I alluded to this in Monday’s blog, and I figured with the market where it is, and with the process as complicated as we currently find it, an entire blog post should be committed to this subject.
Every multiple offer process is different, and every listing agent can, and often does, handle it differently.
So it might surprise you to know that despite the differences, I still believe there’s one approach a buyer should take. Let’s discuss…
“I want to start at $880,000,” my buyer client tells me, “And then go up to $900,000 in the second round of bidding. My absolute max for this property is $905,000.”
And I immediately tell him how that strategy is flawed.
“What if the highest offer is $890,000, and your offer of $880,000 is beat. The listing agent calls and tells us we lost. Then how do you feel?”
The buyer looks dejected. He thought he had it all figured out.
You simply can’t plan for a “second round” as there might not be one.
Of course, there could be a second round, third round, and fourth round – you just never know.
I always tell my clients, “Put your best foot forward. If your max is $905,000, and you’d be happy if you got the house, then offer that amount, and don’t go up if there is a second round.”
Why would you offer $880,000 if you’d “go up” to $905,000?
What if there was an offer of $885,000 along with your offer of $880,000, and you both got sent back? Then you go to your max of $905,000, and the other buyer goes to $915,000. You lose. Had you submitted your max of $905,000 to begin with, you would have beat the offer of $885,000, and perhaps that $20,000 is enough to “win” without being sent back for a second round.
It’s a lot of guessing, a lot of predicting, and a lot of posturing.
But in the end, and in this introductory example, I always tell my clients to “put their best foot forward.”
The truth is, you don’t know if there’s going to be a “second round,” and in probably half the offer presentations I’m in on, there isn’t one.
So I tell my clients, “You can’t hold back for a second round that you don’t know is coming.”
Every agent handles things differently.
And every agent is upset regardless of the outcome.
I’ve never met an agent that didn’t groan at being “sent back” along with another competing offer, although I’ve never met an agent that didn’t complain, “You mean there’s no second round?” when told that he or she came second.
Call it a double-edged sword, or use the cliche, “You’re damned if you do, damned if you don’t.”
But every listing agent is free to handle multiple offers as he or she sees fit, and you, as the buyer agent or the buyer, have to know how to play the game before it’s even begun.
I talked on Monday about the property I sold for $811,000, listed at $699,900, so here’s a good situation to use as an example where that “second round” comes into play.
The property was listed at $699,900, and my clients and I figured the house would be anywhere from $775,000 – $800,000 as soon as we saw it.
It all depends on the number of offers on offer night, but it’s that “damned if you do, damned if you don’t” mentality again. Because if there was one competing offer, you probably wouldn’t go to $800,000, would you? But if there were ten competing offers, you would go there, and you’d be happy as hell if you got it!
In the end, there were seven offers, so we went to our max, and added $1,000 just to give it that “not-so-round-number” look of $801,000.
After the seven offers were presented, we were told by the listing agent that we were “tied” with a competing offer, which doesn’t necessarily mean both were exactly $801,000, but an offer of $800,000 or $802,000, with a slightly different deposit, and/or a slightly different closing date, and/or a slightly different list of inclusions/exclusions, is essentially “tied.”
The listing agent sent home the other five agents with the other five competing offers, noting that “two were just below you,” and told us we needed to “change our offer.”
“Change” means “improve,” make no mistake about it.
Change, improve, revise – call it what you want. “Sent you back” or “Give you an opportunity to revise,” it’s all the same.
So at this point, some buyers would be frustrated.
Some of you readers might be frustrated.
You might think it’s “greedy” or it’s unnecessary, but is it worse to take the $800,000 offer with the $75,000 deposit and March closing over the $801,000 offer with the $30,000 deposit and April closing, or is it worse to send both back to improve?
I tell my clients, “The silver lining here is that we were competing against six other bidders, and now we’re competing against just one. Our chances of getting this property have improved from 14% to 50%. I’ll take that any day.”
Now comes the decision-making process, and how to proceed with the “revised offer.”
In this case, I told my clients the following:
We can do four things:
1) Leave our offer at $801,000
2) Add $5,000
3) Add $10,000
4) Add $15,000
I told them that those four options, in my estimation, provided the following:
1) If we leave our offer at $801,000, we will lose. We will lose because if we’re already behind, say, the other offer is $802,000, then we’ve lost if we don’t improve ours. And since about 85% of buyers being “sent back” end up improving, we’ll lose if the other offer improves.
2) If we add $5,000, we have about a 25% chance of getting this property. Buyers usually add 1% in cases like this, so adding $5,000 and going to $806,000 puts us behind if the other offer was ahead of us, and they add the same, and puts us behind if they were ahead/behind, and added $8,000 or more.
3) If we add $10,000, we have about a 50% chance of getting this property. As I said, buyers usually add 1%, and if we round up to $10,000, knowing we’re ahead or behind by probably $1,000, then I’d say we’re flipping a coin.
4) If we add $15,000, we have about a 90% chance of getting this property. I just don’t the competing buyer making such an aggressive jump, and if you want to guarantee you get this property, then a revised offer of $816,000 would do it.
I then told my clients that it was up to them, and they should discuss, independent of me, and call me with a decision.
It’s not my money. It’s up to the buyers. I can lay out the option set, and I can tell them their chances, but ultimately they have to make the final call.
They called me twenty minutes later and told me: they wanted to re-submit at $807,000.
It wasn’t my plan to push, or to pry, but I needed to hear the thought process behind it. During the conversation that followed, my client said something to the effect of “…..we just really want this house.”
So I asked him, “Well which one is it? Do you want to offer $807,000? Or do you really want this house?”
The two were contradictory, given I had just laid out the option set, and percentage chances of success as I saw them.
I asked him, “Do you see a quantifiable difference between $811,000 and $807,000?”
He said he did not.
I asked him, “Would you be happy if you got this house at $811,000?”
He said that he would be ecstatic.
“So offer $811,000,” I told him.
And we did.
And we got the house, by what I’m told is less than $1,000.
I told my clients, once we were down from seven offers to only two, “We’re either going to win this, or lose this, by probably less than two-grand.”
And that’s exactly what happened. We just ended up on the happy side of par.
As I said in Monday’s blog, identifying the market value of a home in this market is a skill, but when you’re competing against double-digit competitors, there’s always some luck involved.
We had about a 50/50 shot at this house, and we got it. I’ve been on the other end of this many, many times before as well.
But as a buyer in this market, you have to be prepared for a situation exactly like this one. You have to know what to expect, and you have to keep a cool head, and make a well-thought-out decision.
Hindsight is a bitch in this business.
You don’t think that the second-place buyer said the next day, “Goddamit, I would have paid $812,000 for that house, or $815,000, had I knew.”
But they didn’t know. You never do.
You don’t think my buyer said the next day, “Oh my God, if I knew it was going to be that close, I’d have paid a couple grand more just to not have to go through that!”
But they didn’t know. You never do.
You do, however, have the option of hosting these “what if” scenarios before the offer is presented, and discussing with your partner, and your agent, how you might proceed.
It’s crucial to prepare yourself for one round of bidding, as I said at the onset, by putting your best foot forward, but it’s also crucial to be aware of your option set in that second round of bidding, once you find yourselves there.
As for the third round, I think it has no place in this business. There absolutely, positively, is no reason for it other than greed.
Fortunately, I encounter it maybe once or twice a year, and it’s usually when I tell my clients to tap out.
Most agents will tell you in advance, if you ask them, “How are you handling the multiple offers.”
Most agents say something like “We’ll pick a winner if there’s a clear favourite, but if two or more are virtually tied, well, you know…”
Most agents want to work for their sellers, but they also don’t want to be sadists. They know that sending back the top two offers is an acceptable practice, and they’ll do it, but not flaunt it.
Then again, some agents are sick bastards who will try to keep buyers and buyer agents going back and forth until midnight, round after round. Very few, but they do exist.
There may not be rules to this “game” but there are patterns, practices, and consistencies.
I sympathize with any new agent, or new buyer, or new buyer with a new agent (tough combo in this market…) who is trying to learn all this on the fly.
Just remember that if this was all easy, we’d be in Scottsdale, Arizona, or Key West, Florida.
But we’re not.
We’re in Toronto, and this is the way it is…