Phantom real estate bids are enough of a problem that Ontario is cracking down

Starting July 1, the Real Estate Council of Ontario will be enforcing new rules that place strict criteria on what constitutes a bid on a residential property.

The goal is to crack down on the elusive phantom bid, which some homebuyers suspect occur in bidding wars, but are unable to prove.

The scam involves a sales agent hinting to prospective buyers there are other bids as a way to coax them to bid higher. “You say, ‘We’re expecting another offer. I do have another offer. You may want to go back to your client and make sure this is their best offer’,” says said Joseph Richer, registrar of RECO. “You are suggesting there might be competing offers when there may or may not be.”

With the new rules, “You cannot suggest or even imply that you have an offer unless you have one in writing, signed sealed and ready to be delivered,” said Richer, while adding there have been very few formal complaints about phantom bidding over the years.

Richer doesn’t say fake bids are not part of the real estate landscape. Instead, he suggests they might be a bigger problem in some municipalities than others. “When I have been out at different boards and associations, some have said, ‘It’s not an issue, but it does happen every now and then,’” he said.

You cannot suggest or even imply that you have an offer unless you have one in writing, signed sealed and ready to be delivered

The current rule is clear that no offer is valid until it is signed. The new rules will force brokerages to keep an offer, or an equivalent summary (basically, a list of buyers and contact info with name of broker, date and time), on record for one year.

However, no amounts will actually be included in the history, and suspicious buyers will only be able to find out if there were truly other offers after the bidding, through a complaint to RECO. In which case, a realtor found guilty of creating a phantom offer would be committing a provincial, though not a criminal, offense.

The changes will ultimately allow the winner of a real estate auction to see if they had been “played” by agents, says Richer. A winning bidder would also be able to see if any offers had been withdrawn, also required under the new law.

Phil Soper, chief executive of Brookfield Real Estate Services, which operates the Royal LePage brand, says he supports the move to protects consumers but has some reservations.

“The requirement appears to be overly cumbersome and bureaucratic and will be challenging for small businesses to comply to,” said Soper, whose company will be ready by July 1.

Real estate lawyer Lawrence Dale, a founder of discount broker Realtysellers, thinks unscrupulous agents are going to find their way around the new rules. “I’m not sure any legislation will stop these people,” says Dale.

I’m not sure any legislation will stop these people

But Dale also thinks that “the issue of phantom buyers might be a concern of buyers who have remorse over the price they paid for a property. They think they overpaid. Some buyers want to blame others for a decision to overpay.”

There’s one thing the process probably won’t do, and that’s slow down the booming housing market where multiple offers have become the norm and a blind bidding process can jack up prices.

Kashif Khan, managing director of Toronto-based Ritchie Auctioneers, says the nature of the Multiple Listings Service system, which handles all the transactions for organized real estate, is that there is no transparency when it comes to bidding.

“You only have to bid incrementally more than the next person,” said Khan, referring to a traditional live auction process. “Canada is a very new market. It’s not a mature market like Europe and Asia, which are hundreds of years old.”

He says when you get into higher-end homes, you can end up bidding hundreds of thousands of dollars more than you have to because you don’t know the competing bids.

“The (current real estate) system is designed to get someone to pay the maximum they are willing to pay, not the fair market value of a property,” said Khan. “This is what happens when the market is hot. Fair market value is not even a consideration and it causes irresponsible situations.”

Peter Norman, chief economist with Altus Group, agrees there are transparency issues in Canada.

“You might have some people who may have had a bad adviser or doing a bid themselves who might be taken advantage of,” he says, adding he doesn’t think the price increases we’ve seen in housing can be blamed on the process. “Once you get above the individual transaction level, the numbers smooth out over a bunch of transactions.”

[“source – financialpost.com”]