When Good Bids Go Bad

Posted by urbandigs

Thu Feb 7th, 2008 11:11 AM

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A: I've been very busy lately and bids are being submitted. As I focus on product quality, resale potential, and valuation, my clients usually start a bidding strategy in their head right after they leave the property. I try to wait until after I do comps analysis to devise a strategy because in my opinion the most important past sales to review are the ones that occur in the same building, NOT nearby! The goal is always to try to get the best price possible for the product that we choose to go for. Sometimes it works, sometimes it doesn't. But at least we know we will not overpay for a property just because the seller is greedy and stubborn on counter-offers; and expects to get 10% more than a past sale 6 months ago.

First off, here are my past writings on bidding strategy for buyers and all should be must reads for any first time purchaser:

Bidding Strategy 101: Reverse Psychology

The Sellers First Response: The Probe Bid

Timing A Low-Ball Offer

Moving on. First off, you must take into account listing history (time/price) & seller psychology when devising a bidding strategy; at least I do. What I mean is, if a listing is less than 3 weeks on the market then the seller really hasn't reached the point of desperation & frustration yet. So, by submitting a low ball bid on a property that is only a few weeks on the market may not get the desired response. Why? Because the seller says to themselves, "...it's only been 2 weeks and I already got a bid 10% below ask. I have time. I'll wait for a better bid".

On the flip side, a seller who has been on the market for 4+ months already and is getting frustrated by the lack of action in terms of bids received, their response is likely to be very different to your low-ball!

Another type of bid, a probe bid, is designed to be more aggressive than a low-ball bid with the hope to gain information about the seller's motivations on price. A probe bid is a very interesting negotiating tactic if applied correctly. The ultimate goal is to:

a) not insult the seller by bidding too low
b) retrieve information from the seller that may assist with the next move
c) see how motivated the seller is

Many brokers do not analyze bidding strategies and negotiating like I do, and encourage their clients to bid as aggressively as possible to get the deal done fast. Fine, I have no issues with that as long as buyers agree. But I don't think that's the best approach for buyers trying to get a good price on a deal; and lets be honest, many sellers do price high and try to test the market. If the product is such a deal, and has all the features that demand a strong bid, by all means do it. But more times than not, buyers don't get everything they hope for in the same package.

Which brings me to today's point: when good bids go bad! Say you find a great product, that is priced right, is fairly new to the market, and you want it. So, you put a bid about 7% below ask to start out the negotiation and get a very quick response that is not as aggressive as desired. This tells me:

1) seller is taking back control of negotiations by limited counter-offer
2) although a very fast response by the seller, its clear they are not too willing to stretch right now
3) is testing my clients seriousness to get a deal done

A fantastic response by the seller and one that tells us good information. The probe bet worked and after analyzing the building comps, it's clear the seller knows they priced correctly and shouldn't have to stretch too much from asking to get a deal done. While its not the result I had hoped for (seller is not as motivated to get a deal done quickly), it's a great deal of information that we can use for the next bid.

As I told my client after the seller's response to our probe bid, I think we should get aggressive, up the bid, and pay what I feel the property is worth on the open market without playing the ping-pong game any longer. This will give the seller the seriousness they are looking for, and give my client the best chance of getting the property at a price that I consider market value! If that doesn't work, at least it will get a final counter from the seller leaving my clients with a decision to make.

My client ultimately decided to bid less than my suggestion, put a 'best & final' tag on it, and give the seller until end of day Friday to accept. A bold move! This kind of move will work 50% of the time, and is a move I would be on board with IF the seller countered our original offer more aggressively, and showed some signs of motivation. But the seller didn't, and I think this move doomed us and had little effectiveness given the underlying scenario.

The Result: It didn't work and a higher all cash offer came in that was accepted; we are now backup. The combination of an un-aggressive re-counter + the strong arm tactic of it being our last bid, hurt us in the end. There was never a chance for us to up our bid, and the seller broker never got back to me that multiple bids are now in and for us to submit our highest bid by a certain deadline. While my clients bid was a good one, and the probe got us very useful information, we didn't respond the right way. It was a good bid that gone bad. Of course, the timing of another offer submitted didn't help either.

So what should we learn? When a property is priced right and early in its listing history, don't be shy to get a bit aggressive and pay what the property is worth on the open market! Many people have a fixed % in their head, regardless of asking price, that they must get the seller down from asking in order to do the deal. THAT IS A VERY BAD CHARACTER TRAIT and may prevent you from jumping on an opportunity when one presents itself. Instead, go into the bidding phase with a clear understanding of what the product SHOULD fetch on the open market based on comps, permanent features, location, light/views, condition, etc..If you do decide to play ping-pong, analyze the seller's response closely and don't hesitate to get aggressive and bid market value, even if its closer to the asking price than you might otherwise hope! In the end, it doesn't matter if the property is priced correctly!