It’s been a while since we’ve seen all-out bidding wars here in the Denver real estate market, but they’re popping up again. We already talked about this a bit in a previous post about the hopping real estate market. Let’s talk a bit about what they are, and why you care about them.
First, think of real estate contract negotiations as nothing more than a slow-motion auction. Behind the scenes, there is the give-and-take between the buyer and seller as they determine amongst themselves the true value of a piece of property. In a “normal” transaction — if there truly is such an animal — the back-and-forth is between one buyer and one seller (although the “buyer” and the “seller” might be more than one person).
What happens when more than one buyer decides to enter the fray, and try to make a real estate purchase? Suddenly, not only are the buyers trying to win the seller’s heart, they are trying to get the seller to not pick the other guy. We’ve talked about some strategy there, too, but let’s look at what happens when multiple real estate buyers jump into the action, and the seller decides to keep them all in play, because that’s what a bidding war is, in a nutshell. Rather than negotiating a contract with a single buyer, the real estate seller is simultaneously negotiating with multiple buyers, and trying to play each of them off the others.
It can be a risky move for a seller to negotiate a real estate transaction with more than one buyer at a time. What if the seller makes offers to several buyers at the same time, and they all accept the “deal”? Not to put too fine a point on it, but the seller is suddenly obligated to sell the same piece of real estate to more than one person at the same time. That can’t happen, of course, but let’s focus on the buyer’s issues with a bidding war.
In a world with limited supply and rising demand, like the real estate market we are seeing now, it would be expected that more than one buyer would pop up for any given property. Take a bidding war for what it is: an indication of market strength. That, of course, doesn’t make it any easier for a buyer to deal with while you’re down in the trenches battling against an unknown foe.
So how do you deal with a real estate bidding war? Start out by accepting the fact that any time you make an offer in a seller’s market, there will likely be at least one other buyer making an offer on the same property. It behooves you to make a good offer. The stronger the market — from the seller’s perspective — the closer to your “best” offer you need to be. In fact, sometimes, especially with foreclosed properties, the seller will actually call for everyone’s “highest and best” offers to be submitted simultaneously, and then pick the offer that most is most suitable.
Sometimes sellers get ahead of themselves and try to manipulate the negotiations with an interesting tactic: the virtual bidding war. Just keep in mind if you’re ever in that spot, but the bidding war you’ve jumped into, might, in fact, not be real. The seller, in an attempt to strengthen his position, might lead you to believe that multiple offers are being entertained and negotiated. The simplest way out of that? Call the seller’s bluff and withdraw your offer. As with all negotiating, your strength lies in your ability to walk away from the negotiations. The person who “needs” it more, is in the weaker position. Remember, don’t fall in love with a house until it’s yours.
What’s the best way to protect yourself in a real estate bidding war? The easiest way is to refuse to engage. Put your offer in, but refuse the invitation to “beat” any other buyers. If you know for certain that there really are other ready, willing and able buyers, go ahead and put your best offer in and hold your ground. You might win with that strategy, or, as in any negotiation, you might lose, but if it really was your best offer, chances are you would have lost, anyway.
The next best thing is to refuse to engage temporarily. A bidding war in real estate normally starts on a property that generates a lot of excitement, and the properties that generate the most excitement the ones that are new to the market. A bidding war is most likely to happen on new listings. To counteract that, only look at properties that are still active after being on the market a month or two. By then, the excitement is dying down, and the seller is more likely to negotiate from a reasonable place.
With any negotiations, regardless of whether you get drawn into a bidding war, you need to keep your wits about you. It’s helpful to have an ally, and that’s what I’m here for. Go ahead and give me a call.
So what’s next? Take your pick.
Yeah. You should probably do at least one of those things right now.