Accepting The Bully Offer

Business

5 minute read

August 17, 2011

August is a very curious market since there are typically both fewer listings and fewer active buyers, but it’s almost as if the few sellers that listed in August didn’t get the memo.

As a result, many bully offers are being shunned…

Just because I’m on vacation down in the American west doesn’t mean that I can completely escape from my job.

I brought my laptop down to the house here in Idaho, and I even brought it on the road with me as we drove through Utah and Arizona.  Since when did even the crappiest motel have free wireless Internet?

I’ve received a few emails from prospective sellers in the last two weeks, and my message to them has been all the same: Wait until September and the busy Fall market.

Actually, my message has been prefaced with, “I’m not just saying this because I’m on vacation, but…”

August is one of the slowest periods of the real estate calendar, and save for the time around Christmas, I think that the week leading up to Labour Day is the slowest point of the year.

But as I alluded to in the excerpt above, it seems as if many sellers don’t quite understand what takes place in August.

Every year, it’s more of the same thing: buyers that don’t purchase in the spring market will get a “last gasp” in July, and then they put their plans on hold until September.  Some buyers shut it right down in July as well!

With fewer buyers in the market, the sellers shy away as well.

What came first: the chicken or the egg?

A couple months ago, I mentioned that there are fewer and fewer properties with associated “offer nights,” and perhaps the market was preparing for its inevitable August slowdown.  However, there are still a few properties being listed with offer dates, and this is where the ideology gap between buyers and sellers becomes obvious.

Case in point: a property my colleague was trying to sell last week.

This was a condo in the Roncesvalles area, listed at $344,900, and offers were being “kindly reviewed” eight days after the listing hit the market.

My colleague figured that this price already represented fair market value, since the previous comparable sale had sold for $339,000, but he and the buyer both decided they didn’t want to chance competing against 2-3 other buyers a week later, so they decided to submit a bully offer.

The offer was spectacular, in my opinion: $352,000.  This represented a very large premium over what I figured was fair market value, and I figured that the seller would jump at the chance to take it.

I figured wrong.

My colleague and his buyer-client were shocked when the seller said, “This is far below what we expect on offer night, so just keep that in mind.”

If you think you know where this story is headed, you’re probably right! 🙂

Offer night came, and my colleague had a $352,000 offer ready to go, among others, but by 7PM, he had the only registered offer!  The listing agent tried to stall, and by 7:30PM there were still no other registered offers.

My colleague and his client offered the asking price: $344,900.

The sellers were pissed.

They figured that if they turned down $352,000 five days earlier that they’d be getting at least that much on offer night!

But what the sellers didn’t realize is that their own greed, incompetence, and lack of common sense was getting in the way of logic and reason.

I learned at six-years-old that no matter how hard you close your eyes and wish for something, it doesn’t necessarily mean it’s going to come true.

The sellers played hard ball and rejected the offer flat-out, and the next day the property was still on the market at $344,900.  This is a clear example of false advertising, and breaks not only RECO rules but those of the Competition Bureau, so the sellers (after some pressure…) would have to raise their asking price.

In the end, they elected not to raise the price of a property that they were unable to sell, so they went back to my colleague and asked for the $344,900 offer once again.

My colleague advised his client to re-submit the offer, and within a few hours, the deal was done.

The sellers took on a lot of unnecessary risk (what if my colleague had sold his client another property?) and I believe that their upside was somewhat limited.

This is where sellers need to truly examine their actions and take into account upside and downside.

What was the upside with this condo?  They turned down $352,000 as a bully offer and were waiting for a windfall on offer night.  What could they have reasonably expected?

Did they think they were going to get $360,000?  Or were they just hoping for a couple thousand dollars more?  Maybe $354,000.  If that’s the case, then the sellers were truly playing with fire and the upside was so limited when compared to the downside!

This is when I think sellers need to take a look at expected value.

As a quick aside here – a client of mine is an avid poker player, and before you roll your eyes and say, “Sure, sure, everybody is a poker player these days,” let me say that my client has built his net-worth on painstaking hard work in his industry combined with his poker winnings.  And his net worth is substantial for his age.

I asked him if he’d ever consider playing in the World Series of Poker, and he he said he didn’t think so.  He didn’t welcome the spotlight, but he added, “My expected value for that tournament would be about $75,000.”

The entry fee for the tournament is $10,000, so suffice it to say, he expected to come out on top!

But before we delve any further, let’s consider what expected value truly is.  Anybody who took grade ten math knows that the expected value is essentially the sum of a series of probable outcomes assigned to possible values.

A crude example of my client’s expected value table could be this:

50% probability of $0 = $0
10% probability of $20,000 = $2,000
10% probability of $50,000 = $5,000
10% probability of $100,000 = $10,000
10% probability of $150,000 = $15,000
5% probability of $300,000 = $15,000
3% probability of $450,000 = $13,500
2% probability of $800,000 = $16,000
0% probability of $9,000,000 = $0

TOTAL: $76,500

The expected value of my client’s payday is $76,500, but there’s still a 50% chance he goes home with nothing!

We can use expected value in real estate, but clearly there are fewer extremes.  For example, there is no 50% chance of getting $0 for your condo!

Let’s assume that the sellers of the property in question made an expected value table like the one above to try and determine whether or not to accept the $352,000 bully offer that was submitted five days before offer night.

As the property was listed at $344,900, and there was a hold-back on on offers, let’s assume the sellers determined the following:

10% probability of $344,900 = $34,490
10% probability of $350,000 = $35,000
10% probability of $352,000 = $35,200
10% probability of $355,000 = $35,500
50% probability of $360,000 = $180,000
10% probability of $370,000 = $37,000

TOTAL: $357,190

In this example, the sellers expected value for the condo was $357,190, so that meant they should NOT have accepted the bully offer of $352,000 that my colleague submitted.

But you see the issue with expected value is that it’s highly subjective.

The sellers themselves, with all their bias and hopes & dreams, can’t be expected to impartially assess the probability of various prices for their home.

In this example, they severely over-estimated the upside for their condo, and they severely under-estimated the probability that they get the asking price.  They didn’t even consider the probability that they got less than asking!

Again – consider that these numbers are for illustration purposes only, and I made them up in about forty seconds.

But when a bully offer is on the table, you can’t just make a snap decision.  It will likely be based purely on emotion.

Expected value is just one way of evaluating your property’s worth, but I think it makes the point that you have to use something other than the old, “What do you think?  Well what do you think?”  As you and your partner stare at eachother and shrug your shoulders.

The real estate market is and forever will be full of hindsight, so it always seems obvious after the fact that you should/shouldn’t have accepted/rejected that bully offer.

But from what I’ve seen in the past three weeks, a lot of sellers have been severely dissapointed on offer night…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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6 Comments

  1. Joe Q.

    at 7:22 am

    “The sellers played hard ball and rejected the offer flat-out, and the next day the property was still on the market at $344,900. This is a clear example of false advertising, and breaks not only RECO rules but those of the Competition Bureau, so the sellers (after some pressure…) would have to raise their asking price.”

    David, can you elaborate for those of us who aren’t in the industry?

    1. David Fleming

      at 1:35 pm

      @ Joe Q.

      If you list a property for $344,900 and somebody offers you $344,900, and you DON’T accept the offer, then you’re guilty of false advertising. You are adveristing a price for the property that you are not willing to accept. In this case, you would have to change the price to something higher than that which you turned down, such as $344,901.

      In more extreme cases, where for instance, a property is listed at $799,000 and the sellers are expecting $200K over asking, and they turn down $905,500, they’ll have to cancel the $799,000 listing and bring the property out at something like $919,000. However, if they were trying to under-list to solicit multiples, that ship has likely sailed. Instead, they’ll come out at $999,000, which is what they were hoping for. This never works, and the property usually sits on the market.

      1. Joe Q.

        at 2:46 pm

        Thanks for the clarification, David.

        I can understand turning down offers at the listing price would be considered “false advertising”, but find it odd that the whole thing can (apparently) be remedied by simply re-listing the offer at a higher price the next day. Seems like a bait-and-switch.

  2. Vincent

    at 8:58 am

    If I were the buyer I would have offered MUCH less than asking price in this situation. Being the ONLY offer the sellers ever saw, I’d put in a much lower offer.

  3. Ralph Cramdown

    at 9:21 am

    The question to ask is “What is the EV of the vendor’s agent?”

    Here, according to your fact scenario, the agent mispriced and/or mistimed the sale, assuming that a) the best second-half month to sell in is October, not August, and b) if you want multiples for an average condo, you have to price below market.

    The EV of agents varies widely, and it is difficult, if not impossible for vendors to estimate. Maybe the agent “bought” the listing. Maybe the vendors didn’t listen to good advice. But probably, they just picked an agent with low EV.

  4. DB

    at 11:52 am

    David – this is not related to bully offers, but in your next anti-pre-construction rant you may way to add “potential exploding glass” as a reason not to buy until the building is 2-3 years old.

    I cannot imagine how bad a week the people at Lanterra have had with two panes of glass going at 1 Bedford and the first pane going in the south tower of Murano. Surprisingly, there are still 5 units listed on MLS despite all the horrible press and a lack of balcony railing. Something tells me these places will not go for top dollar.

Pick5 is a weekly series comparing and analyzing five residential properties based on price, style, location, and neighbourhood.

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