Bidding Wars May 2, 2012

No Reason

by James Stefanile, ABR, GRI, SRES, QSC, REALTOR/Salesperson, Prudential NJ Properties, Montclair, NJ

One of my buyers lost a house to a multiple offer situation recently.  Yes, it’s happening again so it’s worth going over the basics of the bidding war.

But first, some thoughts about why things happen.  These buyers are blessed with many good friends and, when informed via Facebook of this disappointing turn of events, most wrote back that “it’s ok, things happen for a reason”.  No they don’t.  Things happen because they just happen.  It’s lovely that my buyers’ friends are trying to comfort them.  I know it’s comforting to think there’s a better house my buyers are fated to find, but it ain’t so.  We’ll find another house because we’ll look for one – period.  There’s no master plan, fate or master of the universe making any of this happen.  We lost the house because of a decision the seller made, nothing more, and we’ll find another one based on our efforts without anyone pulling our strings.    It’s probably a bit disconcerting to regard the world in this random fashion but it’s the closest thing to reality I can think of.  I think of the world as a ball of yarn – every strand is a causality intersecting every other one in a completely random fashion.  Even if you are deeply religious, we are human only because of our free will – He’s not calling the shots.

Ok, now that we’ve taken full responsibility for our actions (and even invoked God), let’s concentrate on the task at hand – maneuvering the multiple offer maelstrom.

There seems to be some confusion out there over how binding a real estate contract is.  In New Jersey there is a 3 day right of rescission on any contract and since New Jersey is an Attorney Review state, that right of rescission is rolled into the three business days of Attorney Review where the principals’ lawyers get to review the contract of sale, revise it and even cancel it for no cause.  As a buyer you can lose a house in attorney review for a lot of reasons and no reason has to be given.  Once attorney review concludes you have a “binding” contract but even that agreement can be voided for cause if both sides agree.

If you are a seller: let’s say you are blessed with 2, 3, 5, 10 offers on your property.  What a great problem!  I usually make a spread sheet showing, not only price, but terms of all the offers so the sellers can see and compare at a glance.  If there’s a big gorilla offer that dwarfs the rest, your decision is almost made for you.  But, you may find a couple or more offers that are virtually identical.  In that case, the best thing to do is give all the offers a chance to improve their position.  Some will not and just drop out (like a poker player folding).  Others will come back with better price or terms or both once you’ve explained that the offers were similar.  The important thing to remember here is to give everyone a second chance, not just the front-runners.  You never know when that crow of an offer that’s number 10 on your list might turn into a swan.  Besides, it’s just bad manners to exclude anyone.

Should you create an artificial round 2 if you already have an offer you’re willing to accept.  I don’t think so and you’ll see where that can lead – read on…

Is there a chance for round 3 if the buyers who are still standing improve similarly?  I never encourage a third ‘go-round.  You always run the risk of losing everyone.  Buyers are very emotional and will take offense with less provocation than being asked to pony up yet again.  Besides, if you have multiple bidders chances are you’re looking at a potential sale well above the asking price.  Greed can take over – that’s right, I said it.  I’ve never seen a seller benefit from greed.  Either everyone goes away or the winner is so pissed off at being squeezed repeatedly that the transaction from that point on will be tortuous.  After round 2, make a decision.  You’re way ahead of the game and all the other, similar, offers can be back ups in case something happens and you lose your winner.

I had a situation some years ago where the scenario played out as described above and we had a winner after round 2 (call them Buyer A).  Buyer B, after being told they lost, came back with an even better offer than Buyer A’s round 2 winning offer.  At that point I feel the seller has an obligation to inform Buyer A that they were outbid by Buyer B and ask if they will, at least, match the offer.  It’s the only time I recommend telling anyone about any other offer’s particulars.  I have to tell you I was getting very concerned at this point.  My seller, however, did not give Buyer A a chance but terminated that contract and accepted Buyer B’s offer.  Guess what…Buyer A comes back after being cut loose with the best offer yet.  I’m getting panic attacks by now because this is spiraling out of control.  What do you think my seller does?  Cuts loose Buyer B’s contract and goes back to Buyer A.  I encouraged my seller in the strongest possible terms to end this here and now.  He did not.  He went back into bed with Buyer B when that buyer came back with, yet another, improved offer and closed with that buyer after the most horrendous transaction imaginable.  Everything was a pitched battle, from the home inspection issues, to schedules, to mortgage terms and dates, to additional visits by contractors and on and on. There was plenty of blame to go around in this situation.  Both Buyers A&B took competition to some new, weird standard and inflamed an already tense situation.  My seller, who continued to pour gasoline on the fire, got what he regarded as top dollar but he also gained a lot of indigestion and that transaction almost didn’t close plus it had the most fractious closing I have ever attended.  There were arguments and threats down to the bitter end.  No one parted as friends and I can’t imagine there was any real joy in Buyer B’s heart over purchasing this home (I know that’s true because they sold the house about 2 years later and, fortunately, I was not involved at all!).

At some point, I believe, a seller has to be satisfied and keep his sanity at the same time.  Can you imagine if that deal had not closed?  After weeks of work, if Buyer B deserted him and the contract was voided for cause, the seller could probably not have been able to rely on any of his former suitors still being available or interested in dealing with him.  That’s worse than being back to square one.  That’s square minus ten.

How about being a buyer?  What should you do if you hear that there is multiple interest on a property you’d like to purchase?  Whenever I’m about to write an offer on behalf of a buyer I always ask the listing agent if there has been any formal interest other than ours.  By formal I mean in writing.  I listen very carefully to how that question is answered, both the words and the inflection and subtext behind the words.  I know I’ve been lied to at this point – not a lot – 99.99% of  REALTORS are smarter than that – but a couple of times my radar jumped up.  It could be the seller spinning a tale or maybe his agent thinks it’s acceptable aggression to hand me this fish story.  It’s my obligation to share my suspicions with my buyer and to get their approval for my next step.  If I feel I’m competing against “phantom buyers” I simply tell the listing agent that my buyers are re-considering their interest in light of this competition.  Like I said, it has only happened a couple of times and both times the “phantom” buyers disappeared (amazing!) and my buyers purchased the house successfully.

In most cases the sellers will be honest and there really will be 5 other offers.  As a buyer you have to, at this point, decide how much you really want this house.  You can try to make that gorilla offer that will blow the others away or you can make an acceptable offer, at or above asking price, knowing full well you’ll probably be involved in a kind of auction.  Money is important, naturally, but so are terms:  How much have you already deposited in your REALTOR’s trust account?  You’ll be seen to be serious if you can put down more than the usual $1,000 in earnest money.  Regarding the additional deposit: an aggressive buyer will fork over the largest amount of money, in the quickest period of time after attorney review.  Other, legitimate, improved terms include accelerating the periods of time between attorney review and additional deposits, home inspection completions, closing dates and some other deadlines. A buyer can also waive the lead paint inspection option but I always explain the hazards of lead paint carefully if this waiver is discussed and leave it up to my buyer to decide what’s best for them, as with all other contingencies and schedules in the contract. I encourage a buyer to tighten and improve terms only as much as they feel comfortable doing.

Another thing to consider these days is whether the home you are trying to purchase is a short sale.  If so, the seller may be intent on avoiding any deficiency judgments by getting the highest price possible.  Bidding wars on short sales are a new phenomenon.  Be sure you are aware of all the potential pitfalls with a short sale.  You can get that information from my Short Sale posting of December 2010 in this blog.

Is it ok to put in another unilateral offer after you’ve been cut from the first round?  Sure, but maybe your initial offer should have been a tad sweeter.  Your offer will always have the greatest chance of success if it’s strong initially.  Holding back money is, usually, a failed strategy in a multiple offer scenario.  There’s no guarantee the seller will cast a benevolent eye back on you when you sweeten your offer after being cut and if you’re going to try this make sure your unsolicited counter offer is one the seller can’t ignore (make him an offer he can’t refuse…).  You, now, have to overcome the seller’s prejudice against you for holding back in the first place.

Believe it or not, I’ve had buyers who have decided to offer less than the asking price when they knew there were other offers.  Their rational has been that the other offers could be less than the asking price also.  The chances of all your competitors offering less than the asking price in the face of multiple interest is slim to none.  I have told these buyers that I will (and am obliged to) submit any offer they choose but I also have an obligation to inform them, up front, that there is probably no possibility of them successfully purchasing this home.

There used to be a sleight of hand I never encouraged my buyers to offer where the buyer would waive the mortgage contingency.  In other words, he’ll buy the house regardless of whether he gets a mortgage or not – this is not a cash sale.  The buyer will still apply for a mortgage and will still have to have an appraisal.  As a listing agent confronted with this waiver of mortgage contingency, I always insisted on wording to avoid the voiding of the contract for appraisal reasons, but most often I discouraged my sellers from accepting such specious terms.  If the buyer is willing to buy the house regardless of obtaining a mortgage they might as well make this a full cash offer.  If they can’t they have no business waiving the mortgage clause.

If competing makes you mad or uncomfortable, maybe you shouldn’t do it.  Maybe you should keep looking for a house where you’ll have more options.  If, however, you’re ready to play the game, play it to win, but within the bounds of responsibility.

I believe, if both buyer and seller take full responsibility for their actions in any transaction, especially a multiple bid transaction, they will have the smoothest outcome possible.  You can’t blame The Fates for bad behavior.