Wellington Scoop
Network

The tender (housing) trap

by Benoit Pette
The housing market. The place you reluctantly enter as a buyer knowing that pain and disappointment awaits you.

The offerings are few, the demand is high, the temperature keeps heating up when one thinks it can’t possibly go higher. New entrants are celebrating if they finally secure a house, no matter the house, and almost no matter how much.

So what is so hard about entering the housing market? Well, finding a house, first, and being able to afford it, second.

The first problem can only be fixed by building more until the pool of houses for sale balances the demand. The second issue is fueled by multiple factors: the lack of houses, of course, but we could also cite a vigorous economy (allowing people to spend more), the interest rates (allowing people to borrow more), etc.

One factor, though, contributes to real estate inflation in a disturbing way, and that’s the tender process.

Immensely profitable to the seller, it contributes to prices going up by leaving the buyer mostly in the dark. With only one shot, and limited information, the buyer is invited to put the “best offer” forward, as the agent will say, which should be understood as: “go all in”.

When submitting the first couple of times, the buyer will cautiously make an offer that seems fair for the property. They will then get beaten by other buyers who’ve been in the rounds several times before them, and know they have to push their envelope to the maximum or beyond. After a series of disappointments, desperate to get in, the buyer will then push his or her own envelope to unreasonable levels, just to get a foot in the door, thus contributing to the market price hike.

At no time in the tender process are the buyers involved in a reasonable, balanced, open negotiation, where sound increments are allowed to reach a fair market price. This distortion obviously contributes to an artificial capital inflation, and fuels a sense of panic just to get a foot in the door.

Of course, first to benefit from this bias are the sellers, already in a very comfortable position, but who make even greater gains by maintaining an opaque curtain between each offer. This unfair game is so obviously favourable to the sellers that hardly any property on the market is sold differently: a house shortage together with the closed tender process work wonders for property owners, terribly for buyers.

A decade ago, when the market wasn’t so tense, this selling mechanism was just one amongst others: some sellers chose this approach because it suited them and the house they were trying to sell. Selling via closed tender contained a risk for the seller: that no offer reached the reserve, that no offer was unconditional, or simply that some interesting buyers would refuse to enter the tender out of frustration for this process. Buyers wore a risk too, but because both parties had a share of these risks, it was kind of fair, and moderately healthy. In the current market, the tender process is a one way street that works for the seller, and contributes significantly to the housing price hike, thus to homelessness.

Of course, the other selling processes are not perfect. While way more transparent for all parties involved, auctions are stressful for a lot of people as they require quick thinking on a significant amount of money. Open tenders or negotiations tick all the boxes, although they require more work from the agent, and potentially, more time. It seems however, in the current context of the housing shortage, they are fairer processes, more transparent, and allow, in the end, for the buyers to know they are paying the actual market price. Houses are sold for the fair amount (the correct amount), and don’t go contribute to heating prices artificially up.

Everyone has stories of buyers going all in and purchasing houses for way more than they are worth. They then hope the market will eventually catch up and make up for the “little extra” they put in to secure the house.

Here a house valued at $750K (by the registered valuer) went for $1M+. This other one, valued at $1.25M (again, by the registered valuer), in an impossible state (roof, ceilings, walls and floors were to be scrapped) went for $1.5M+! And the buyers weren’t developers!

Even real estate agents are sometimes shocked: on a recent occasion, one of my friends, a real estate agent by trade, confessed she was receiving offers via closed tenders which made her think « are you sure??? ». Working for the sellers, she and all other real estate agents aren’t in a position to feedback on these offers and bring buyers to reason.

Closed tenders are not the only reason why the median price for buying a house is going up, but they certainly contribute to it. Out of fairness, to ensure prices remain an accurate reflection of the properties being sold, but more importantly, to help houses remain affordable, it would be very good if, at a local or national level, a moratorium was introduced on this practice. This would help the property market to follow a more natural inflation, truly representative of the housing shortage.

12 comments:

  1. Woodburner, 27. February 2020, 10:20

    Auctions are not ideal either, as they are an unconditional offer. So, you have to do due diligence ahead of the auction – builders reports, valuations etc and whatever else needed to secure finance. Thousands of dollars just to be at the table to place a bid.

     
  2. K, 27. February 2020, 11:47

    Don’t agree with this article at all. People offer what they think a house is worth to them, if they don’t think the house is worth X amount then they don’t offer X amount, and the value of a house is exactly what a buyer will pay for it at any particular point in time – no more, no less.

     
  3. CC, 27. February 2020, 15:59

    Serious question ‘K’, when were you last in the real estate market?

     
  4. Traveller, 27. February 2020, 19:42

    Benoit’s descriptions parallel exactly the recent stressful experience of a family member, searching for a house in Wellington.

     
  5. Conor, 27. February 2020, 19:49

    I would say nearly all housing problems “can only be fixed by building more until the pool of houses for sale balances the demand”. Build build build build build. Won’t happen in Wellington though, too many people hate new homes.

     
  6. Chris Calvi-Freeman, 27. February 2020, 20:32

    Excellent article, Benoit. If I might add:

    1. In this overheated market, it’s now quite likely that the “successful” tenderer will receive a call from the agent saying “Your bid was the highest. Now if you will just add $40k, the property is yours.” So much for best & final offers.

    2. At auction, if the seller or agent puts in a patsy to bid up, there’s a reasonable chance that that bidder will be recognised by someone else. With closed bids, the potential buyer is completely at the mercy of the honesty of the agent as the identities of other tenderers, and their bid amounts, are not disclosed.

    3. A dishonest agent could potentially favour a tenderer (for a kickback or because they are mates) by letting said person know the highest sealed bid then giving them the opportunity to immediately top it. The unsuccessful party would never be the wiser.

     
  7. K, 27. February 2020, 21:05

    @CC. Currently looking to buy.

     
  8. Meredith, 28. February 2020, 10:29

    The closed tender system always seemed to me to be ethically suspect. Why can’t we buy a house in the same transparent way we buy anything else? Product, advertised fixed price, purchased, sold.

    But then what would real estate agents do?

     
  9. CC, 28. February 2020, 12:02

    Good luck ‘K’. You will probably now find out like myself and others that Benoit Pette was on the mark. In the current climate, it is OK if you are selling but not the best if you are on the purchasing side of the line.

     
  10. Benoit Pette, 28. February 2020, 13:43

    Good luck indeed ‘K’. As Meredith explains it perhaps better than me, the lack of transparency around the process cannot be seen as healthy, especially with the amounts at stake, especially in the current market where demand vastly outweighs the offer. Not only does it make it very stressful for buyers, oblivious to who they fight against, but it inflates the prices unnaturally, contrary to your comment: sometimes the highest bidder will be 15% above the next bidder. How can this be a true reflection of the market price? The examples (amongst others) I cited have actually happened: the registered valuer, a paid expert, was off the mark by $250K on one example. It shows how desperate the winner was.

     
  11. K, 28. February 2020, 18:19

    I still don’t know what you are trying to say. The winning bidder pays what they are prepared to pay for a house. This can happen with almost any type of sales process. I also think it makes total sense for a seller to get as much as they can for a house, and agents (who work for the seller) would be failing in their duty to the vendor if they didn’t recommend the process which gets the highest price.

     
  12. Ronny, 11. March 2020, 12:08

    Be fair. Everyone is entitled make a buck or two. If you don’t like then change the rules.