"Phantom offers", a sneaky tactic used by some selling agents to pressure potential buyers, are coming under fire from the Real Estate Council of Ontario (RECO). The non-profit firm, which regulates the trade of real estate in Ontario, is introducing new measures to counter the practice as of July 1, 2015.
In red-hot real estate markets like Toronto and Vancouver, phantom bids are more commonplace - many buyers have likely encountered this real estate scam, which occurs when a sales agent suggests to interested buyers that there are other bids on the way, and that they should up their offers to stay competitive.
Under the new rules, selling agents aren’t allowed to “suggest or even imply” that they have an offer from a competitive buyer unless it’s signed, sealed and delivered in writing. In fact, real estate brokerages will be forced to keep an offer on record for a full year in case a complaint is filed.
As a home buyer in the highly competitive Toronto real estate market, I have experienced the phantom bid scam firsthand. When I was interested in making offers on several properties, it was suggested by the selling agents that more offers were on the way, so if I was serious about the property, I should consider coming in with my best offer. In several cases, this encouraged me to up my offer in hopes of being the highest bidder.
In a real estate transaction, it’s important to understand the interests of all the parties involved. I highly recommend reading the New York Times best seller, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, by Stephen J. Dubner and Steven D. Levitt. It does an excellent job of explaining where the loyalties of your real estate agent may lie.
While it may be in your best interest as a buyer to purchase a home for the lowest amount possible, the higher your bid, the higher the commission your real estate agent receives. To tie this in with phantom bidding, although your agent may be aware phantom bidding is illegal, he or she may decide to keep mum, since a higher selling prices means for commission.
While the new rules are a step in the right direction, critics say they come up short in several ways. Although phantom bidding is an offense often seen, it rarely goes reported. Even when the new rules come into effect, the fear is that dishonest agents will still find a way to break the rules without getting caught.
If a buyer suspects they’ve been the victim of phantom bidding, they have to file a formal complaint with RECO. That’s because no actual offer amounts will be included in the history. Buyers have enough to deal with them moving into a new home, and the process of filing a complaint will likely dissuade many from doing so, even if they suspect they’ve been a victim.
Even with the new rules, the booming housing market in Toronto isn’t likely to slow down. With bidding wars commonplace, it will be interesting to see if there’s a spike in phantom bid complaints in the coming months.
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He offers Unbiased Fee-Only Financial Advice, specializing in pensions and the decumulation of financial wealth in retirement. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/