Editor’s note: This is the first of a four-part series.
Are you in a red-hot seller’s market where listings sell the first day with multiple offers? If so, you can turn this seemingly difficult situation into a huge competitive advantage if you know what to do.
I recently had a conversation with Mary Pope-Handy who works the Los Gatos market near San Jose, Calif. The region has a population of 1.2 million, and listing inventories over the past few years have averaged between 4,000 and 5,000 properties. Currently, there are approximately 770 homes on the market.
This is not only a red-hot seller’s market, it’s a blazing inferno. The result: multiple offers pushing realistically priced, $600,000 listings up to $800,000 or more.
In this type of environment, sellers mistakenly believe that all the agent has to do is to put a sign in the front yard to sell the property. While this may be true, the real issue is not getting the property sold, but getting it closed.
At first glance, having so many counteroffers actually sounds like a good situation for the seller. Nevertheless, there is a serious downside.
As a rule of thumb, about 10 percent of all normal transactions fail to close. In contrast, the fallout rate on multiple offers is often as high as 50 percent. Buyers get caught up in the auction mentality and often have buyer’s remorse once the seller signs their offer.
If the buyer needs a loan and the property doesn’t appraise for the purchase price, there’s no deal. This means that the only way the seller may actually close with an outlandish price from a multiple offer is if there is an all-cash buyer. Generally, all-cash buyers come in on the low side of the spectrum, not the high side.
Negotiating multiple offers
*Note: Please check with your manager or board to make sure you are familiar with the requirements for conducting multiple offers.
When you receive a multiple offer, it’s smart to have your manager become involved. You could literally sell the house twice, so take the extra step of protecting yourself and everyone else in the transaction.
Once the multiple offers are presented, it’s usually smart to make a counteroffer to all the buyers. You never know which buyer will step up to the plate to purchase. (Some states don’t permit this — again, know the guidelines in your state.)
Issuing counteroffers to everyone avoids any charges of unfairness or discrimination. The seller does have the option of accepting one of the offers or negotiating with one or more buyers. In most cases, however, issuing a counteroffer to all parties will result in a better price for the seller.
To avoid selling the house twice, check with your attorney to determine what language must appear in the contract to avoid this scenario. Generally, the language says something to this effect:
"This counteroffer is being made to more than one prospective set of buyers. This counteroffer will not be considered binding on the seller and buyer until it is signed by the buyers and then countersigned by the sellers."
Also, if you have your own offer, have your manager represent the seller. You will represent the buyer to ensure appropriate representation for all involved. Give all buyers a minimum of 24 hours to respond and ask them to bring back their best offer. At this point, the sellers should take one of the offers. Do not counter back on price. You can clean up terms, but you will lose buyers if you counter their "best offer."
When the market is hot, but not red-hot
When you take a listing, it’s often best for the seller to slow the process down. While you may receive an excellent offer on the first day the property is listed, it may not be the best offer. The key point to keep in mind is that "maximum exposure to the marketplace results in the maximum net price to the seller."
Due to a lack of understanding about the power of marketing, many sellers leave thousands of dollars on the negotiation table because they accept an offer that comes in on the first day. For sellers to net the most money, a better approach is to set up an auction environment where the buyers actually bid against each other.
Instead of looking at offers as they come in, the agent actively markets the property for at least one week. The agent posts in the multiple listing service that no offers will be considered until a specific predetermined date. This means the agent has a chance to market the property and search for the buyer who is most likely to close the transaction.
More importantly, it gives buyers a chance to carefully go through the property, bring in their contractor and/or decorator, and have time to discover more about the area. Allowing this extra time is one of the best ways to ensure that the transaction will close.
Interested in more tips on how to deal with a red-hot seller’s market? See Part 2 on Monday.