraiser and the Bank both think that he overpaid by a ridiculous amount, and he did, but certainly not with their money!

The Options:

  • Try to get a mutual release from Bob
  • Try to get Bob to provide a second mortgage in the amount of $100,000 (the shortfall)
  • Try to get someone from the secondary market to loan him $100,000
  • Default on the transaction

The Remedies

Assuming that Bill has defaulted on the transaction, he has lost his $75,000 deposit. Bob sells for $$690,000 and is suing for his additional losses, the shortfall on the price ($110,000 less the $75,000 deposit, being $35,000) plus expenses, carrying charges, the double commission (he had two sales) and costs. This is likely at least another $60,000.

From Bill’s perspective his losses amount to $75,000 (deposit), $35,000 (sale price deficiency) and $60,000 (additional expenses), for a total of $170,000. That’s a lot of money to lose!

Who can Bill sue to get back some of his money:

  • The Seller, Bob
  • The Listing Agent
  • His own Agent
  • His Mortgage Broker
  • The Bank
  • His lawyer

While these are all potential possibilities, there is no evidence that either the Seller or the Listing Agent did anything wrong. So, that should be the end of that story.

There is however some possible recourse against his own team of advisors, presuming that he acted upon their “advice” or lack thereof to his detriment.

Brian Madigan LL.B., Broker

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