For those of you that have been through a multiple-offer process on a house, you probably have your own stories on how the evening went down.
Did you “win” with the first bid?
Were you asked to improve?
How much did you come up, and how did you decide on that?
For those of you that haven’t been through the process, let me help prepare you…
I know some of you are reading the blog title and already working yourself into a tizzy.
“Second round of bidding? What’s wrong with one round?”
“Why do you need a second round?”
“Goddam greedy sellers!”
What can I say, folks? That’s just the way it works.
I’ll be on B.N.N. on Monday morning to talk about “Realtor Tricks.”
I told the producer straight-up, I don’t like the idea of “tricks,” and that we could just as easily call them “strategies.”
For example, with respect to the old “under-price and hold back offers,” that’s far from a trick. It’s not fooling anybody. It’s a strategy, and as I said above, that’s just the way it works.
It’s the way it was when I got into the business in 2004, and it’s just the way it is now.
We’ve accepted it.
And as for the “multiple rounds” of bidding, buyers need to accept that too.
It doesn’t always work that way, however.
I sold a house last Sunday night, and the agent told me, “We’re simply going to work with the highest offer.”
But is anything that simple in real estate? Was that a trick? Was that just the buttering up of the bun, before the big meal?
Low and behold, she called me two hours after offers were submitted, and said, “Congratulations, we’re going to accept your offer.”
There was no second round of bidding, and believe it or not, she told me that there were three offers that were “really, really close.” She even told me how much we won by!
But that’s a rare case, and most of the time, especially with freehold homes in the core of Toronto, there is a second round of bidding in multiple offers.
So what’s my advice for buyers?
How can I best prepare you?
The very first thing you have to do is simple: accept it.
Don’t blow up. Don’t get angry. Don’t get emotional.
When you submit your offer for $855,000 on that $729,900 listing, and your agent calls you and says, “There were nine offers, and they’re working with the top three – giving us all a chance to improve,” do not let anger take over.
Some buyers get frustrated and say, “What, they can’t take our goddam $135,000 over asking? That’s not enough for them?”
But you have to remember that it’s not personal. It’s business. And as I keep saying, it’s just the way that it’s done.
I had a buyer once tell me, “I’d rather lose in the first round than win in the second,” because she was so offended that the seller came back to the top three buyers for more money.
But that was emotion talking. Could it be anything else? Isn’t this cutting off your nose to spite your face?
Buyers need to accept a second round, but do not expect one unless told.
A classic mistake among buyers is expecting a second round, and saying, “I’ll start at $900,000, and then I’ll come up to $930,000.”
But what if there’s a $915,000 bid, and the listing agent simply takes the highest offer?
I’ve had this happen before. Once. It was enough to ensure I never let it happen again. My buyer was insistent on “opening” with a lower bid, and increasing gradually. The listing agent told me there would be a “one shot deal” process ahead of us, and my buyer didn’t listen. Our situation was similar to the one above; I believe he offered $700,000, saying he’d go to $740,000, and we lost to a bid of $720,000.
As I said – accept a second round, but don’t expect one.
And that’s my advice to agents too!
I brought out a condo listing on Wednesday afternoon, and by Wednesday night, I had three offers.
I told all the agents they got one shot, and once they were all aware how many offers there were, and they had submitted their “final” bid, we would work with what we had.
That’s exactly what I did.
My buyer accepted the highest offer, and I called that agent to let her know, then the first agent with the lower bid to let him know, then the next agent.
And that agent basically cried into the phone.
He said “please” about a dozen times. “Pleeeeease give me another shot, three minutes, that’s all I need.”
It’s funny, because I rarely come across an agent, who loses in competition, knows he or she didn’t lose by much, and doesn’t say that he or she could get more money.
Monday morning quarterback.
Saturday morning lottery number picker.
Now as for what to do in the second round, that’s probably more important.
My second nugget of information: if you don’t improve, you’ve lost.
If there are nine offers on a house, and you’re in the “top three” and sent back to improve, you have virtually no shot at winning if you don’t improve.
Well first of all, I would estimate that 80% of buyers improve. There’s no science behind that number; it’s an estimate. But it’s based on my experience as a listing agent, seeing what happens in second rounds, but also as a buyer’s agent, seeing how many of my clients walk away.
So if 80% of buyers are improving, then we can work through an example, and see how it’s impossible to win without improving.
Let’s say there are three offers left: $923,000, $931,000, and $933,000.
Those three buyers are sent back to improve, and you’re one of them.
There are three scenarios:
1) You’re the lowest.
This is easy to explain.
If you’re the lowest, and you don’t improve, then you lose.
2) You’re the middle offer.
If you’re the middle offer, and you don’t improve, then you lose to the higher offer. Easy.
And there’s a very good chance that the offer behind you comes up in price, and you end up in third place.
2) You’re the highest.
You have the $933,000 bid, and you’re in first place.
But as I said, 80% of buyers improve.
If the offer behind you improves, you’re beat. There’s no way they come up $1,999 or less.
If the offer in third place improves, you’re still probably beat. Rarely would a $923,000 offer come up only $5,000. The expectation for a “jump” at that price point is $10,000, which I’ll get to in a moment.
So even if you’re in first place, the odds of you staying in first place without improving are slim to none.
So to reiterate: if you don’t improve, you’ve lost.
And I’m not saying you have to improve. Do as you see fit, I’m not here to price gouge, or push anybody. I’m just trying to teach you, the way it is.
Now my third piece of advice, would be with respect to how much to improve, if you choose to do so.
Again, you work through the example above.
I would tell my client that if there are three offers, we’re either in 1st, 2nd, or 3rd.
If we’re in first, we need to improve enough to keep us in first.
If we’re in second, we need to catch up to the highest offer, and then beat them on improvement.
If we’re in third, we need a massive jump, and it might be one that’s too uncomfortable to make.
So now you look at how much you need in each scenario.
If we were the highest, at $933,000, I would figure we have two offers behind us – maybe $932,000, but maybe $920,000. I would figure that the most likely number to jump is $10,000, with an outside shot at $15,000, and at least $5,000.
So if somebody was behind us, and they jumped $15,000, how much would we need to still have them beat?
If we were the second highest, at $931,000, we have to play offence and defence, and keep one offer away, but also trump the other.
And if we’re in third place, again, we’re probably too far off to make a jump that’s comfortable, although you never know – sometimes in this situation, my buyers might say, “We want this goddam house, and there were nine offers, now there are three, so let’s take a leap and bring this home.”
It’s up to them.
“I lay it out, for y’all to play it out.”
Back to the example above – I would tell my clients what I feel their odds are, in three scenarios:
1) No increase. They have a 0% chance.
2) $5,000 increase. They have a 10% chance.
3) $10,000 increase. They have a 33% chance.
4) $15,000 increase. They have a 50% chance.
And a 50% chance at a house, in this market – when there are nine offers, is pretty damn good.
So whether we have the offer that’s $923,000, or the offer that’s $931,000, or the offer that’s $933,000, a $15,000 increase, I feel, would give us a 50% chance.
Obviously if we had the lowest offer, and went from $923,000 to $938,000, we’d likely lose to one of the higher offers, after they’ve improved.
If we had the $931,000 offer, and we ended up at $946,000, I feel as though we’d likely have the $933,000 offer beat, assuming they improved the “standard” $10,000, or went conservative with the $5,000 bump.
And if we had the $933,000 offer, and we ended up at $948,000, we’d have an even better shot at beating that original $933,000.
As you can clearly tell, there’s a lot of guesswork here, and a lot of assumptions.
But it’s a blind process. That’s just the way it is.
But when you’re asked to improve your offer in a “second round,” you would be shocked at how many times the listing agent calls you back twelve minutes later and says, “How we doin’?” as though your clients don’t need more than a commercial break to make their decision.
So if you’re a buyer for a freehold property in this market, and you’re in competition on offer night, remember:
1) You need to accept that there will be a second round; don’t let emotion take over.
2) Accept a second round, but don’t expect one. Put your best foot forward.
3) If you make it to the second round, and you don’t improve, you’re out.
4) Either walk away, or give yourself a shot. Don’t add $1,000 – go for it, or go home. Play out the scenarios, as I’ve done above, and you’ll see how it works.
Lastly, don’t shoot the messenger.
I didn’t create this market, I merely work in it.
This is free advice, and good advice, and you don’t have to take it.
But get angry, get frustrated, and hate the system we have, and you’ll never get into a house in this market…