Strategy: Multiple Offers
This third and last post of the series on strategy deals with that bane of the Houston residential real estate market: the multiple offer situation. Defined as two or more sets of buyers offering at the same time on the same property, multiple offers are stressful for buyers and sellers alike.
Even as the broader housing market has begun to move more into balance, certain market segments still struggle with inventory so tight that multiple offer situations are nearly inevitable. HGTV is partly to blame; buyers at a variety of price points long for a home worthy of a magazine spread.
Buyers usually explain this phenomenon as wanting to buy a property that “doesn’t need work.” This phrase used to mean that a buyer wanted a property without known defects — but for a new generation of buyers, it increasingly means a property that looks nearly flawless.
Given the realities of living with pets, children, hobbies, activities, and busy schedules, this is a standard that’s hard to meet for most sellers. But when a seller stages their home just right and hits the market sweet spot, sometimes several buyers will offer in the same day. Meanwhile, perfectly wonderful homes that have missed the market on either staging or initial list price will take a while longer to sell.
How should sellers handle a multiple offer situation?
There are three good seller strategies for managing multiple offers. The first is to choose the best one of the bunch, do due diligence on it, and accept it. There’s nothing wrong with this strategy, and in fact it is often seen by buyers as acting in particularly good faith, which may save the seller money in repair negotiations during the option period. It can also be an attractive option in areas with a high percentage of infill development. For sellers who built a home and raised a generation or two in it, they may want to keep their home from becoming a teardown and choose a buyer who promises to raise their own family in the home instead. Intangibles matter in residential real estate.
A second strategy is to choose one offer from among the bunch, do due diligence on it, and work it — negotiate with just that one buyer. This strategy is more common when all the offers are below list, or when the highest or second-highest offers are unattractive for other reasons (for example, a lender with a bad record of closing, a financed versus cash offer, or certain financing types). With this strategy, the seller may choose the third or fourth best offer and ask those buyers to match a higher offer. Remember, sellers’ agents are allowed to disclose information about other buyers’ offers with seller permission.
The third strategy is to give all the buyers a deadline to submit their highest and best offers. Buyers will then either rest on their offer, resubmit at a higher price, or withdraw their offer. Losing on a series of homes in tight market conditions is emotionally draining and upsetting to buyers, and some ultimately refuse to participate in the highest-and-best process. Sellers should know that withdrawal of an offer is a possibility, and it may not necessarily be the lowest one.
If sellers do declare a highest and best deadline, they should keep in mind that they are not obligated to choose the highest offer — they should choose the best offer, however they define it. An experienced listing agent will be able to provide good advice when it comes to that.
However, anytime multiple offers go into highest and best, it becomes a complex system and anything can happen, from losing all the offers to netting a huge premium over list in an all-out bidding war. Sellers who choose to go the highest and best route should be very risk-tolerant.
But I’m a buyer, and I hate this! How do I know there really is a multiple offer situation? And how can I buy the home of my dreams with all this competition?
Ideally, buyers will be represented by knowledgeable agents who will sound out the exact nature of a multiple offer situation, including timing, along with any particulars the listing agent is permitted to divulge. During this conversation, an experienced buyer’s agent will quickly be able to tell if the “multiple offer situation” isn’t legit. Further, buyers and their agents should consider the character and reputation of the listing agent; a good listing agent with a reputation for honesty and integrity is unlikely to risk that reputation to gain a small advantage over a buyer in one deal.
Some buyers really are uncomfortable being just one offer among several, however, and would prefer to avoid multiple offer situations at all costs. Assuming their agent has set up instant notifications in the MLS, these buyers should try to be first to see a great new property when it hits the market, and if it’s the one for them, first to submit a strong offer. If they know they’re unwilling to stay in a multiple offer situation, they should authorize their agent to say so to the listing agent when they first submit. A seller who knows that a strong first offer will withdraw rather than compete with other offers may accept that strong offer right away.
The alternative is to find a wallflower property that would have shone if staged or photographed well. It can help to think of the process as almost investigative: what great features are hiding in this terrible camera angle? What might this yard look like with fresh plants and mulch? If the walls were cream or gray instead of red, blue, or orange, would these rooms look larger? Many of these are easy fixes; it may even be possible to negotiate a professional cleaning or carpet or paint allowance with the right offer. And less competition may translate to a better price.
The bottom line for buyers dealing with multiple offers is the same as for sellers: be honest about your tolerance for risk, think through and discuss your priorities, and work with an agent you trust.