How To Handle A Bidding War
A: I got an email from a FSBO (for sale by owner) the other day asking me for advice on how to handle a multiple bid situation. She knows about bidding wars and priced her property low enough to produce one, but she didn't know the best way to handle a bidding war. Very understandable given this seller is on her own and without a broker to advise her on how to proceed. Here you go.
First off, you must know how to interpret when a bidding war exists (especially if you are selling a co-op with board requirements)! It is NOT as simple as getting 2 verbal offers. A bidding war should arise when you receive COMPLETE BIDS IN WRITING (see Brady's post titled, "The Art of the Offer: How To Submit A Bid" for details on how to submit a complete bid) that are:
Within the ACCEPTABLE PRICE RANGE / TIMING FOR CLOSE of the seller AND Financially Qualified to buy and pass the boardAssuming that two or more bids are received that meet the above mentioned criteria, you could create a bidding war situation. It is very important to note that the intended seller strategy of a bidding war is to encourage a sense of urgency via potential property loss and NOT to install fear into the prospective buyers. I can't begin to tell you how important this is. By installing fear into the bidders rather than encouragement to participate in the bidding war, chances are you will 'scare away' and lose one of the bidders messing up the entire goal of the war.
The ultimate goal of the bidding war is to procure the highest & best bid that generates a signed contract for the seller! Let me repeat that so as to keep the ultimate goal very clear! The ultimate goal of the bidding war is to procure the highest & best bid that generates a signed contract for the seller!
If you get a great bid because of a bidding war that fails to produce a signed contract, than you got nothing out of the deal and are back to square one with only 1 bidder who may feel questionable about why the first deal fell through. So, here is your step by step guide as to how to handle this situation that is in the best interests of the seller and the prospective buyers that are participating in the bidding war.
Step 1: Confirm A Bidding War Could Exist - Did you receive multiple bids in the acceptable range of the seller that are financially qualified to purchase the apartment and pass any board requirements? If a bidder fails to meet one of these criteria than you don't really have a bidding war situation since one of the bidders is meaningless.
Also, make sure both bidders don't have any restrictions on the time line to close the deal that may conflict with the seller's time line for closing.
Step 2: Announce the Bidding Procedure & Deadline - Announce to ALL parties the bidding procedure plus deadline for submitting their final bids. It may look something like this: "Due to the high level of interest the seller has decided to give all interested parties the opportunity to present them with their "Highest and Best" offer by 11 AM Friday May 11th. The seller will accept the winning bid by 12 noon Friday and the contract of sale will be delivered to the buyer's attorney shortly thereafter."
You will also want to include the items expected with any bid in writing. You could say something like: "All offers must include the following information.
1) Offered price with financial analysis. Please specify if it's contingent upon financing or not and how much. Pre-approval letter should be provided from Manhattan based lender.
2) Proposed closing date.
3) The buyer's full names, address and social security numbers.
4) The buyer's attorney details. (Name, address, phone and email)"Step 3: Announce Expectations For Winning Bid - Announce to ALL parties before hand what the expectations are for the winning bidder. The reason you do this is to ensure all bidders that the winner will be given X amount of time to have their attorney complete diligence and generate a signed contract. It could look something like this: "The winning bid will have until 12 noon May 18th to deliver a signed contract with 10% down payment to the sellers attorney. If the sellers attorney is not in receipt of the contract by set time the seller will move forward with the back up offer immediately."
Lets not forget the meaning of 'BEST & FINAL' and that a deadline was presented to the bidders. You must honor this deadline and give the winning bidder a chance to generate a signed contract. Should the winning bidder NOT produce a signed contract by the previously disclosed timeline, the seller can move on to the other offer. In the real world deals fall through and buyers get cold feet. There is nothing you can do about this other than be prepared to move on to the next qualified bidder.
Step 4: Announce Any Unit/Bldg Info - Now is NOT the time for surprises! Be sure to announce any assessments, delayed/expedited closing dates, inclusions, or any other matters of fact that will ultimately come out when the winning bidder's attorney does diligence.
Step 5: Announce Complete Marketing Until Signed Contract - Announce to all parties that the property will continue to be shown and marketed until a signed contract of sale is provided to the seller's attorney with 10% deposit! This does not mean you will go behind your word of giving the winning bidder a chance to produce a signed contract! It just means that the apartment will be considered ACTIVE & ON THE MARKET until a fully executed contract of sale is reached.
The rest is up to you!
UrbanDigs Says - Bidding wars are a very desirable situation for a serious seller. However, you can mess one up if you don't know what you are doing! By being too demanding and fearsome in your demeanor you may scare away potential bidders. By being too lax, you may open yourself up for a confusing and troubling situation should one party fail to act accordingly. You must find the middle ground to encourage participation by the prospective buyers and at the same time lay down the rules that are in the sellers best interest and fair to the bidders. In the end, if you stick to this method you should do just fine!
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Comments (4)
I need to paste these instructions to the wall here. . .:)
Posted by Pearl | May 7, 2007 10:24 AM
Paste away Pearl!!
Posted by Noah | May 7, 2007 10:42 AM
Hello,
What seems to me to be the biggest issue is saving the real estate commission in NY.Flat Fee MLS Brokers who are willing to list you on the MLS and save you thousands on commissions are the way to save. Regardless of the bidding war. New York for sale by owners need this.
http://www.mlsisland.com
Posted by paul | May 7, 2007 6:05 PM
I advertised as an owner/seller an 8-family in Brooklyn and seem to have gotten into a bidding war. Several are willing to fly cross-country to seal the deal and give me the best terms for closing, including a 1-day turnaround. I know I have outstanding issues on the building, perhaps including a ECB violation, back taxes, and a small lien, which the buyers know, because they have access to all NYC records and told me they knew of the issues. However, one prospective buyer, an attorney, warned that me that problems could occur if someone decides to 311 report e.g. the open sewage line; the building could be closed, and I could end up paying for hotel rent for tenants while repairs are mandated and made, and not be able to sell the building for months while trying to keep up with liabilities resultng from violations, which could grow as inspectors enter the building.
I'm interested in setting up rules about bidding as discussed above. Should I be fearfull that something will go awfully wrong given that the building is as as-is and in need to seriuous rehab? Help and thanks!
West Coast Woman
Posted by Pat G. | May 5, 2008 1:54 AM