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Making Cents of Life – You Fell In Love With A House

You fell in love with a house. Now what?

By this point of our Home Ownership series, we’ve written about the money and people. Now, we talk about the emotional side of buying a home. Buying a home is an extremely emotional experience. We go through a wide range of emotions; from loving a home to stress about moving and everything in between.

What happens though, when you fall in love and the house breaks your heart? By this, we mean, when you lose in a bidding war. This is a very typical aspect of buying any home, especially in the current “hot” real estate market. How do we know how much to bid on a home? If you do end up in a bidding war, how much should you over-bid on a home? Once again, we have partnered with James Loewen of Loewen Group Mortgages to chat about the emotional side of home ownership.

Hi James! We have chatted about the money and people side of real estate. Now, lets talk about the emotional side of buying a home. You walk into a house and then it hits you; you LOVE this home. You NEED this home. How much should you put down as your initial offer?

The process of making offers is truly the arena of your realtor – so listen to them! (they want you to win the house just as much as you do and we’ve compiled the #1 piece of advice from top realtors for 1st time home buyers to further help).  The advice I can give here from experience is to review the CMA (comparable market analysis) your realtor should prepare for you of the house relative to other homes sale price in the geographic region and days on the market.  A good realtor (and happy to introduce a great one) will review strategies to increase your odds of winning based on which clauses or “conditions” to include, closing date to offer, purchase price etc. Your realtor will also be abreast as to how many other competing offers you’re going up against and discuss max purchase price based on what your capable of offering from your pre-approval and what they feel the home is ultimately worth.

Now that we have put down an offer, it comes back that there is a bidding war. What is the general rule of thumb for bidding wars? How much should you over-bid on a home?

The answer to this is of course unique and will pertain to the specific home in question. It may help though to explain the “risk” associated with bidding over on a home (which again will be unique to each buyer) and will use 2 buyers as an example on the same house purchase price.

The House: $500K home and wish to have the strongest offer on this house – as such, both clients are requesting full pre-approval with the ability to waive your “Condition of Financing” on the house (the lesser the conditions, the strong your offer is). Your pre-approval is good for $600,000, so lots of room for you to afford an offer of $575K – the “risk” is that the home does NOT appraise for that amount.  Your mortgage broker can verify that you have the financial means to afford the house – but cannot guarantee the value will be supported should an appraisal be required (which sadly appraisal is generally combined into the condition of financing clause – though some realtors have begun separating the two.)

Clients A – “The Smith’s”: They have $40K in savings to cover the $32.5K down payment and remaining $7.5K for legal & land transfer fees. They make an offer of $575K BUT the house value appraises at only $550K. They are now responsible for putting down payment of $30K on the $550K appraised value AND have to pay the difference of the purchase price compared to the appraised value ($575K – $550K)= $25K “out of pocket”.  So over $55K required plus legal and closings … but they only have $40K – they now need to ask family for money or risk not closing on the home and are liable for any damages (meaning they can be sued).

Clients B – “The Wesson’s”: They have $100K in savings to cover their purchase, they offer the same amount as the Smith’s, are able to cover the $25K out of pocket short fall, cover the $30K down payment and legal fees, while still having funds set aside for emergencies and any home maintenance costs that should arrive after buying.

It happens many times; you lose your bidding war. This happens once, twice, three times. How does someone overcome the disappointment of losing on countless amounts of bidding wars? 

BIGGEST MISTAKE: I have watched our clients lose DOZENS of times sadly after hundreds of hours spent looking and offering on homes – the reason: thinking they should “get a deal” on the house and make offers below the recommended amount their realtor has suggested.  Just because a home is listed for X, doesn’t mean you “should” be able to get it for X less 5%.  Case in point, many homes are now being listed below market value to insight bidding wars, thus selling for far more than the list price.  Further example of this is the $1 House that was listed in May of this year done to prove listing price at the days end has no affect on the true value of what you need to offer.

Should people engage in bidding wars? What advice do you have about putting an offer in on a home?  

The lesson here is to ensure you review with your realtor as to what they feel the house will:
1) actually sell for
2) what it will appraise for and
3) review with your mortgage broker based on these what your contingency plan will be should there be a short fall and if you should then be participating.
OR you can seek to exclude the appraisal from the condition of financing as a separate condition
OR you can ask to have an appraisal (and even a home inspection) completed up front before making your offer to then be able to remove both conditions. I am VERY weary to advise any client to remove a condition of home inspection, even on a “newer home” there can be issues costing ten’s of thousands, so spend the few hundred dollars and if the sellers won’t take your offer due to the inspection – ask yourself: why is that / what are they perhaps hiding ?

We’ve also compiled a brief list of 10 ways to avoid buying the wrong house to help too!

Yay, you win your bidding war and the house is yours! What’s next ? How much should you budget for moving costs? What should you consider when planning the moving process?  

Congratulations – at this point we have been liaising with your realtor as your broker and will obtain the MLS listing and the fully signed/accepted offer from your agent. With this, your broker will be reviewing the rates and terms of each lender with you (we use a 5 lender comparison chart in excel for example) and submit for your now “Full Approval” based on the exact purchase price and closing date and align the best strategy for your needs with the lender best suited.  A summary of the remaining documents required is sent and you’ll then either meet in person to sign the “commitment” or approval from your lender or this can be done virtually with scanned PDF or docusign.

Before submitting for full approval, your broker should review a “Closing Costs Worksheet” – a simple excel sheet outlining the cost of the land transfer tax, movers (if hiring pros or soliciting friends), legal fees, PST on the CMHC, obtaining a will, if any debts are being paid off, if the home requires any improvements etc.

Any additional advice? 

Through the pre-approval process we really recommend that if you are buying with another person, couples begin discussing their feelings and attitudes towards finances. (sounds silly – its not and is part of the discussion during a pre-approval you should be having with your broker)  Some people don’t watch their bank accounts, won’t care about budget and leave financial success to simple luck and just “hope for the best” – which if your partners attitude is more conservative and more a “penny pinching” type – is going to cause some Fights about money.  These are of course very common, but also can be extremely detrimental to your relationship and enjoyment of your new home together. We’ve teamed up with renowned Psychologist Dr. Amy Muise of York University (also my amazing wife) in exploring if those who buy together, stay together which further includes an effective quiz to complete with your partner to help identify areas that you agree on and those where you differ in your financial goals.

Furthermore – Dr. Amy Muise is currently conducting a study on couples who are looking to buy their first home together! This is a great opportunity to share your experiences and help researchers understand home buying motivations. Not to mention the gift cards you and your spouse get just for answering a couple questions about your experience so far and another survey once you’ve bought your home & moved in. If you are interested you can contact Dr. Muise’s research partner samantha.joel@utoronto.ca for more information and to get started.

Thanks so much James! Once again, we have learned SO much and hope you guys did too! As take away points, remember:

  1. Listen to your realtor! They have experience and know what they’re talking about.
  2. Make sure you can afford anything you “overbid” on for your home. You don’t want to be mortgage poor!
  3. If you’re buying with your partner, make sure you chat about your attitude and goals on finances.

We are in the home stretch (see what we did there?!) for our Home Ownership series and have our penultimate post about renovations, budgeting for new furniture and home maintenance.


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