The housing market is on the rebound, home prices are rising, and, for the first time in nearly a decade, two or more offers at the same time is a common occurrence.
It’s a good problem to have if you’re a seller. But before you lean back in your chair and daydream of the piles of money you’ll be sleeping on, there’s one more thing to think about: Now that you started that bidding war, how, exactly, do you choose the best offer?
The best strategy is to play offers against one another and take the highest price, right?
Wrong! While money is a major consideration, real estate agents are counseling their clients to look at a variety of factors when entertaining multiple offers.
“People are prone to get excited when they have an offer they like,” said Andrew Sohnof Coldwell Banker in Evanston, IL. “But you have to look behind the cover of the book, so to speak. The price is on the front page. It’s the first thing people see, but you can’t judge the book by its cover.”
Contingencies, closing dates, and all-cash offers, oh my!
For instance, try looking for the most appealing (proposed) closing date and whether the bidders are willing to waive contingencies such as inspection, attorney review, and mortgage approval, said Stuart A. Schwartz of @properties, also in Evanston. By waiving their contingencies, buyers have fewer “outs” and a deal is more likely to sail through the process, he said.
And if one or more of the bidders asks for a contingency to keep the deal on hold until his or her property sells, that’s an easy buyer to eliminate from consideration, Schwartz said.
Sellers should also know how much earnest money each bidder is offering, Schwartz said. Earnest money isn’t a down payment, but it is money held by the real estate agent that provides “skin in the game” to guard against a buyer walking away from the deal at the last minute.
Also, while you might be dismissing a higher offer, remember that cash is still king.
“Whether or not it’s a cash deal would be a factor,” Schwartz said. “You’re not waiting on a loan [approval], and it may or may not be subject to appraisal.
“There’s no formula,” Schwartz added. “You sit down and go through the terms carefully and figure out what offer works best for you.”
Buyers should also examine a bidder’s financing––how stable it is and where it’s coming from, Sohn said.
“If you’ve got an offer that’s $5,000 more, but it’s from an out-of-state lender you’ve never heard of, those are shaky table legs,” Sohn said. “If you’ve got someone with a cash offer, with no contingencies, but the price is a little lower, you might be wiser to take a lower offer.”
All the offers are so similar—how do I choose?
If there are two or more offers that are roughly equivalent, a seller can respond to more than one buyer. But a seller should be transparent about the time frame and ask for what’s commonly called a “best and highest” offer. It can be tempting to keep that bidding war going, but remember—a war can be a turnoff for potential buyers.
“To negotiate in good faith, you shouldn’t sit on offers too long,” Schwartz said. “You could tell someone who made an offer on a Saturday morning that we’re not going to respond until Monday. But be upfront about the fact that it’s because you have showings over the weekend.”
Giving everyone a deadline narrows the focus and gives everyone the chance to strengthen their offer, Sohn said.
“Some people seem to think that real estate is like eBay: You can go with your offer of $800,000 from Buyer A, go to Buyer B and play it off like an auction,” he said. “There is nothing illegal about doing that, but it’s very frowned upon. It’s not considered ethical.
“If you give everyone an even playing field,” Sohn added, “that’s the best practice.”