The one-bedroom that broker Ian Katz sold recently had a formal dining room, low monthlies, and was on Central Park around the corner from the Museum of Natural History. So no surprise that it sold quickly, and over asking. (It was priced at $649,000.) At the first Sunday open house, Katz, founder of the eponymous real estate firm, had 29 lookers in just two hours. By Thursday morning, several had visited a second time, and five offers came in. “The winner paid 4 percent over the asking price," Katz says. "The contract was signed by both parties in two business days.”
It's a seller’s market right now, so if you have a desirable home—say, a renovated two- or three-bedroom below 96th Street or a townhouse in prime brownstone Brooklyn—and it’s priced right, it’s no stretch to expect multiple offers. And those could easily turn into a bidding war.
Put simply, a bidding war occurs “when more than one, or perhaps several, offers are made on the same property and none of them is distinctly better than the others, and the seller’s broker will ask all the buyers’ brokers for their best and highest offer in writing by a given time on a given day,” says broker Confidence Stimpson of Stribling & Associates, who has blogged about the topic.
Also called a best-and-final offer or best-and-highest, a bidding war is a complicated juggling act, involving expert timing and careful judgment. But most of the advice out there is geared toward buyers, with little advice for sellers on how to manage them.
Below, a step-by-step guide to ensuring you and your broker (if you have one) handle the process smoothly and fairly—and get the best deal possible.
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Pick a broker with experience managing bidding wars
If you plan to work with a broker to list your abode, look for one who has the expertise and demeanor to handle a bidding war. Ask about his or her experience handling multiple bids and similar negotiations. What's their strategy? How will they remain calm communicating with all the parties involved, all of whom have different goals? Will he or she "qualify" bidders--figure out if they are financially capable of affording the apartment, getting a mortgage (if needed) and passing the co-op or condo board process--so that you can make the best decision?
Your broker should know how to read a financial statement and to get a multitude of information on the buyer--not just whether they have a down payment, but where they work, their debt and assets, and their liquidity, even if it means speaking to their accountant, says Kathy Braddock, a managing director of real estate brokerage William Raveis New York City. A good sign? If your broker is familiar with the Real Estate Board of New York's standard financial statement. A powerful industry trade group, REBNY requires members to follow certain ethical guidelines, and this form has the main items you'll need to evaluate a bidder.
Price your place at or below similar apartments
One of the surest ways to create a bidding war is to price your home in line with or slightly under market value, brokers say. If it's a great apartment in a desirable location, some brokers will counsel their (often wary) sellers to price it on the low side to bring in multiple offers, says Paul Purcell, a managing director of real estate brokerage William Raveis New York City.
In fact, says Braddock, it's perfectly legal to set a bargain-basement price you know you won't take, as well as reject offers that come in at the asking price, says Braddock.
Note that while it may be legal to set a price you'll never accept, you might not want to go bragging about it.
“If you price the property low in hopes of [creating] a bidding war, and then immediately get a full price, non-contingent offer from a well-qualified buyer who will close whenever you want to, and you don’t accept it, you’re not doing business in good faith,” Stimpson explains.
Some brokers have other reasons for setting an asking price to generate interest—not a bidding war, says Donald Brennan of brokerage Brennan Realty Services. Too high a price will create a sit-and-wait situation, too low can set off a hard-to-manage feeding frenzy. At one bargain-priced Cobble Hill townhouse, Brennan recalls, 50 offers came in after the first open house, sparking such a furor that it was impossible to communicate with the listing broker. That can be overwhelming for a seller too.
Watch for early signs of interest
After the first open house or set of private showings, you’ll generally get a good sense of whether to expect a bidding war. One clue: Your open house is swarmed.
Or the signal can come even earlier. "If you start getting a lot of calls from brokers for the first open house, you can often expect a bidding war," says Stimpson.
Just be sure those brokers' interest isn't based on an overly rosy listing: "Some brokers will de-emphasize or even leave out of the listing a serious flaw--extremely high maintenance or a brick wall view or a four-flight climb-- in hopes of attracting a lot of people," says Stimpson. "They’ll attract a lot of people for sure, but not a lot of buyers. No bidding war there.”
Within a day or two of the first open house, offers start to trickle in, says Katz. At this point, you'll have to decide whether you want to negotiate with one of those prospective buyers or go to a best and highest.
“If there are only two offers received,“ Katz explains, “then a ‘best and highest’ may still be a good approach, but we need to see what exactly the offers are, as countering both may be just as effective, if not more. If the two offers are each below ask, trying to drum up a 'bidding war' may not be the right message to send and may turn them off. However, a counter offer to both might keep their skin in the game."
Set a deadline for best and highest
The amount of time you take to get to the best-and-highest stage will depend on how many offers you get and what kind of property you're selling. But typically, a seller will wait for a few days before setting a deadline for buyers to submit a second, better offer.
Indeed, Katz warns against responding to offers too soon.
"If we have enough offer interest within 24 hours, there’s no reason to wait," Katz says. "But I like to set the deadline a few days after the first offers start coming in. This is done since buyers may want to come back for a second look or want to take a day or two to sweeten the offer by moving funds around or reapplying for financing."
When scheduling the deadline, Katz gives the three best candidates from the first round 24 to 36 hours to get in their best and highest offers. “I give the brokers a sheet with the high points of what we're looking for, which may include flexibility of closing date and a waiver of financing contingencies. Many of the sellers want to close all-cash in 30 days," he says.
Brennan takes things a bit slower, since many of the homes he sells are pricey townhouses, and buyers need more time to have their questions answered. “I need to expose a listing for two to four weeks in order to get to everyone who might be interested,” he says.
“Any seller wants at least two offers—working with just one gives you no leverage," he adds. "Once we have two or three offers, we schedule a best and final."
Decide what information your broker should reveal
In the run up to that deadline, the seller’s and buyer’s brokers go back and forth, trying to figure out how much more the buyer needs to offer, and “to make sure the seller’s broker understands how fantastically well qualified the buyer is and how much he or she truly loves the property,” says Stimpson.
Under state law, it's not legal for the seller's broker to explicitly say what number a buyer needs to offer to win a bidding war, say Braddock and Purcell. (The reason? If you tell a buyer he needs to come up to $1 million, he may never offer the $1.2 million he'd planned on bidding.)
"We never share private information from the other bidders that would cause them to change their bid. We simply relay the fact that there are other interested parties," says Brennan.
That said, you can let a buyer know that an offer has come in over the asking price--so long as you don't disclose an actual figure--and you can share other requirements, like the closing timeframe, Braddock says.
Also worth considering is how serious a buyer seems to be.
"I also suggest that my sellers not take a buyer too seriously unless he and his partner or spouse have both seen the property at least twice," Stimpson says. "Too often buyers will notice things on the second visit that they missed on the first. Better to find out sooner [rather] than later if they’re going to change their minds."
Pick your winner
When you’ve got your offers in, the next step is to figure out which is the best of the best and highest. And, of course, it's not always about the highest dollar figure.
A host of other factors can nudge one offer above another, including a buyer’s timeline for closing the sale, her likelihood of getting approved by the board and, even more importantly, an ability to pay in cash. After all, a contract that hinges on the buyer getting a mortgage and, in the case of a co-op, having their financing situation approved by the board, provides that much less certainty that a sale will go through.
In short, "the seller has to decide which of the offers is the best balance between an attractive number and the willingness and ability to close," Stimpson says. "The seller should know at least the annual income and liquid assets the buyer will have after closing along with any significant debt."
This is where your broker, if they're a REBNY member, should be asking a buyer to fill out a financial statement.
If all the potential buyers need financing, you’ll have to evaluate how bankable they are. One helpful but not foolproof way to do this is to look at buyers with pre-qualification or pre-approval letters from a bank.
“There is a due diligence and underwriting process that goes into a pre-qualification letter,” says mortgage banker Robbie Gendels of National Cooperative Bank. “The borrower does complete an application, the bank runs a credit report and if any questions arise, the lender contacts the borrower to go over the application. If it is a strong candidate, the seller can be comfortable with the pre-qualification letter.”
Notify the winner
Once you’ve chosen the best offer, it’s important to tell the winner immediately, says Katz, though make sure you time it right when you're contacting the unsuccessful bidders.
“We tell the losing parties that they lost on the day we accept the best offer, but we check first with the best offer to make sure that they are ready to go," says Katz.
Sometimes a bidding war winner will need "time to digest" that they're moving ahead with the deal they proposed. Until a contract is signed, it's best to keep the unsuccessful bidders invested in the process.
"When they confirm they are ready for the contract phase," Katz says, referring to the winner, "we tell backup parties that they lost and that we are giving the winning party a certain period of time--five business days is common--to sign the contract and that we will keep them posted on [the] status."
Some sellers send out multiple contracts to keep their options open. Even though this is legal, others find it morally suspect--and not necessarily good business.
Indeed, sending out multiple contracts risks losing bidders and creating a poisonous atmosphere when it eventually comes time to negotiate the contract, Katz says.
“If a higher offer comes in after we accept a ‘best and highest,’ I advise my seller that the ethical and most straightforward, above-board move would be to stay with the bidder who won," he explains. "But sometimes a new offer is just that much better, and the seller is in charge. I prefer to stay with the winner as it is lowest risk, or at least give him a chance to match and continue on with the deal."
Pick your winner...again?
That said, even if you've accepted an offer, you're not necessarily done.
“One of the losers may decide he doesn’t want to be a loser and opens up everything again by raising his offer substantially,” Stimpson says.
At this point, the seller may tell his lawyer to send out a contract to the new winner, which is legal as long as both sides haven’t yet signed the agreement.
“It is then 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. Harsh words usually result and I am on the receiving end," says Stimpson.
Buyer’s remorse is also a very big risk with bidding wars, cautions Stimpson. “When the buyer suddenly realizes that the reason he won is that nobody else thought the property was worth what he was willing to spend, he may well decide he’s overpaying and walk away," she says.
“But if neither of those things happen,” Stimpson adds, “and the lawyers can agree on the terms of the contract, and the contract does get signed, and the bank comes through with the needed financing, and the board application gets finished and submitted, and the board interview goes well and the board approves the buyer, and the building then doesn’t burn down, and the sale actually closes, and all the checks clear, then, and only then, is it okay to break out the Champagne.”
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