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Posted by on Aug 31, 2012 in Bidding Wars, Market Conditions, Thinking of Buying?, Tips, Advice & Links | 8 comments | Print Print

Multiple Offers/Bidding Wars

Lily has an article about the bidding wars and shortage of inventory downtown:

http://www.utsandiego.com/news/2012/aug/30/downtown-market-update/

Buyers fret at the thought – and many will say, “I’m not getting in a bidding war!”

Here are my thoughts on bidding wars:

1.  It means you have found a decent property with a good price on it – which isn’t easy these days!  You should at least find some comfort in your advanced hunting skills, and ability to identify a quality buy – congratulations!

2.  It also means it will be likely that the other buyers and agents will panic, and half of them will hit the eject button – so hang in there, the competition is likely to eliminate themselves.

3.  There are no rules or standard procedures, so get the listing agent to commit to a specific process – how will they handle multiple offers?  Will they counter each one with a specific price, or will they ask each bidder to submit their highest-and-best offer?

On a hot, new listing, it is better for the seller to ask for highest-and-best offers – because you don’t know how high a buyer might bid.  If faced with a H&B request, only submit the price you are comfortable with, and tighten up all the other terms so at least you have improved your chances the best you can – and hope for the best.

If they counter each bidder with a specific price, it is imperative that you ask the listing agent how they will pick a winner if everyone signs their counter.  Typically the answer is a vague and lame, “well, we’ll just look at them all, and the seller will make a decision”, when really it gives the listing agent a chance to play God and select their favorite agent or some other slimy way of choosing.

They may have countered a specific, but different, price to each bidder, but that is rare – agents aren’t that smart. But if they say that they did, then you may want to consider offering more than the seller gave you, just in case.

If it is a tired, old listing, and/or you think the listing agent is bluffing and you don’t care enough about buying this one, then don’t respond.  If there is any chance of coming back later, you don’t want to tip your hand, or sully your reputation now.  I think it is rare that agents bluff, because they aren’t good at it, don’t have much experience at it, and they don’t want to blow a sale.  If you are going to be suspicious, be wary of the top-notch agents, but they usually have their assistants doing all the work anyway so there’s less chance than you might think – plus typically they are in it to maximize their volume of sales, not toying around.

4.  Discuss strategies ahead of time.  You don’t want to be in the heat of battle and have to figure out how you are going to handle it on the run.

5.  Read Paragraph 3K of the C.A.R. Residential Purchase Agreement.

6.  Remember that you always have your contigency period to sort things out.

Whether you are selling or buying, you should ask questions of your agent about bidding wars, and how they handle them.  They should have recent success stories and/or strategies available – because they will need them!  My winning percentage is down a little due to other agent’s buyers willing to pay a lot more than they should – if you love the house, add a little extra mustard, just in case – but don’t overdo it.

8 Comments

  1. What is the psychology of the seller in this scenario? Do they feel like their price was too low? Do they feel entitled to a healthy single digit percent or even double digit over asking, or are they selecting based on buyer credentials? Thanks JtR

  2. Sellers who are willing to price their home properly are doing so hopefully because they are following their agent’s advice, and will continue to do so.

    In the times when it happens by accident, the sellers lose faith entirely in their agent and want to commandeer the plane. Those are the ones that usually fall apart with no sale.

    When selecting the winning bid, the ego really kicks in, and the sellers gravitate to the highest price – and they should, if everything else checks out.

    You do NOT want to pick the wrong buyer, have it fall apart, and be left holding the bag. It is virtually impossible to re-ignite a bidding war (unless the sellers keep the price very attractive – that’s when they want to raise it).

  3. What does Paragraph 3K of P$S Agreement have anything to do with bidding war? Please enlighten. Thanks.

  4. From the contract:

    3K. BUYER STATED FINANCING: Seller has relied on Buyer’s representation of the type of financing specified (including but not limited to, as applicable, amount of down payment, contingent or non contingent loan, or all cash). If Buyer seeks alternate financing, (i) Seller has no obligation to cooperate with Buyer’s efforts to obtain such financing, and (ii) Buyer shall also pursue the financing method specified in this Agreement.

    Buyer’s failure to secure alternate financing does not excuse Buyer from the obligation to purchase the Property and close escrow as specified in this Agreement.

  5. 3K explanation:

    Buyers with low down payments are put at the back of the line by listing agents. 3K is a way to avoid be discriminated against by the listing agent.

    If you have 20% down payment or more and can show it on a bank statement, then you can state that as your financing plan in the offer. Paragraph 3K allows for you to seek alternatives too, so if you show up at closing with 95% financing, the seller can’t cancel on you. By that time, why would they care, anyway?

    I used this once when there was a battle between three cash offers. We had to state that we were cash buyers to be in the game, but then financed the deal. I had to do some fancy dancing to get the listing agent to cooperate with getting the appraisal done, because the sellers don’t have to cooperate.

    But if you have an agreement on a 20%-down financed deal, the need for an appraisal is cooked in already – changing to 5% or 10% down isn’t that big of a deal.

    Note: One of these days a buyer is going to sign off all contingencies at Day 17, after hearing from the loan rep that the loan has been approved. But the low-down-financing packages get additional scrutiny all along the path. I could see a situation where a final underwriting finds something missed by a previous scan, or a disagreement on a borderline qualification. The loan could get denied after all contingencies have been removed, and buyer loses the deposit – or if you pulled the 3K alternative, you’d be forced to close with the 20% down.

  6. Thank you very much for the explanation JtR. You’re truly a professional.

  7. Thanks, madhatter!

    Most agents have never read the contract, let alone know it well enough to explain how it works.

    Next time you are talking to an agent, ask him/her to explain how disputes are resolved.

    Mediation is automatically included, and arbitration is a choice on every contract – should you choose arbitration and give up your rights to have the dispute litigated in court or jury trial?

    Does your agent have a clue about what they are asking you to sign?

  8. Don’t have one and don’t miss them either (sorry nothing personal here).

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