How to keep a cool head in your bidding war

You might think that homebuyers would keep a cool head when it comes to the biggest purchase they’ll ever make, but the bidding war frenzy that has become the norm in the GTA market says otherwise.

So does a recent survey by the Real Estate Council of Ontario (RECO). Of those polled, nearly half (47%) said they would consider paying up to 10% over budget to win a bidding war, with 31% saying they would go as much as 10% to 20% over.

In the GTA, the numbers jumped to 57% of respondents saying they’d go up to 10% over, and 38% would go 10% or 20% over. I’m not sure those polled have a firm grasp of the definition of “budget,” but it should surprise no one. Once emotions get involved, it’s hard to stay planted in reality.

To compound matters, last year’s RECO survey found that more than a third of first-time buyers felt they were ill-informed about their own home purchase, and I don’t suppose much has changed on that front. Ill-informed + open to going over budget before negotiations even start = potential for financial disaster.

Advice on their website entitled “5 Tips to Keeping a Cool Head” attacks both issues with common sense, if little hope for success: The first thing they advise is to leave your emotions at the door. The second is to read and understand everything before you sign.

Essentially, the answer to getting overly emotional is “don’t” and the way to be less ill-informed is to get informed. It seems like telling a person who struggles with weight loss to eat less, and a personal who can’t handle finances to spend less — sensible on the surface, but essentially useless. If it were that easy, we’d all be thin and rich, and there would be no bidding wars.

Their next three items — be sure you and your representative are on the same page; know your tolerance for risk; be flexible and have a backup plan — are sound, but they don’t go far enough. Again, the advice a bit like “to keep a cool head, keep a cool head.” The fact is, when the human brain is subject to the flood of chemicals produced in times of stress and excitement, it all goes out the window.

In an experiment last fall, a Caltech neuroeconomist imaged subjects’ brains as they were forced to make a series of increasingly uncertain bets, according to Entrepreneur.com. He found that the less information the subjects had to go on, the more erratic and irrational their decisions became.

It seems counterintuitive: Shouldn’t we become more careful and rational as our information becomes more scarce? Maybe, but we don’t. When faced with uncertainty, human thinking shifts from the rational brain to the limbic system, where emotions including anxiety and fear are generated.

It was a great way to keep from getting stampeded by mammoths or eaten by a sabretooth tiger, but it doesn’t do us any favours in a real estate transaction. But it can be counterproductive in modern times, especially considering that today’s bidding wars can be an ever-escalating series of uncertainties that require quick responses. You go in with a budget and some conditions, and the next thing you know, you’re calling off the inspection, changing the closing date, and bidding 20% over budget. Afterwards, when the chemicals calm down, you’re left wondering what the heck just happened.

To take back control from our own instincts means quieting the knee-jerk fear response. One key to doing so is to recognize fear and anxiety for what it is. When the sales rep tells you there are only two units left, instead of giving into caveman thoughts — “I’ll be homeless!” “This place is perfect and there will never be another one like it!” “If I don’t move by Christmas, I will DIE!” — take a step back and analyze the situation.

The whole point of a haunted house is to freak you out, and they do, even though you know the zombie is just a guy in some gory makeup and the shrieking witch swooping down from the ceiling is battery-powered. If you walk through a haunted house firm in the belief that it is perfectly safe, that nothing bad is going to happen, you may not have as much fun, but you’re going to be a lot less scared.

Keep reminding yourself that it’s just your limbic system trying to take over. Calm down and redirect your thoughts to something positive, like the awesome parking space you scored when you got here or the wings you had for lunch. Then address the crazy thoughts one by one with the facts: You KNOW you aren’t going to be homeless. You KNOW that Toronto is a big market, and eventually you’ll find something you like just as well. You KNOW that one more Christmas in your current home is not going to kill anyone.

When you rejoin the negotiations, focus on your deal-breakers. If you need a certain closing, walk away from any deal that can’t make it happen. If you need to stick to your budget, walk away from a deal that means exceeding it. That’s not to say you shouldn’t be prepared to compromise; you absolutely should. Perfectionism can be as dangerous an opponent as fear. Ever watch one of those real estate shows where a couple says they’ve looked at 115 homes and can’t figure out why they can’t find one they like? Unrealistic expectations, plain and simple.

If you just can’t make a deal happen within the parameters you know are best for you, walk away. There will always be another deal.