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The Problem of Phantom Bidding

Let’s be honest, not all real estate agents exercise the best moral judgment when conducting business. Greed is a powerful motivator for deception, and it’s easy to see how some would want to take advantage of the skyrocketing house prices in Toronto by jacking up the price ever so slightly.

Homebuyers have been suspicious of this practice – real estate agents making up phony bids and masking it as part of a greater bidding war to drive up the price of a home – for a long time. But unfortunately, such a fraudulent practice is one that is difficult to prove, when one considers that a formal bid for a home need not be in writing. Garry Marr of The Financial Post offers a great example of how a “phantom bid” typically goes down:

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.”

As Alexandra Posadzki of The Canadian Press explains, as of July 1, agents will not be allowed to imply they have received an offer unless it is in writing and has been signed. They will also be required to keep records of all of the offers they have received on file for one year. Buyers who suspect that there is foul play a foot can file a complaint and a request for information with the Real Estate Council of Ontario. Carolyn Ireland of The Globe and Mail raises an important appoint, stating that the new rules are intended to protect the consumer, helping to take out some of the stress associated with entering a bidding war.

In terms of the logistics for brokerages the new law will require them to keep an offer, or an equivalent summary (a list of buyers and contact info with name of broker, date and time), on record for one year. A broker who fails to follow the rules could be prosecuted and face a maximum fine of $50,000 or up to two years behind bars. Alternatively, the agent could be referred to a disciplinary committee and be ordered to take educational courses or pay up to $25,000 in fines.

There’s at least one critic of the laws making his opinion known in the media. Real estate lawyer Lawrence Dale, a founder of discount broker Realtysellers, doesn’t believe the law will do anything to deter agents from abusing the system and scamming potential buyers, arguing that they’ll simply find a way around it. In addition to that, Dale believes the new complaint system being introduced could be abused by buyers suffering from remorse from paying too high an asking price for their new home.