Thursday, February 6, 2014
Bidding wars: The only good news is that nobody actually gets killed.
(Part 5 of a series)
Here's what's wrong with bidding wars:
They can involve dozens of people, but only two parties win--the seller and the buyer whose bid is accepted.
Everybody else goes away mad, buyers and brokers alike.
The worst outcome is that, after everybody else has gone away, the buyer with the accepted offer suddenly realizes he's bid over his head and goes away too, and by that time the other buyers have either found other properties or are still so upset they no longer want this one.
But when inventory is as limited as it is now, bidding wars are a fact of life. There are currently far more buyers than available properties, and that means heavy competition.
In a recent survey I made of co-op and co-op sales downtown over the last few months, more than half had sold at or above the last asking price.
That means there were an awful lot of bidding wars.
Most brokers working with buyers (including me) have strategies for winning bidding wars. Sometimes these work; sometimes they don't.
The way a bidding war usually happens is this: When more than one, or perhaps several, offers are made on the same property and none of them is distinctly better than the others (not just higher, but also from a buyer with better qualifications who offers better terms), the seller's broker will ask all the buyers' brokers for their buyers' best and highest offers in writing by a given time on a given day.
Sometimes the term "best and final" is used, but as bidding wars can devolve into free-for-alls, the word "final" as applied to an offer can be meaningless.
After the deadline, the seller will review all offers and choose which to accept. Then a contract will be sent to the winning buyer's attorney.
You might think this is an orderly, logical and reasonable process. Well, it should be. Maybe sometimes it is. But often it isn't.
During the time before the deadline, there is a lot of backing and forthing between the seller's broker and the buyers' brokers, who are trying to gain some insight as to how far their buyers have to come up in order to win while also trying to make sure the seller's broker understands how fantastically well-qualified their buyers are and how much they truly love the property.
Buyers' brokers are frantically trying to reach their clients. Clients are trying to reach their accountants.
The seller's broker is fielding phone calls constantly, trying both not to give away information that might hurt the seller in any way, and to get the highest offer possible.
When all the offers are in, and one is accepted, you'd think we could all breathe a sigh of relief and move on to getting a contract signed.
But no. Not always.
One of the losers may decide he doesn't want to be a loser and open everything up again by raising his offer substantially.
When this happens, if I'm the seller's broker, I want to go home and crawl under the bed. But I don't. It's my job, and most of the time I love it.
The new offer may be so high as to be irresistible to the seller. So the seller will accept it and tell his lawyer to send out another contract in addition to the one he's already sent.
It then becomes my job to tell the broker for the first buyer that his accepted offer has been un-accepted, and ask if he wants to raise it, as a higher offer has come in.
Harsh words are usually the result, and I am on the receiving end.
If a contract is signed at a higher price of course I am very pleased. This, after all, is the point.
But too often this higher buyer (fun to say that, not always fun to deal with it) ultimately decides he has bid over his head and walks away without signing a contract.
I am then the one who goes back to the broker for the buyer who won the original bidding war and says hey, just kidding, your buyer's offer is accepted after all.
Only by this time, that buyer may be so angry that he is either no longer interested or actually wants to lower his offer.
The can is open, and the worms are wriggling all over the place.
Even more complicated and unpleasant negotiations may ensue, but now I'm getting a headache, so I will leave the possibilities to your imagination.
A broker needs a great deal of tact, patience, resilience and empathy to deal with this kind of thing. Fortunately or unfortunately, over the years I've been on both sides of many bidding wars and have grown a lot of calluses.
There are three very important things to remember if you, as a buyer, get involved in a bidding war:
One, be grateful you're not alone. You have a skilled broker who has been through this before and will make sure that in the end, everything will be all right. (And to quote the character in the movie*, if everything is not all right, then it isn't the end yet.)
Two, decide what is the most you are willing and able to spend for this property and DO NOT GO ABOVE THAT NUMBER.
Three, if you lose, remember this: It's okay. There are more than 300 million people in this country not living in that apartment and not minding a bit.
Your broker will find you another one that you will love just as much. Maybe more.
Any questions? E-mail firstname.lastname@example.org or call 917-991-9549.
*"The Best Exotic Marigold Hotel." Great cast, fun flick.