The Inevitable Discussion About Blind Bidding

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Pardon my lack of zealousness here, folks.  I guess part of me just felt like this post would prove to be a fool’s errand.

Everybody and their mother want to talk about “blind bidding” but many of those people aren’t interested in a discussion.  At least, not a two-way discussion.

Many people already have their minds made up!  Blind bidding has to go!  Blind bidding is causing our market to shoot for the moon!

I just couldn’t stomach the thought of putting so much effort into a blog post, when all the while, I know full well that people will skip the blog itself and head straight for the comments section to provide their two cents.

I’m not afraid of this topic, but rather I harbour so much resentment toward the willfully ignorant and deliberately misleading members of our society that it’s difficult to write this without sounding like a complete jerk.

I’ve often asked: if you tell the truth about something, do so in a blunt and to-the-point way, and that particular truth is not welcome, would the recipients automatically dislike you?

I would have to think, “yes.”

And because there’s so much frustration across our country with respect to the price of real estate, and often a hate-on for real estate agents, I don’t believe that an honest, open conversation about blind bidding is going to change many already-made-up minds.

Let’s start from the very, very beginning: real estate is expensive.

From there, we could ask, “Why,” and that’s a whole other topic.  I would argue that Toronto was undervalued for so long that only now, after a two-decade bull run, have prices caught up to where they should be.  I would also argue that Toronto is a first-generation world-class city, and these prices make sense.

Compare Toronto to New York, London, Paris, et al, and you can plainly see that we are hysterically cheap.  Now, tell me, “Toronto is not New York, and never will be,” and I would agree, but that’s why our prices are still a bargain by comparison.

So we’ve established that real estate is expensive.

But now we need to ask, “Is this a problem?”

To people who want, then yes, it’s a problem.  And in 2022, just about everybody wants.

So how do we solve the “problem” then?  Should we look at the causes?

Those that refuse to accept the most obvious cause, supply and demand, have spent the last five years looking for someone or something to blame.  It just has to be foreign buyers, right?  Damn them!  Or low interest rates.  That’s it, for sure.  Or, maybe it’s speculators and investors.  Way too many of those!  Then again, we think the problem is real estate flippers.  Yes, has to be flippers, buying up houses just to re-sell them!  Or what about all those vacant properties?  Isn’t that the cause?  How about the government driving up the prices with all their taxes and development charges, is that it?

Sure, it’s all of those things, or at least it was when those things were hot buzz-words, but each of those ideas got played out.

Today, it’s blind bidding.

In last year’s federal election, the term “blind bidding” gained a lot of traction!  So too did the idea of a “Bill of Rights” for all those wanting members of society who, “unfairly,” can’t afford a house of their choosing in one of the most sought-after cities on the planet in which to live.

So with all this said, the federal government decided that “banning blind bidding” was something that needed to be tabled, however, whether they figured this would gain attention, support, and votes, or whether they actually felt this would “cool the market,” remains to be seen.

Two weeks ago, the federal budget referenced a potential “ban on blind bidding,” and in response, the Ontario provincial government got out ahead of this by updating the Trust In Real Estate Services Act (TRESA) to allow home-sellers the option of disclosing terms and conditions of competing offers during a multiple offer scenario, whereas previously, they were not legally permitted to do so.

Does this updated legislation mean that the federal government no longer needs to address blind bidding?

That too remains to be seen.

But let’s pause here for a moment and ask an important question:

Will banning blind bidding cool the market?

It seems to me that many people out there automatically assume that it will, and that’s dangerous thinking for many reasons.

First of all, I believe that the government feeding people the idea that banning blind bidding will cool the market is irresponsible, since they have no idea whether that’s true or not, but they also don’t know how they would implement a “ban” and how the multiple offer process would then work.

But even if the government said, “This is not going to cool the market,” there are still those people out there who have already made up their minds.

Blind bidding is the problem in our market, according to these individuals, and once it’s banned, they can go out and buy the house that they want, for the price they can pay.

As I’ve said many times, the problem is often inexperience among buyer agents and willful ignorance among buyers.  When a house is listed for $999,000, for which all the comparable sales are $1,300,000, and “blind bids” are submitted, the person who offers $1,050,000 usually has their photo in a news article one month later when they complain about the blind bidding process and how it “drives up the price of real estate.”

Those individuals will always believe that blind bidding is the cause of high real estate prices, no matter if they read this blog post five times over, or not.

But what if the opposite happened?  What if banning blind bidding drove prices up?

Last week, I reviewed eight offers on a King West condo and the “winning” bid of $865,000 had an $850,000 offer behind it, and an $846,000 offer behind that one as well.

If I had told all eight buyer agents the exact bid prices after they submitted, in the spirit of “banning blind bidding,” what’s to say that the person at $846,000 wouldn’t have resubmitted at $866,000?  Or what’s to say the clueless agent at $780,000 wouldn’t have said, “Ah, okay, so that’s the value of this condo,” and then submitted an offer of $880,000?

Be careful what you wish for, folks.

And I’m sure that the people who have a hate-on for all things real estate have a “better” system in their minds, but I have yet to hear anything that is rational and allows for the seller to look for the most money possible.  Critics of our system usually come from a starting point of keeping prices as low as possible, and I’m sorry but that’s simply not how markets work.

But let’s look at a world in which “blind bidding” is not allowed.

Let’s look at the process and try to see how this would work in practice, because I think this exercise is going to show you just what a farce all this talk truly is.

Let’s say that I have a freehold listing, priced at $1,199,000.

“Blind bidding” is no longer permitted.

Offers are due at 7:00pm.

Now what?

How can anybody make a bid without it being blind?

And there’s the first roadblock here, folks:

In any system, there are always “blind bids,” even when blind bidding is not allowed.

At the very least, the initial bids are blind.

With offers due at 7:00pm, eight agents submit offers with the following purchase prices:

$1,200,000
$1,210,000
$1,305,000
$1,410,000
$1,510,000
$1,540,000
$1,550,000
$1,575,000

Now what?

All of those bids were submitted “blindly,” so in order to “eliminate blind bidding,” what do we do?

I think the idea of “eliminating blind bidding” refers to after initial bids have been submitted, correct?  We can all agree on that?

So here’s the next rub, and this part is absolutely amazing for those who think blind bidding will cool the market:

Eliminating blind bidding means mandating the chance for improvement, aka a “second round.”

Right then and there, the government’s “good idea” has driven up real estate prices.

Bravo!

As the listing agent, I wasn’t legally permitted to sell this house to the bidder with the offer of $1,575,000 because to do so would have made all those initial bids “blind.”  A second round is now necessitated.

So,  in order to “eliminate blind bidding,” I must now send out the following email to the eight buyer agents:

Dear Colleagues:

Please note that on 123 Fake Street, as of 7:10pm, we have received bids with the following prices:

$1,200,000
$1,210,000
$1,305,000
$1,410,000
$1,510,000
$1,540,000
$1,550,000
$1,575,000

Feel free to revise your offers as you see fit.

David.

Alright, is this what the public wants?

Because now, the person at $1,550,000 knows that he is in second place!  Great, right?  It’s no longer blind!

He can revise and resubmit at $1,576,000.

But he refuses to do so until he’s told what the buyer at $1,575,000 does, because he has the right to “know all the other bids.”

Correct?

So he doesn’t resubmit, but the person at $1,575,000 plays the same game.

In fact, everybody plays the same game.  So nobody resubmits, because they’ve all been told that “blind bidding is eliminated,” and the entire process falls apart because every buyer is waiting for every other buyer to resubmit, so they can gain the advantage of “not being blind,” and the process grinds to a screeching halt and fails spectacularly.

(womp, womp).

So that doesn’t work.

Let’s try this:

Feel free to revise your offers as you see fit.  We will accept the highest offer after all bids have been resubmitted.

David.

That makes sense, right?

Initial bids were blind, then we disclosed all the bids, and now everybody gets one chance to resubmit and we’ll accept the highest bid.

Uh-oh.

Now we’re back to blind bidding!  Because while buyers know what the current bids are, they have to blindly resubmit thereafter.

Let’s say the first three buyers withdraw, and the other five buyers improve their prices as follows:

$1,510,000 improves to $1,576,000.

$1,540,000 improves to $1,580,000.

$1,550,000 improves to $1,576,000.

$1,575,000 improves to $1,600,000.

$1,410,000 improves to $1,645,000.

And then that buyer “wins?”

But wait, did we give all bidders the chance to improve their offers?

Because in most cases under the current system, listing agents would likely have sent the first four lower bidders home.

So let us ask:

Does every bidder get a chance to improve?  Is this mandated by law?

If that’s the case, then maybe the eight initial bids look like this:

$1,199,000
$1,199,000
$1,199,000
$1,199,000
$1,199,000
$1,199,000
$1,199,000
$1,199,000

Ah, okay!  Two steps forward, twelve steps back.

So that can’t work.  We can’t legislate that all buyers are permitted the chance to improve, or we’d end up with a situation like the above.

Let’s say that the new legislation allows for the listing agent to decide which bidders are given a second chance.  Now, we’ve opened the door to discrimination, favoritism, and cries about the process being “unfair.”  But if we don’t give the listing agent that option, then it might provide for a scenario like the one above where every bidder simply submits an offer of $1.00 because they’re all expecting to be told the prices of competing bids in the spirit of “eliminating blind bidding.”

So let’s go back to the scenario where the $1,410,000 buyer improves to $1,645,000 and “wins.”

Will you now suggest that this buyer “overpaid” because the next highest bid was $1,600,000?

Does this buyer have a “right” to revise and pay only $1,601,000?

This is where people get wild ideas and start to use the word “should” quite a bit.  This is also where people start to act as though “fairness” equates to the lowest price possible, while completely ignoring any rights the seller might have.

Somebody will suggest, “If this was eBay, that bid of $1,645,000 would beat the bid of $1,600,000, but the ‘bid increment’ of $5,000 would allow the winning bid to come in at $1,605,000.”

True.

But this isn’t eBay.

Should it be?

Should the federal government consult eBay with respect to their Bill of Rights?

Okay, so let’s do what eBay does!

Buyers can submit very, very high prices because they all assume that if they have the highest bid, they aren’t going to pay that price, but rather only a $5,000 increment above the next highest bid.

With that in mind, the buyer at $1,410,000, who improves to $1,645,000, is only doing so because he believes that the minimum bid increment rule will protect him, and he has no intention of having to pay $1,645,000.  He thinks the bidding will end up in the high $1.5’s, or maybe just over $1.6M, thus his bid of $1,645,000 is brilliant.

But the buyer at $1,575,000 has the same strategy, and he re-submits at $1,700,000.

So too does the buyer who came in at $1,540,000, and he re-submits at $1,685,000.

Now, the buyer at $1,700,000 “wins,” but has to pay $5,000 more than the next highers – per eBay rules, and thus “wins” at $1,690,000.

Remember when we had the highest bid of $1,575,000 at the onset?  Too bad that bid wasn’t permitted to be accepted, in the spirit of “elminating blind bidding,” right?

Alright, so now you want me to scale this back.

You want some sort of allowance for this process to be slowed down as your end goal is to see prices the lowest as possible.

So in our initial scenario where $1,575,000 is the highest bid, I do not inform people that there will be one more “round” of bidding, thus making the next bids blind, but rather I email:

Feel free to revise your offers as you see fit.  We will update you again after revised offers are received.

David.

The following bidders drop out:

$1,200,000
$1,210,000
$1,305,000
$1,410,000
$1,510,000

The other offers improve as follows:

$1,540,000 improves to $1,575,001
$1,550,000 improves to $1,575,001
$1,575,000 improves to $1,575,001

Perfect!

Now we have a scenario where transparency was given, bids were not “blind” as the initial bids were disclosed, and price escalation was avoided.

But how long did this take?  How long did it take for the first five buyer agents to call the listing agent to say they were dropping out, and for the three highest bidders to resubmit on paper?

Let’s say that took two hours.

Now what?

Now we have three bids all at $1,575,001.

So now I email all three buyer agents and disclose the prices.

Now what?

What if all three buyers say, “Screw it, take it or leave it?”

The public would love that!  Only, it would never happen, because human nature is to want.  Somebody would pay more for that house.

But to entertain that fantasy, maybe the seller says, “Screw it,” and signs back one of the three offers at $1,650,000.   That buyer accepts.

Is that fair?

Some might say it’s not fair for the seller to pick one bidder to work with, right?

Debate “fairness” in that case.

And the seller can’t sign back all three, because if they were all accepted, he’d have sold his house three times to three different buyers.

Now, let’s say that after receiving three bids of $1,575,001, the listing agent allows all bidders to improve, and they call come back at $1,575,002.

That takes another two hours.

Do you see where this is going?

So how about this:

We don’t need buyers to physically re-submit an offer, just have their agent give the listing agent a verbal offer.

But a verbal offer isn’t binding, and even if you want to debate that, it opens the door to chaos.

So how about this:

We’re selling this house to the highest bid at 11:00pm tonight.

But now we’re back to blind bidding, right?

Setting a “deadline” means that, even if buyers continue to resubmit $1.00 higher, as successive offers are disclosed – thus adhering to the “ban on blind bids,” eventually, the last offer before the deadline will be blind.

Also:

Who sets the deadline?

Who?  When?  How is it communicated?  Can it be 3:00am?  Is that fair?  Can it be today at 10:00pm but then be extended to next Saturday at 4:00pm, mid-process?

Okay how about this:

Offers cannot be improved by $1.00.  The minimum increment must be $10,000.

Great!

But who determines that?

The government?  Via legislation?  Isn’t that bordering on ridiculous now?

How about the listing agent?  Can he or she set the minimum bid increment?  But why give the listing agent that kind of power?  We’d be worse off than we are now!

You just can’t legislate your way out of this.  You can’t perfect this system so that prices don’t escalate and everything is “fair” to both buyers and sellers.

Show me a scenario where:

1) Blind bidding is completely eliminated.
2) The process is completely transparent and fair to both buyers and sellers.
3) Prices are always lower.

In all the examples above, that’s just not going to happen, and this is the biggest problem I have with the idea of “banning blind bidding.”  The talk is always about how it will “cool the market” when that’s simply a sound byte for politicians.

So now comes the part where somebody says, “We need online auctions!  That’s the only way to cure this!”

Okay, so who designs the platform?  Who owns, regulates, and oversees it?

The government?

Oh, great.  Another Phoenix online payment system scandal is just around the corner…

Personally, I don’t think we should be looking to the government to control the sale of all real property in this country, but I guess I must be alone on that one.

And if we found a platform, say, via the individual real estate boards, then we’re back to the same questions and issues: what are the bid increments, how does the timing look, who is permitted to bid, etc.

And we haven’t addressed the biggest red herring in all things auction just yet:

“Bids” through online auctions or on the lawn of somebody’s house in Australia are not binding.

Because you’re forgetting that in addition to the purchase price, there are other negotiable points of an offer to purchase real estate:

-Deposit amount
-Deposit method
-Closing date
-Title search date
-Chattels included
-Fixtures excluded
-Rental contracts assumed
-Conditions
-Clauses

You cannot standardize an “offer” via auction, because that wouldn’t be fair to buyers, and it would lead to another sort of chaos.

So now every real estate auction leads to further negotiation on terms and conditions, thus the auctions are only getting you halfway there.

Imagine bidding on a house in Australia.  You stand on the front lawn and call out prices at the top of your lungs against other excited bidders.

Oh, wait, you can’t stand on the lawn because your boss didn’t give you the day off work.  Or because you hit traffic and couldn’t get there on time.

Are in-person auctions on the front lawn of somebody’s house really the best way to buy/sell real estate in 2022?

Alright, well, whether we’re on somebody’s lawn in Australia or Toronto, or bidding behind a computer, either way, once the “winning bid” is established, now the buyer and seller enter into negotiations.

What?

Negotiations?

I thought we had a “fair” way of doing this, ie. via auction?

Oh, but what about the 5-day condition on financing that the buyer wants?  And what about the 180-day closing date that the seller wants?  Those weren’t communicated in the auction, as nothing was communicated except for price.

So every auction leads to a bargaining session, and that opens the door to disagreement over terms and conditions, and many of these properties won’t end up “selling via auction.”  This is the case in Australia where many properties are re-listed for auction thereafter, or re-listed outside of the auction in a traditional sale format.

Of course, we also have “reserve prices” in auctions, which are kept secret, so the seller isn’t obligated to accept a “winning” price that’s below what he or she really wants.

Then there are the properties that sell before the auctions, which we would liken to the “bully offers” here in Toronto.

Again, feel free to draw up two hundred rules that you want to be legislated for the “new way” to buy and sell real estate in Toronto, but the bottom line is:

Any “solution” is going to open the door to other problems.  Unintended consequences are impossible to avoid.

I’m not averse to any ideas, solutions, or changes, but I am realistic when it comes to the implementation and the process thereafter.

I said at the onset that many people will refuse to read the preceding or do so with an open mind.  The level of hate for all things real estate, including the process and the players, results in these people sitting around with blinders on.

Case in point: all this talk about real estate agents being averse to a ban on blind bidding because of commissions.

When I got into the business in 2003, a good friend of mine cited the best-selling book, Freakonomics, and the chapter on how real estate listing agents aren’t motivated to sell properties for more money because of the commission structure.

“If you sell a house for $1,000,000 you get a $25,000 commission,” he told me.  “But if you sell for $1,020,000 you get another $500, so why the hell would you work harder to jack up the price?”

His entire argument stemmed from the fact that the commission structure provides no reason for listing agents to want prices any higher.

Today, the argument is the complete opposite.

Multiple letters-to-the-editor in major newspapers last week had people claiming Realtors chasing higher commissions were the issue.

The sound bytes in some of these angry letters were fantastic.

For sure it would see a reduction of increased prices in the recent market.  For sure it would reduce commissions.  Victor Wells, Mississauga.

That snippet appeared in the Globe & Mail.

As did this one:

The excessive greed of realtors cries out to be reined in by politicians who really want to bring relief to all facets of a diseased housing market.  Rob Hawkins, Oakville, Ont.

These are the individuals that I speak of when I argue that many people don’t want to truly understand what blind bidding is, how it works, and most importantly, why it’s present in our market.

The greed needs to be “reigned in by politicians.”

“Politicians” have the answer for everything, don’t they?

This is the type of constituent that politicians salivate over!

So again, I ask: can we have a conversation about “blind bidding” with a clear mind?

Do you think that Victor and Rob would read this blog post?  Or do you think they’d rely on the age-old, contrarian, “Screw off, realtor scum,” as the iron-clad backbone of their argument as it pertains to “solutions” to our housing problem?

I am 100% in favour of allowing listing agents to disclose the terms and conditions of competing offers in an effort to bring transparency to the process, but as I’ve demonstrated above, “banning blind bidding” is impossible because at many points during a revised process, subsequent actions will, in fact, be blind.

And prices aren’t going down as a result.  That’s naive.  That’s fantasy.

Some properties will sell for more, some will sell for less, the process of reviewing multiple offers will be even more complicated and lead to complaints and litigation, but the government will get to say, “We banned blind bidding!” so all will be well on their end.

But what I am continued to be bothered by in all of this is the people who believe that banning blind bidding is some sort of “solution” to a problem that hasn’t been defined.

Even worse, I am incredibly bothered by people who refuse to learn and understand the process of selling real estate in Ontario, how other processes could succeed or fail, and all the while believe that there’s a system that’s absolutely perfect, and we’re just unwilling to implement it.

And most of all, I’m bothered by those people, both in the general public and in government, who think that a “solution” like banning blind bidding will cool the housing market, when it won’t, and all this time, effort, and energy could be otherwise spent on meaningful action to increase housing supply across the country.

I live in reality, folks.

I’ll leave the fantasy for somebody else…

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