What is open bidding, and can it help bring down home prices?
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Throughout the U.S., high demand from buyers coupled with continued low inventory has resulted in a real estate market that gives sellers the advantage. This allows sellers to up their prices and accept multiple bids on homes for sale, often resulting in bidding wars. This process, which is typical in America, is known as “blind bidding” — rival buyers operate in something of a vacuum, unable to see what others are offering. But there is an alternative: “open bidding,” in which all competing buyers know what the others are offering.
Open bidding in real estate is popular in other parts of the world, including Australia, and parts of Canada are now considering implementing it. While it remains to be seen if the American market will adopt open bidding practices, many believe it could be beneficial, making the process fairer and more transparent. It could even help bring down inflated housing prices.
What is open bidding in real estate?
Open bidding is a transparent process of making an offer on a home that allows multiple prospective purchasers vying for a particular property to know all of the competing bid details — including purchase price, financing and terms.
“In an open bidding process, everyone who makes an offer on a property would get to learn about every other offer on that same property,” says Martin Orefice, CEO of Orlando, Florida–based real estate company Rent to Own Labs. “They can learn not just how many other offers have been made, but the amount of each offer and even other details, like how big of a down payment is included, whether it’s all cash or if it’s contingent upon selling a previous home.”
Tim Quirk, co-CEO of Boston-based Final Offer, points out that there are different processes for open bidding. In some cases it’s similar to an auction format, in which offers can be made at a set date and time. In others, like the Final Offer platform, real-time notifications are sent to all interested parties when an offer has been made, driving a short competitive event. His company also offers auction-style open bidding in which sellers disclose their committed list price, required terms of sale and an optional “final offer” price; buyers can view all offers and know what it takes to make a higher offer before time runs out. If the final offer option is available and a buyer commits to paying it, they instantly win the home and competitive bidding ends.
“Other formats allow offers to come in over a set period and may include a deadline for when the seller can accept an offer,” Quirk says. “And some open bidding processes, like Final Offer, vet buyers ahead of time to know they have the financial means to purchase the home.”
Open bidding vs. blind bidding
Blind bidding involves submitting an offer on a home for sale without knowing whether any other bids have been submitted, or the competing offer details. The buyer submitting a blind bid also does not know what price and terms the seller is willing to ultimately accept.
“Blind bidding is a very common practice in residential real estate — many offers are submitted confidentially to the seller for their review and decisioning,” says Doug Greene, owner of Signature Properties in Philadelphia. “The prospective buyers placing these offers cannot see what others are bidding and, therefore, must place an offer based on their intrinsic valuation of the property.”
Open bidding, however, is transparent: All bidders know what the competition is offering and can make decisions accordingly. “With open bidding, buyers can learn that they are competing fairly and on the same terms as all other buyers,” says Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors. “Open bidding auctions can also reduce the time involved with purchasing a home, eliminating long negotiation periods. For sellers, open bidding could accelerate the sale of their homes.”
Advantages of open bidding
- Open bidding brings more clarity and information to the process, allowing each buyer competing for a home to know what the others are offering. “Buyers can simply make an offer slightly higher than the highest current offer, instead of guessing how much they will have to bid to get their offer accepted,” says Orefice. “Anyone who is close to reaching the limit of their purchasing power for a particular property would be the biggest beneficiary here.”
- It also streamlines the communication process, allowing for less back-and-forth between parties. Sellers can state their desired price and terms upfront, so buyers know exactly what it takes to make an offer that will be accepted and where they stand throughout the entire process. “This transparency allows buyers to react immediately instead of waiting and hoping that their offer will be accepted,” says Quirk. “Depending on the platform, it can also save real estate agents time by not having to write offers for their buyers or evaluate and compare offers with their sellers.”
- In addition, open bidding can save money on both sides of the transaction. The transparent process prevents hopeful buyers from bidding an excessive amount, driven by emotion, that might well exceed the next competing offer — which can lead to overpaying and buyer’s remorse. And if sellers choose to list their property online with an open bidding platform that removes agents from the process, which saves them from having to pay real estate commissions.
Disadvantages of open bidding
- One of the most significant drawbacks of open bidding is that it has the potential to push prices higher. “When buyers know there is competition for a property, they may be more likely to place a higher bid,” says Boyd Rudy, owner of Dwellings Michigan. “This can be especially challenging for buyers who are already stretched thin financially.”
- It can swing the other way as well, says Orefice: Open bidding may limit a seller’s profit margin, because when all bidders know everyone else’s offer, it’s less likely that a buyer will make an offer that far exceeds everyone else’s bid.
- NAR’s Evangelou notes that bidding of any kind creates competition that can drive prices upward, and may put first-time homebuyers at a disadvantage. “While the U.S. real estate market is already very competitive and home prices continue to reach record highs, this could hurt first-time homebuyers and create another obstacle for them.” First-time purchasers also lack experience participating in a bidding process. If they attempt to bid on a home listed online via an open bidding platform and are not represented by an agent, they may overpay for or lose out on a desired property.
- Additionally, open bidding can be psychologically tough for the seller. “The seller is listing their home for sale, which is a major life event that triggers emotions,” says Greene. “To think that it’s being bid on openly like shares of a stock can really dilute the experience for them.”
Is open bidding likely to catch on in the U.S.?
While some companies, like Final Offer, are already providing open bidding platforms in this country, the practice is not yet widespread — or even known — by most sellers and buyers. But some believe it could catch on over time.
“As prices continue to rise, more people may feel priced out of the traditional housing market, which could lead to an increase in demand for alternative options such as open bidding,” Rudy says. “Additionally, technological advances could make it easier for buyers and sellers to connect, making open bidding a more viable option.”
Others are more skeptical. “There are many complexities that would need to be solved and questions that would need to be answered before open bidding could be embraced,” Greene says. “When and how would the bidding information be shared across buyers? Would the process be based on deadlines to avoid perpetual bidding? And do sellers have a right to ask for a best and final offer under the open bidding process? It would be a massive change that requires government support and approval from real estate commissions.”
Could open bidding help bring down home prices?
Buyers may be less likely to bid aggressively if they know that their offers will be made public, which could result in lower prices, Rudy notes. In addition, wildly over-inflated blind bids aren’t necessary if buyers can see the competition’s offers and raise only enough to win.
However, many real estate pros are doubtful that widely adopted open bidding could bring home prices down. “There are too many underlying factors driving up home prices for open bidding to really make a dent, especially with its tendency to lead to bidding wars,” says Orefice.
Open bidding has its benefits, most notably greater transparency — on the surface, it does make the real estate process seem fairer for buyers. It may also lead to faster, more streamlined transactions. While the process has the potential to lead to lower sale prices, it could also lead to paying more for a property than if you engaged in traditional blind bidding, rather than less. Open bidding is not very common in the U.S., so before participating in any open bidding process, do your homework and make sure you know the details of how the transaction works.