There's little doubt that the real estate market is heating up and in a number of cases the result has been a seller's delight: a property so coveted that it sets off a bidding war and multiple offers.
"Bidding wars generally reflect four situations," said Wendy Forsythe, executive vice president and head of global operations for Carrington Real Estate Services, a national, full-service residential brokerage firm with a network of 1,100 licensed agents across 25 states and the District of Columbia. "First, a home is so unique and desirable that numerous buyers are willing to bid. Second, a property is priced so well that multiple buyers are attracted. Third, there is a market in transition where buyers want a particular property as a hedge against what they see as rising values. Fourth, there is a strong market where buyers write offers for multiple properties, hoping that one will be selected."
A bidding war is actually a delicate dance between buyers and sellers. All parties want as much from the transaction as possible. The trick is to find the sweet spot where each side is satisfied, a spot which involves more than price.
Imagine that a property is for sale at $350,000. The listing price reflects only part of the transaction. The buyer will make an offer which includes numerous details such as the date of settlement, what comes with the property, deposit amount, the conditions to settlement, and the type of financing.
The seller may respond to an offer with an acceptance, rejection or a counter-offer, which is actually a form of rejection with a new offer. However, the process becomes more complex when two or more bidders compete for a single property.
"The property owner must weigh competing bids with great care," says Forsythe. "While the price offered is important, it's not the only factor to consider. Owners have to look at individual bids as a package and compare the pros and cons each offer contains as well as the expected net proceeds."
For instance, there may be one offer at $350,000 and a second offer at $360,000. The second offer is higher and appears to be better at first glance, but the second buyer wants the seller to deduct the cost of a new roof and is asking for many repairs and upgrades at closing. The bids are not the same and the owner may well prefer the first offer, even though the offering price seems lower.
While pricing is an issue which is crucial to both buyers and sellers, there are other factors that can tip the bidding process. Here are some questions for purchasers:
First, look at the deposit sought by the owner. Are you willing to offer more? In a bidding war with offers closely bunched, a bigger deposit may give you an advantage.
Second, consider the seller's needs. Would you be willing to have a quick closing, rent back the property for a set period or defer settlement as the owner prefers?
Third, have you made your best offer? Some buyers believe the strongest negotiating approach is to bid with a single best offer while others prefer to open with a lower bid and the understanding that there may be an additional round of bidding.
Fourth, can you demonstrate financial capacity? When looking at bids owners want to know that the purchaser can complete the transaction and not get bogged down in financing issues. The National Association of Realtors reports that in January 28 percent of all existing home sales were completed with all-cash offers. If you cannot offer all cash, can you provide a pre-approval letter from a lender?
"Every bidder has a somewhat different strategy," said Forsythe. "Buyers have to go with the approach that works best for them in terms of economics and personal finances. As long as they have a competitive bid, they have a real shot at getting the property."
When dealing with multiple bids, the owner may accept one proposal or counter-offer by asking the bidders to try again and submit their "best offer." There's risk to the seller with such a request because purchasers are not obligated to make new bids or even to continue their original offers once a counter-offer has been made.
Alternatively, buyers also have risk. If a purchaser has the highest original offer but does not improve upon that offer in a counter-offer scenario, that purchaser could lose the property to a higher bidder in the counter-offer process.
Another strategy for owners is to accept one offer and ask the other bidders if they are willing to accept a back-up agreement. The other bidders might agree, but then they too might have a special request such as a 72-hour kick-out clause.
In fact, the world of bidding wars is complex. Like a chess match, there are moves and counter-moves -- not just with the owner, but with other prospective purchasers as well. Buyers and sellers should speak with an Atlantic & Pacific real estate professional for more details regarding navigation of multiple offers.
"In a bidding war, the bargaining goes back and forth between the seller and the bidders until there's a mutually-acceptable transaction," said Forsythe. "In the end, there's usually a magic spot where individual buyers and sellers each have enough of what they want to shake hands and close the deal -- a great moment for everyone."