In January, after an unexpectedly strong close to 2006, we were forecasting busy first and second quarters for real estate. Discretionary bonus money jingled, pent up buyer demand was high, interest rates stayed low, and quality inventory remained tight. As of this writing (4/30/07), the mild slump of 2006 is decidedly over, and our market is surprisingly hot again. The pace of trading has quickened, open houses are crowded once more with as many as 30 people showing up in an hour, and competitive bidding is becoming commonplace in all price ranges and categories.
It’s unlikely that we’ll repeat the sizzling runaway market of 2004 when properties were speeding into contract at record breaking numbers with more than 25% price appreciation jumps. But the market is hardly unhurried, and well priced properties are attracting multiple bids and selling quickly, often over asking prices. Following are some tips for buyers and sellers in a competitive bid environment.
Let’s assume for the moment you’re an educated buyer. You’ve collaborated with an experienced professional to sift through Internet offerings and have visited all that’s appropriate from a limited inventory. You’re prepared to act decisively because you have been pre-approved—which is different from being pre-qualified—by a prime lender. Your broker has told you that the perfect apartment doesn’t exist within a given price range, and that the search for your next home is really the process of determining what you will give up and trade for something else. You enter a property and think excitedly: “I can live here. This could be home.” Do you bid the full price immediately? Do you make an offer just below the ask as an opener? Do you bid over ask to seal the deal?
Or let’s assume you are the seller of a plum, well priced listing. You embraced your broker’s wise counsel and have set a realistic price. Shortly after your first open house, there are four bonafide offers—one at the ask—and the promise of another bid to come. Your broker advises on possible strategies. You can decide on an amount above your ask with which you’re happy to go to the bank, and say that you’ll sell to the first qualified buyer who will bid that target. Or, you can agree to go to “Best and Final” by a certain day and hour.
When I’m representing a seller, my own preference is for the latter approach since it brings out the boldest of bidders, doesn’t leave money on the table, and frequently exceeds expectations. Additionally, it gives all prospects an equal opportunity to make an offer and promote their co-op board worthiness.
When I’m representing the buyer, I engage the seller’s broker in conversation before I submit any bid. In a hot market, the seller may want to wait the week before responding even to a full price bid. Showing my hand on Day One or Two may not work to win the apartment.
In a best and final scenario, it makes sense for buyers to bid the highest they can afford without over-extending. The difference between a winning and losing offer may be insignificant, or the difference can be staggering sometimes. I try to guide purchasers by asking at what number they will kick themselves for having lost the apartment. What is the last dollar at which they will feel good about entering into a contract of sale? When you go to this last dollar, and you’re overbid, disappointment follows, but not regret.
There are factors besides money to make your offer more attractive than a rival's. The highest bid is not always the best. In competitive situations, what matters also are the terms of the deal and the buyer’s qualifications, especially in co-ops where the board approval process can be worrisome. It’s best to make the offer as clean as possible and eliminate any contingencies. If you remove the financing contingency but need a bank loan to complete the transaction, work closely with your mortgage broker and order an appraisal immediately after your bid is accepted to ensure you don’t get caught with a report that unexpectedly falls short of the contract price.
Take time to prepare a clear employment profile and net worth statement
to give substance to your bid. Determine the seller’s time frame and express your own flexibility with respect to closing and occupancy. Personal notes from prospective buyers help to humanize negotiations. If you discover that you have something in common with the seller—schools, charitable interests, club memberships—put it in a cover letter. When all else is equal, the seller may be influenced by the human element.
If your bid is accepted, instruct your attorney to complete his due diligence promptly. With back-up bidders breathing down your seller’s neck, a delay could cost you money and the apartment. Once an offer is accepted, it’s best for a seller to stay with the deal and continue to show for back-up only. The ethics of a verbal handshake speaks volumes. Sellers are cautioned also not to lose momentum. Be prepared to issue a contract to the buyer’s attorney within 24 hours. Have all documents ready for review, including the last two years’ financial statements, house rules, proprietary lease, offering plan and amendments, if appropriate. Set a time limit for a buyer to return a signed contract.
Competitive bids require skillful broker management. To maximize the ability to move forward, it is important for brokers on both sides of the transaction to control the emotional climate to minimize stress and frayed nerves. I cringe whenever I hear a broker or principal refer to “bidding wars,” because war connotes hostility and lawlessness. On the other hand, in “competitive bidding,” while there may be casualties, there is reason and deliberation. Good luck with your campaigns!