How To Address Multiple “Rounds” Of Bidding

Business

7 minute read

February 10, 2016

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…

RealEstateBidding

“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.

Who knows.

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…

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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14 Comments

  1. Ed

    at 9:29 am

    There appears that there are two different mindsets at play depending how the home is marketed.
    Lets assume that a home has a fair market value of $750,000. In the traditional pricing model one could estimate the seller would then price the home slightly above, lets say $769,000, and review offers as they come. In this scenario the buyer goes in with the mindset of lets see how low they will go on price and offer accordingly.
    In the new normal the home is under priced and the buyer goes in with the mindset that they have to put their best foot forward and possibly pay more than fair market value for the same home.
    So here is my question for those who know better than I.
    Is there one demographic of buyers (boomer, GenX, millennials) that prefer one method of ‘buying’ over the other??
    For instance, do boomers prefer the traditional pricing model over the new normal? Or do millennials prefer the under pricing?

  2. Marina

    at 9:44 am

    The problem is, there is no “best foot”. Even in your example, David, clearly your clients did not put their best foot forward because in the end they ended up paying $10K more.
    Once you are in it, the incentive will always be there to pay a little more.

    On a side note, aside from the sadism, is there a financial reason for a seller agent to avoid second rounds? I mean presumably there is a risk that if you sign back, the buyer will get pissed off and walk away, but in this market does that ever happen?

    Because I can also see a seller pushing for multiple rounds to get more money. I mean an extra 20K is not much on a realtor’s commission, but it’s a big deal to the seller, no?

    1. Long Time Realtor

      at 10:21 am

      @ Marina. You hit the nail on the head.

      Despite what some readers seem to think, sellers are under no obligation to play nice. Incidentally neither are buyers. I’ve been through slow markets with an abundance of listings, when low-ball offers were the norm.

      No use blaming the system – there is no “system”. It’s called the market.

  3. Paully

    at 12:00 pm

    “And we got the house, by what I’m told is less than $1,000.”

    Unfortunately, there is no reason for the selling agent to tell you actually what the other offer was. If the agent has any shred of decency, they should tell you that you just squeaked over the second best offer, no matter what really happened. If the vendor’s agent laughed and said, “haha, your buyers paid $25000 over the next best offer! What suckers!” would not do much to improve the transaction, and could really piss-off the buyers. The same transaction price can yield buyer’s happiness or buyer’s remorse, depending on what the vendor’s agent tells you.

    1. David Fleming

      at 12:33 am

      @ Paully

      The agent is somebody I know, trust, work with, and have done deals with before.

      The agent that came second place is somebody I know too.

      Trust me – we got this by less than $1,000.

      You are correct – there’s no real reason for an agent to tell you the truth. But I’m not naive enough to write about a situation like that; I’d only write about it when I know it to be true.

      1. Paully

        at 7:57 am

        I figured that you had reliably good information about the other offer.

        For context regarding my comment: I know someone who received multiple offers on a place, and the winning offer was over $50,000 higher than the next best offer. When the winning buyers agent asked the selling agent about it, the selling agent looked squarely at him and said, “The offers were sooooo close. You just barely squeaked in!” Sure, that was a fib, but I would consider it an acceptable white-lie, since it was only done to make the buyer feel better about the purchase to which they had just committed. Sharing the naked truth would not have improved the situation for anyone.

  4. Dustin

    at 1:52 pm

    It’s funny how this is coming out at the same time as the BC realtor shenanigans. There is no transparency in this at all. It’s all “what if” and to trust an agent. Sure, this helps the seller get more money, but this reeks of BS. Just continually appreciate the price of houses in the GTA. “You better put your best foot forward or you can lose the house”. Money and emotions NEVER work out in the end. I understand that over a lifetime of a mortgage/house that 25k doesn’t mean much. But think of what it takes to make 25k after tax. A lot. I am not a housing bear by any means, but this can’t end well.

    1. Kyle

      at 2:41 pm

      None of this appreciates the price of housing. It is demand far outstripping supply that is appreciating the price of housing. If there wasn’t someone willing to pay it, then the prices wouldn’t be realized – full stop.

      1. Paully

        at 4:25 pm

        As far as supply/demand goes, it is important to recognize that it is mainly behaviours at the margins that really move the market. For example, it is the frustrated couple that has lost out on their last ten offers that finally steps up on their eleventh and blows everyone else out by a hundred grand or more, thus resetting everyone else’s baseline price for that street. Conversely, if there ever comes a time when buyers are scarce, most sellers would hold on or could hold out for the price they want. However, a desperate seller, one who has become unemployed or disabled or divorced and absolutely has to sell, could accept a low-ball offer, and that lowers the perceived value for future transactions.

        1. Kyle

          at 4:45 pm

          “For example, it is the frustrated couple that has lost out on their last ten offers that finally steps up on their eleventh and blows everyone else out by a hundred grand or more, thus resetting everyone else’s baseline price for that street.”

          Bingo, that right there is scarcity (i.e. demand being way higher than supply). Bidding wars, bully offers, Agents strategies, etc are merely a means of price discovery. It is scarcity that is setting the prices.

          1. daniel

            at 10:08 am

            The underlist/bidding war model only works because there are more buyers than sellers, however, it is also a market convention or ‘norm’ that is not inevitable. Put another way, you can have a sellers market where the norm is not to underlist. In fact, Toronto was once like this.

            I think the underlist model does push prices higher than the alternate model where people expect to transact at or near list. I think it absolutely drives people to make more emotional decisions in the home buying process than they would otherwise.

            To suggest that it is only the supply/demand dynamic that sets pricing seems like pretty rigid and inaccuracte thinking. in the more typical model the structure of the market drives prices below their value because agents want to move the transactions at the risk of slightly lower pricing (this is the well know realtor section on Freakonomics).

          2. Kyle

            at 10:30 am

            Play it the other way around. Let’s just for argument’s sake say every listing out there overnight changed their listing price to $20M or best offer by X date (which is equally as meaningless an under-list price). Same thing would happen. As long as there is competition, people wil submit higher prices and keep chasing it. It doesn’t matter how you change the rules of the game, once there is competition people will get emotional and prices will rise.

    2. Appraiser

      at 7:58 pm

      @ Dustin:

      I don’t see how supposed “B.C realtor shenanigans” are even remotely related to this topic.

      Where was the “transparency” when Nortel was selling for $125 per share? Where was it when Worldcom, Enron, Fannie Mae, Freddie Mac, Countrywide Financial and many others were cooking the books too?

      Transparency? Please!
      It’s a house, at least you know what the hell you’re buying AND you get to live in it as well.

      1. Kyle

        at 5:32 pm

        Speaking of Nortel, the TSX is quickly approaching the Aug 2000 level when Nortel was the largest constituent of the index. So much for the theory that a balanced portfolio is a wiser investment than real estate.

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