Handling Multiple Offers in Today's Market
A: Whether you question the sustainability of it or not, you can't deny that some well priced properties out there are receiving multiple offers in the past 4-6 weeks or so. However, that doesn't mean each will end in a bidding war! In fact I find that while sellers love bids competing with each other, almost all buyers and many brokers out there hate them - it just "complicates things" they say! They call it a war but it's not really a bidding war; which I would describe as a situation in an auction where two or more bidders aggressively battle each other in a transparent manner sending the final price for the item much higher - each buyer knowing what they are up against with each move. For highest & best situations in Manhattan, interested buyers are simply provided a deadline with which to provide their most aggressive offer for the target property. In the end, the seller broker and seller review all bids submitted and choose the highest and best one to proceed with! However, "highest & best" situations are often perceived as bidding wars and that alone could scare many qualified buyers running for the hills!
Disclosure: I no longer work with sellers and currently spend my time servicing buyers only. This is a big no-no in regards to building a successful broker business model. The proven broker model is to establish a successful sell side business and to the best of your ability, recycle business (buyers) as traffic comes in - the team approach allows for this and the power in numbers adds to production volume which increases the split distribution with your employing brokerage firm. Then, the team continues to work the referral base expansion aspect of the business. Since UrbanDigs LLC became a member of REBNY, I have been working only with buyer clients as it fit my niche target audience, business model, and compliments my ongoing vision for where I see UrbanDigs.com in the years ahead. You will soon see where I am going with my vision.
The most important thing every buyer should understand about a property that declares a highest & best situation is that you only have to bid what you are comfortable with bidding!! Nobody is forcing you to get into war with anybody and since you are not told the competing offers, there is no back & forth for you to ponder whether to up the ante a bit more! It's basically a one and done!
Now, as I wrote in my "How To Handle A Bidding War" piece almost three years ago:
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.I'll take this one step further and add that a desired goal of a 'highest & best' scenario is the gap-up potential from one of the interested bidders.The ultimate goal of the bidding war is to procure the highest & best bid that generates a signed contract for the seller!
The key is knowing when the situation is ripe for a 'highest & best' declaration, as many brokers and sellers with minimal experience in Manhattan real estate transactions may get a bit excited and ahead of themselves. The ideal situation is when the listing broker receives BOTH of the following:
1) Two or more ACCEPTABLE offers - the offers must be in the realm of acceptability by the seller. There is no point in calling for a 'highest & best' situation when the seller is asking $1M and you receive two offers below $800,000 that the seller has no intention of accepting due to price alone! The buyers' terms must be acceptable as well...
AND...
2) Two or more QUALIFIED offers - the two or more offers must be financially qualified to both be able to secure a loan commitment and to pass board approval; assuming it is a co-op.
Simple. Clear. Easy enough. Now, every offer has its own variation of terms that must also be considered by the seller in these situations - closing dates, inclusions/exclusions, gifted monies, inspection requests, etc..
Assuming your property has procured both of the above, you now have a choice to make on what to do - but before I go into the choices I want to discuss the concept of 'gap-up' bids.
Gap-up Bids: this occurs when a very interested buyer deals with a highest & best situation by going all in in regards to aggressiveness! Let's say you got a property asking $2,895,000 that was priced such that it received multiple offers; a highest & best is declared and deadline for submitting offers provided to all interested buyers. To ensure they get it, one buyer decides to bid $3.1m, well over ask! I consider this a gap up offer that may not have come in like this if negotiations were privately held. I believe this actually occurred for 35 Bethune Street, Unit 2/3A...which is in contract now awaiting closing - let's revisit this discussion in a month or two when we see how far over ASK the winning bidder went to get that desirable duplex! Another example of a gap-up offer was 37D @ 115 East 87th street at the peak of the market, closing some $600,000 over ask after a best & final environment was set by the broker!
Gap-ups don't always happen for highest & best situations, but the environment certainly exists for one to occur. Moving on, when multiple qualified & acceptable offers are submitted the seller has two choices on how to proceed:
a) Handle Independent & Private Negotiations
Pros: Allows you to continue marketing the property and continue the negotiations back & forth for as long as the seller likes or as long as the buyer(s) participate, less chance of scaring away buyers,
Cons: Limits the gap up potential of a highest & best, time may allow for a competing property to come to market and steal one of your buyers
b) Declare A Highest & Best Situation
Pros: Increases the gap up potential in a bid, usually ends the process fairly quickly, usually keeps the sense of urgency on the most interested and the winning bidders to produce a signed contract
Cons: may scare away some potentially strong buyers who 'don't do bidding wars', the situation is usually not handled correctly by the broker or seller, if it fails to produce an executed contract from the interested buyers it could leave the seller in a bad position
Both have its pros & cons and I don't have time to think about and list them all. Experienced brokers will know when to advise a seller which path to take; there is a feel to it that good brokers are quick to pick up on. Handling this situation the wrong way can end with no deals done, no bids left, and a listing that lost all control after being in the driver's seat going full speed ahead.
For newer agents that don't know how to handle this kind of situation, go back and read my article on handling multiple offer situations. In the end, experience will be your best lesson on how to handle similar situations in the future; so when you encounter this environment be sure to focus on how you handled it, how the buyers responded and reacted, and how everything played out! Learn from your mistakes so that next time you don't make them!
Comments (8)
Great analysis on a delicate, intimidating and emotional process. NYC buyers may be more transaction savvy than other markets, but still fall prey to lapses in trust during a heated negotiation. Forewarned is forearmed!
Posted by Nelbee | February 24, 2010 9:50 AM
Thanks Nelbee -- this was more for the brokers and sellers out there who find themselves in this situation. And to tell buyers that they dont need to bid anything more than what they value the property at and are comfortable with. No need to run away, you never know what will happen.
I DO questions the sustainability of this though. Maybe another month or two.
Said that multiple times but for now, it is what it is. Im in the middle of 54 different active negotiations where 3 of them have competing bids and seller broker and sellers are considering how to handle...one of the deals we just got and contracts out now! yay.
Its never easy. Clients must maintain discipline and keep emotions at bay so as not to get crazy and forget where this market is and where we came from. Otherwise you can bid up to peak levels real fast. I believe 35 Bethune St about 6 weeks ago was an example of this, which my client lost out on by not errantly throwing in a crazy offer.
Anyway, a good topic I think to discuss. Times like these usually signal that the rate of rebound for this wave up from 12 months ago might be topping out.
Posted by Noah | February 24, 2010 10:35 AM
Interesting discussion, Noah, THX, but I look at the scare-the-buyer concern in the opposite way from you.
In my experience, when you have 2 buyers who are both Qualified and In The Ballpark they are more likely to feel abused if they get whip-sawed. As in, "The Other Guy just over-bid you, would you like to change your bid?" That process, to a buyer, is more likely to seem open-ended (and uncomfortable). It is a VERY hard thing for a seller and agent to gauge, but (often) the buyers are more comfortable with the One And Done aspect of Best & Final.
I have seen (but never understood) buyers who feel more pressure in a Best & Final than in serial negotiations. To me, the whip-saw is a "bidding war"; Best & Final is less like war, and gives buyers more control. I have seen situations where buyers definitely did not want to wait around for the backing-and-forthing of a seller negotiating with multiple bidders. Especially now, buyers have more choices, and as a seller's agent I would be very reluctant to encourage one to walk away.
But you are right to focus on the difficulty for the seller in making this tactical choice.
Posted by sandy mattingly | February 24, 2010 11:28 AM
Sandy - great comment and I do agree with you on the whip-saw being the bidding war..I just experienced another one last week where we were outbid and kept the back-n-forth going for about 5 business days. The seller broker told me the seller was considering a best & final, but in the end just went with the higher all cash offer; probably because the other bidders stopped in their tracks after a few back-n-forths.
When my clients are faced with best & final, I do my valuation and I have a serious chat with them to simply put their best foot forward considering how they value this property based on my analysis of the comps, their comfort zone, their pressures to close, etc...They ALWAYS get nervous and scared. But as you say, its quite easy and simple and the buyer has control over what they offer.
I think its the thought of LESS CONTROL over what a competing offer may do and what they might need to do to GET IT, that is scary to them??
Thanks for comment, as always!!
Posted by Noah | February 24, 2010 12:28 PM
Hello, I am a new broker at big firm working my fourth sale. It is asking under a million in Midtown West and we have three offers. What would you advise doing if one is a very low offer that never got a response, the second offer is good and qualified that we are still negotiating with and a third highest offer that is qualified but stopped and refuses to move any further about 3 days ago? The third offer is close to where my seller will do a deal.
Posted by newbroker | February 24, 2010 1:42 PM
look, calling for "best and final" offers means nothing! in fact, accepting an offer itself means nothing. all the time, it happens that an offer is accepted, the home is shown after an offer is accepted, a better offer is made before a contract is signed.
The call for best and final is nothing more than making up new rules and pretending that they should be followed.
a signed contract is all there is, and even that ain't a closed sale.
Posted by juan | February 25, 2010 6:13 PM
Has anyone done a short sale in Real estate? Let me know what the lenders are looking for. Anyway thanks for this great post.
Posted by Miami Condos For Sale | March 29, 2010 7:34 AM
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Posted by How to sell house | April 20, 2010 5:33 AM