Today’s seller’s market is creating future victims: An Insider’s Look at Multiple Offers
Originally appeared in Bay Area News Group publications on April 5, 2013
“Common sense is the most fairly distributed thing in the world, for each one thinks he is so well-endowed with it that even those who are hardest to satisfy in all other matters are not in the habit of desiring more of it than they already have.”
– Rene Descartes
It is no secret that a shortage of inventory, combined with historically low interest rates, has led to a market where, in certain areas and price ranges, multiple offers are the norm. Recently, I wrote about the dangers of contracts without contingencies.
There are few areas of real estate where buyers need outstanding representation more than in the handling of multiple offers. Sadly, some buyers are working with licensees who lack the knowledge, caring, or both to protect them from paying more than necessary.
Analyzing asking price
Before deciding how much to offer, ask your agent’s opinion of the asking price. Is it high, low, or just right? This should be based on recent closed sales (three months back at most) for properties in the same or comparable neighborhoods. When a home is priced at the top of the market, it may make little sense to offer more; if it is attractively priced, a higher bid can be made and still be reasonable.
Carefully consider potential problems: A large structural pest control report, foundation defects, drainage issues, the need for a new roof, sewer lateral replacement. In addition, dated kitchens and baths are expensive to upgrade and should be included in the equation. Further, depending on size, interior and exterior painting by a professional can cost well over $10,000.
Take the price you plan to offer and add a ballpark figure for the items above. Compare the total to the highest sold prices in that neighborhood for a completely remodeled home of approximately the same size. Offering less than the highest sold figure is, normally, appropriate.
It is possible that prices will continue to spike for a number of years and your superior offer today will look good at a later time; however, I would not count on that.
Many folks who paid what was then a high price in 2003 through 2005 might have been able to sell for more in 2006 and early 2007. Nevertheless, those who did not sell may, today, have negative equity.
Number of other offers
Potentially, the more offers, the higher the price. As the number of bids increase to 15, 20 or more, it is a question of how high the buyer who really wants it is willing to go. Keep in mind that the amount to get an accepted offer is a different question from how much the house is really worth. Buyers frequently forget the second part in the heat of the moment and their agent may not point this out.
Although there is no formula per se, experienced agents know what has a chance to work or not based on the number of offers, but there is a problem. Few contracts today are presented in person to the seller and his agent. Almost all are emailed. This makes it much trickier to know how many offers actually are involved.
Finding out this number is where agents might be letting their buyers down. Some salespeople submit an offer that is supposed to be based on a certain number of bids without knowing the true figure.
Mechanics of presenting offer
Most buyers do not know they can request their agent to act under specific, written, signed instructions regarding their offer. For example, “If there are no other offers, my offer will be asking price; If there are one or two other offers, my offer will be …” and so on. Given the amount of money at stake, this protection is prudent.
These instructions should include a statement that your agent make arrangements, in advance, to contact the listing agent right before the deadline to submit offers and determine the actual number of contracts that came in up to that point and/or are still expected.
To be most cautious, your written instructions can state that you do not want your offer sent in unless your agent has contacted the listing agent and found out how many other contracts there were. These safeguards are unlikely to work if the property is a short sale or REO.
The fear factor
Be wary of an agent who says, “It may be a high price, but it probably will be higher next month,” rather than, “This high price is something you may regret in the future.” Fear is a tactic used by some licensees and you may not realize it until it is too late. It is better to have an agent who talks you out of paying too much.
What buyers do not know is that the best listing agents will often give the top two or three offers an opportunity to adjust. Usually this means increasing the price. Competent selling (buyer’s) agents ask the listing agent how he/she will be handling these situations.
I have seen many times where a buyer, who probably was not advised otherwise by his agent, paid tens of thousands more than necessary. And the buyer never knew. This is where agent feedback is so important, but is commonly lacking. Make sure it does not happen to you.
I often advise my buyers to “take a pass” when the activity on a particular listing gets out of hand. It is far better to keep looking than to pay more than is dictated by common sense.