I don't see the problem being with the sellers listing price being well below true market value. It can be chalked up to a form of marketing and there is no feasible way to regulate this aspect of the deal. Buyers and sellers are free to transact at whatever price they choose, and it's a negotiation, so any form of regulating the listing price would interfere with the process.
I also don't see any issue with a buyer making an offer at any time. The term "bully bidding" and calling the person making such an offer a "bully" is derogatory and has negative connotations. This was drummed up by real estate agents and sellers who didn't like having their plans meddled with. It can derail the plan to generate emotional hysteria through panic and a lack of transparency. "Holding out on offers", "offer date", and "bidding war" doesn't have a negative tone such as "bully bids". Interesting that the description of the sellers (and RE agents) technique isn't negative, while the buyers is. The buyer is clearly already disadvantaged and is doing the one small thing they have available, which is, at worst making a serious offer above the asking price. The customer who makes a serious offer and doesn't want to get caught up in hysteria and arbitrary practices is now called a bully. Perhaps the emotional shame of being a bully will help make that nasty buyer realize their role is to line up with others when they are told, and offer more than they want to.
I think the real issue here is the lack of regulation around bidding wars and transparency. It's not the listing price. There should be clear rules around holding out for an offer date (regardless of price). There should be a public record of all offers that have been made on a property since it last changed hands. It should include the date and amount of the offer, and registered, with anybody able to view. No other info need be given. This would allow for more even hands between buyer and seller. It would add fairness and integrity to both regular listings and bidding wars.
For a regular listing, it would allow a buyer to see how much interest there is in the property. It would also potentially save somebody from bidding more than they need to. If a property listed for $400,000 has 5 offers around $375,000 - $380,000 and sits on the market for 3+ months, then the seller is asking too much. Now if person 6 comes by and has no info of previous offers, they may offer $399,000 and get the property. They likely wouldn't have paid so much had they have known of the previous offers. What this means is that an anomaly (1 in 6), or rather upward noise in pricing discovery, has been what set the standard. Everybody can only see the transaction at $399,000 and now has to assume the market is there. The other 5 potential buyers have not had any affect and must now raise their price by $15,000 simply because one outlier did. The seller got lucky and walks away acting like savvy deal maker. They may have agreed to transact at a lower price if they knew that everybody could see the market wasn't where they were at. Some may argue this is fine, but a common theme holds true - this is good for the seller, the sellers agent, and buyers agent. It's bad for the buyer.
Problem with bidding wars
- The seller, the selling agent, and the buying agent all have an interest in the property selling for the maximum price. Only the buyer has an interest in the property selling for the lowest price (huge conflict of interest between the buyer and the buyers agent). This means 75% of the parties involved in a real estate deal want the price to move higher. That 75% can group together to ensure the 25% is in a weak position.
- There is no transparency regarding offers. The buyer has no idea how many offers have really been made on the property or at what price. All they are told is that there are other offers (perhaps a number is given that cannot be verified) and that they should raise the price. They cannot be told what others have offered and have no way to verify even if they are told. This leaves the buyer/bidder not only blind in the absence of information, but they've now been informed they need to go higher and the sense of urgency is higher because they don't know what they are up against. They only know they want to beat whatever else may be out there and the best way is to go as high as possible on the offer. Keep in mind buyers own agent is the person conveying these messages. They have a 5 figure commission on the line.
- Potential buyers who lose on these bidding wars get fatigued. They may be tempted to bid very high on the next property out of desperation when they never needed to. Again this is good for the seller, the sellers agent, the buyers agent, but not for the buyer.
Benefits to changing bidding wars
- Buyers would not bid unreasonably high when they don't have to. They could outdo somebody else's offer, but they wouldn't accidentally go over that by 10's of thousands of dollars. This benefits the buyer, and also helps prevent massive jumps in the average price of properties sold, thus lowering volatility.
- It would greatly decrease the conflict of interest between the buyer and buyers agent. The agent still wants a high price and can convince the buyer, but they cannot evoke emotional panic or even worse, collude with the selling agent.
- Buyers would be much less stressed out and less likely to take illogical actions on the next property to avoid the pain of getting attached to a property and losing again.
Regarding the previous comments about "the bully ... is hoping that the early offer would catch other people off guard." - If the seller wants an auction, they should setup an auction and call it what it is. Tell people when the auction will take place, let them inspect the house, have everybody come together and bid. It can be either an open auction (following the rules above about offers being public domain) or it can be silent. Buyers would have much different emotions when the process is marketed as a silent auction vs. holding out on offers. And at least they would be sure that there were other people making offers. It could also benefit the real estate industry by adding some form of integrity to the process.
