Southern California’s amazingly hot real estate market of 2013 and 2014 produced many listings with multiple offers. For a while, in fact, multiple offers were the norm.
Yet, when presenting offers to sellers, “paralysis by analysis” often set in. Which buyer is the best one? Which lender can get the loan done? Which agent has best control of his or her clients, and which offer should we select?
Here are a few guidelines for handling multiple offers based on my experience in this market:
1. Don’t be lazy; do your due diligence.
When the real estate market is hot, it is easy for listing agents to get lazy. The argument is that there is no reason to spend marketing dollars or pay for professional photos because the property will sell without them. There also is no reason to analyze offers because if the deal falls out of escrow, the property will find another buyer quickly, right?
Wrong. In a hot market where multiple offers are the norm, it is even more important to fully analyze each offer. The simple reason is that if the property has to come back on the market after three weeks in escrow, fewer buyers will look at it; they will associate the high number of days on the market with an unattractive property. The thinking is that if this property has not sold in a hot market, there must be something wrong with it.
With this in mind, agents need to cross the i’s and dot the t’s on every offer. What is the down payment, type of financing, contingency period, escrow period, offered amount, buyer motivation, buyer employment, length of employment, debt-to-income ratio, etc.? If the buyer has been with his or her current employer less than two years, is the lender using overtime, commission or bonus payments for qualification purposes? How long has the agent been in business? What about the lender? Does the lender have any overlays? Is this a primary residence or investment home? What is the buyer’s motivation?
All these questions should be asked, and the answers should be thoroughly presented by the agent to the sellers so they may make an informed decision on which offer has the best likelihood not only of closing, but closing on time.
2. Buyer motivation trumps buyer qualifications.
It is not always the buyer with the highest down payment or lowest debt-to-income ratio that is the buyer most likely to get the deal done. Instead, what many times has the biggest impact on whether or not the transaction will close is the buyer’s motivation. A buyer who already has closed escrow on his or her home, and whose rent-back period is about to expire, is always going to be willing to jump through hoops, address potential appraisal issues and be more flexible when it comes to repair negotiations. In short, they will do what needs to be done to make the deal close.
This is rarely the case with an all-cash buyer, who often is willing to do less but expects more.
3. Highest offer does not equal best offer.
In the event that a seller has been fortunate enough to receive multiple offers, do not simply encourage your client to accept the highest one. Too many sellers have made the mistake of accepting the highest offer only to be forced to renegotiate when the appraisal comes in low.
This is sometimes the strategy of buyers who simply want to get their feet in the door and plan on renegotiating the price once in escrow, either by using a low appraisal or the results of a home inspection as leverage for the renegotiation.
4. When the smoke settles, beware of buyer’s remorse.
A blazing hot real estate market can sometimes be likened to the Wild West, with buyers gunning for any new listing that hits the market. In situations where you receive multiple offers on a home within the first few days of coming on the market, tell your client to exercise caution. Many times people get caught up in a frenzy, eager to throw their hat in the ring.
However, when the smoke clears and the last man standing realizes he has won the bidding war, he might get cold feet, take a step back to re-analyze, realize he got carried away and decide not to move forward with the purchase. To prevent this from happening, do your due diligence upfront and try to manage your clients’ expectations, reminding them not to count their chickens until the eggs have hatched.
Calle Montgomery is a real estate broker in Portland, Oregon, and the owner of NextHome Northwest.