Managing Multiple Offer Situations: Should You Go with a Highest, Best, and NOT Final Bidding Process?
As the market is heating up, we’re seeing the return of multiple offer situations and “bidding wars.” So I thought it might be helpful to write up an explanation of how multiple offer situations work, with some recommendations as to how sellers and agents should handle them.
What is a Multiple Offer Situation?
A “multiple offer situation” is simply one where two or more buyers are making simultaneous offers on the same listing. Right now, our local markets have inventory shortages: too many buyers are chasing too few listings. So until we start seeing more homes come onto the market, we’re likely to continue to see these types of situations.
When a listing agent gets multiple offers on a listing, she doesn’t generally negotiate separately with each buyer, because managing several competing negotiating tracks can be complicated and messy. Instead, most agents announce to all the buyers that they have a “multiple offer situation” and invite the buyers to make their “Highest, Best, and Final” offer by a particular deadline. The buyer agents then confer with their buyers, and submit their best offers by the deadline. The seller then reviews the offers, compares them, accepts the best offer, and instructs her agent to notify the buyers accordingly.
The “Highest, Best, and Final” process is pretty standard in the industry, with each word having a very specific meaning:
- “Highest” — refers to the price, which is obviously the most important consideration in most bidding wars.
- “Best” — refers to the other terms, such as financing, closing date, etc. “Highest” doesn’t always mean “Best,” since sellers will often sacrifice a bit on price to get better terms otherwise. For example, an all-cash offer might not be the “highest” offer, but it could be the “best” offer if the seller is concerned with the house appraising out or the higher-priced buyer securing financing.
- “Final” — refers to the fact that the process is supposed toonly include one round of bidding, so that buyers should make their very highest and best offers because they’re not going to get a chance to improve their bid.
Most agents follow the “Highest, Best, and Final” showdown-style process for a couple of reasons. For one thing, it’s a pretty well-accepted standard in the industry, so most buyer agents are comfortable with it and familiar with how it works. For another, it’s simple and quick: you solicit the best offers, review them, and make a decision. You don’t end up in a long, drawn-out process. And most agents think that using the “Highest, Best, and Final” process drives buyers to “put their best foot forward,” making the best offer they can to ensure that they have the best possible chance to win the bidding war.
In practice, though, the “Highest, Best, and Final” process has a number of problems. Let me explain why.
The “Highest, Best, and Final” Process in Practice
Let’s say we have a house listed at $500,000, and three bidders make offers below the asking price. The listing agent announces the “multiple offer situation” and invites all the buyers to make their “Highest, Best, and Final” offers by 5PM on Wednesday. To keep things simple, let’s assume the three offers are identical in most purposes (financing closing date, etc.), and that the only differences are in price :
- Buyer A: $500,000
- Buyer B: $510,000
- Buyer C: $515,000
With everything else being equal, the seller will likely take the offer with the highest price, so she chooses Buyer C with $515,000. The listing agent notifies all the buyers of the decision, Buyer C orders inspections, the parties start the contract process, and the losing buyers become “backup offers” in case Buyer C’s deal falls apart. And that’s how the process is supposed to work.
In practice, though, that’s not how the process often plays out. In a lot of cases, the losing buyers don’t accept the “Final” part of the “Highest, Best, and Final” showdown. Instead, once they find out that they lost the bidding war, they improve their bid.
For example, let’s say that in our hypothetical, Buyers B and C made their best possible offers. But Buyer A didn’t. Buyer A really wanted the house, and was willing to go to $525,000, but thought he didn’t have to. If he’d known that someone else was going to outbid him, he would have maxed out his offer at $525,000.So when Buyer A finds out that he lost, he immediately tells his agent to present a new offer, this time for $525,000, his maximum.
What happens then? Well, the listing agent has a fiduciary obligation to present all offers, even after the seller has accepted an offer, so unless the seller has specifically instructed her to not present offers after the bidding war is completed, she has to present Buyer A’s revised offer. And, most likely, the seller will accept it. After all, it’s now $10,000 higher than the offer she accepted from Buyer C.
So think about what happened. The listing agent represented to all the buyers that this was a “Highest, Best, and Final” process, which means that she’s not supposed to entertain counter-offers once that round of bidding is over. But because she’s legally bound to present all offers to her seller, she couldn’t uphold the integrity of the “Highest, Best, and Final” process. Now, the listing agent has to call back Buyer C and tell her that the deal is off. This is a very unpleasant conversation, because Buyer C had every right to expect that the seller would abide by her own process.
And that’s the biggest problem with the “Highest, Best, and Final” process: buyers often don’t present their best offers. Instead, they “game” the system to make what they think will be the lowest offer that will still win the bidding war, and in many cases lose because they miscalculate. And when they lose, they break the integrity of the process to improve their offers.
“The Highest, Best, and NOT Final” Process
That’s why we recommend that our agents and sellers follow a modified version of the traditional process. Rather than a “Highest, Best, and Final” process, we recommend a “Highest, Best, and NOT Final” process.
Here’s the difference. In the “Highest, Best, and NOT Final” process, buyers in a multiple bid situation are encouraged to make their “Highest and Best” offer by the deadline, but are specifically instructed that this round of bidding may not be the “Final” round. Instead, once all the bids are in, the seller reviews them, selects the best offer, and then notifies the losing buyers that they were outbid. But rather than ending the process right there, the seller (through her agent) encourages the losing buyers to improve their offers through another round of bidding.
For example, let’s go back to our hypothetical, but this time with a “Highest, Best, and NOT Final” process. The three offers come in as follows:
- Buyer A: $500,000.
- Buyer B: $510,000.
- Buyer C: $515,000.
The seller then selects Buyer C’s offer as the “Highest and Best” offer, and notifies Buyer A and Buyer B that they’ve been outbid, but can improve their offers if they wish by making another bid at a new deadline. Let’s say Buyer B decides that she’s out, she can’t go any higher. But Buyer A, realizing that he miscalculated about what he needed to do, raises his bid to $525,000. Now, the seller goes back to Buyer C, tells her that she got outbid, and encourages her to improve her offer by a new deadline. If Buyer C does, and beats out that $525,000 offer, then it’s back to Buyer A for another bid. And so on.
You see how this works. But not representing that the process is “Final,” the seller gets to push the buyers to continually improve their bids, grinding out the best possible terms. In other words, it’s a true “bidding war.”
Advantages of the “NOT Final” Process
We think that the “Highest, Best, and NOT Final” process is a superior way to manage multiple offer situations. Here’s why:
First, the “right” buyer wins the bidding war. By the “right” buyer, we mean the buyer who is willing to offer the best terms. The “Final” process often prevents this from happening, because too many buyers “game” their bid based on what they think will be enough to win — and they miscalculate. And if they don’t get another chance to make an improved offer, then they lose out, even though they were willing to go higher.
Second, the seller gets better terms. From the listing agent’s perspective, the purpose of the multiple bid process is to ensure that the seller gets the best terms possible. But if even one buyer “games” the bid in a “Highest, Best, and Final” process, then the seller is going to leave money on the table. Like, in our example, the seller accepted a $515,000 offer when a losing buyer was willing to go higher, but didn’t think he had to. From an economic perspective, this is very inefficient.
Third, the process maintains integrity. If we inform buyers right from the start that the “Highest and Best” process is “NOT Final,” then everyone is aware that losing bidders are going to get a chance to improve their offers. You don’t get any of the sour feelings that invariably develop in the “Highest, Best, and Final” process when sellers accept offers in an un-announced second round of bidding.
Ultimately, at Rand Realty, we work for our clients, and owe them a fiduciary duty of loyalty. So if our seller wants to follow a “Highest, Best, and Final” process simply to keep matters a straightforward as possible, then we’ll do what she wants. But we did want our clients to at least be aware of an alternative the standard process: the idea that sellers could explicitly follow a “Highest, Best, and NOT Final” process to manage their bidding wars. If you have any further questions, please discuss them with your Rand agent.
I don’t know why so many home sellers still don’t property stage their homes. Maybe it’s because “staging” as a real estate concept started in the very high end, and people still think that it’s only appropriate for select luxury properties. Maybe it’s because the first professionals who offered staging did it as outside consultants, not as part of their core real estate services, and it’s stayed as a “specialized” service offered as an “extra.”
Whatever the reason, though, home presentation is a cornerstone of the real estate services we provide as brokers, and that sellers expect as clients. Every homeowner can benefit from basic staging techniques. Regardless of your price point, you and your agent should work at presenting your home in the best possible light to potential home buyers. Indeed, most of the benefit of staging is really just “detailing,” the way that you’d detail your car if you were selling it. You wouldn’t try to sell your car all dirty and cluttered up with stuff in the trunk. You’d clean it up, polish it, get rid of all the clutter.
Well, that’s exactly what you need to do when you sell your home. 90% of staging is just detailing — clean your home, clear out the clutter, and “de-personalize” it so that prospective buyers can envision themselves in that home. That’s really all that most homes need. You don’t need to spend a lot of money to fix things up, you just need to clear and clean:
Clear out every cabinet, bookcase, and closet of anything you don’t use regularly, and anything that you don’t think you’ll need over the next six months. Take all the other stuff and either give it away, sell it, or store it. That will make your home look bigger.
Reduce your clothes closet to your “vacation-plus” wardrobe: your favorite outfits that you would take with you if you were going away for a week, with some extras in case you don’t get to your laundry promptly enough. If it doesn’t fit, get rid of it.
Clean every part of your home, or hire someone to do it for you. Pay special attention to first impressions like the main front door (the one you never use because you always come through the garage, so you don’t realize that you’ve got cobwebs and dirt and stuff all over it). Clean clean clean!
In other words, if you’re going to be moving anyway, START NOW! Get part of your move out of the way right now, because it will save you time later and make your home much more attractive to buyers.
I personally saw the impact that staging can have on a home sale. When I sold my condo in Nyack, I staged it right from the beginning, taking out about a 20×20 storage container worth of furniture, old books, clothes, and everything else I wouldn’t need while the home was on the market. But I was still living there with two small kids, so the place was still cluttered up with the detritus that follows them everywhere like PigPen in the Peanuts cartoon. About a year after we put it on the market, we went away to the shore for a month, and took that opportunity to clear out all the kids stuff, at least for the month. And that made a difference — we had an accepted offer in two weeks. It really makes a difference.
Your Rand agent can provide you with a host of materials that we’ve created to help guide you through this process. We believe that all our real estate agents should be as accomplished at staging as they are at pricing, marketing, counseling, communication, and managing a client’s transaction — the core services we provide to sellers. Indeed, we’re delighted that in the next month to welcome the great Martha Webb to deliver to all 1,000 agents at Better Homes and Gardens Real Estate | Rand Realty both the national Certified Home Marketing Specialist course and the Better Homes and Gardens Real Estate Staging Certification. We’re committed to making staging a cornerstone service for our clients, so make sure you take advantage of it when you list your home with us.
Activity in the Sussex County housing market surged yet again in the first quarter of 2017, with sales up sharply even while prices retreated slightly after a strong showing last year.
Sales. Sussex sales were up yet again in the first quarter, rising over 32% from last year. And for the year, sales increased over 19%, with almost 2,500 home sales representing the highest 12-month total in over 10 years. Indeed, Sussex sales are now up almost 120% from the bottom of the market in 2011, as a clear seller’s market begins to emerge.
Prices. In our last Report, we noted that the 8% spike in the average sales price in the fourth quarter was probably not sustainable. Well, that played out as we expected in the first quarter, with prices retreating almost 2% on average and an eye-popping 7% at the median. Again, though, don’t read too much into quarterly price changes. Instead, focus on the rolling year, which shows more meaningful, and sustainable, price appreciation levels of over 1% on average and almost 5% at the median.
Inventory. The Sussex inventory of available homes for sale fell dramatically by over 36%, dropping to just 9.2 months. That’s a significant decline, but inventory is still higher than in other Northern New Jersey counties, which are all approaching the six-month inventory line that usually signals the beginning of a seller’s market. But if inventory continues to go down, we would expect that to put some additional upward pressure on pricing.
Negotiability. The negotiability metrics indicated that sellers were gaining some negotiating leverage with buyers. The days-on-market fell dramatically, dropping by 23 days and now down to just over five months of market time. And sellers were retaining a little more of their asking price, with listing retention jumping up to 96.5% for the quarter and over 95% for the year.
Going forward, we expect that Sussex is going to continue to see rising sales coupled with more consistent price appreciation. With an improving economy, homes priced at attractive levels, and near-historically-low interest rates, we expect buyer demand, coupled with declining inventory, to drive a robust Spring market and a strong 2017.
The Essex County housing market started the year strong, with another increase in sales activity finally showing some impact on pricing.
Sales. Essex sales activity was up sharply from the first quarter of last year, rising almost 12% and driving the rolling year activity up almost 5%. Buyer demand has been inconsistent throughout the year, certainly not as strong as we are seeing in neighboring Northern New Jersey counties. But Essex closed over 5,000 units over the rolling year, the largest 12-month total since the height of the last seller’s market over 10 years ago, and up over 65% from the bottom of the market in 2011.
Prices. Essex buyer demand is finally showing signs of an impact on pricing. The average price was up almost 4% from the first quarter of last year. Although the median was down just a tick for the quarter, and the rolling year pricing is still down, that increase in the average price was still promising. With inventory continuing to fall and buyer demand relatively strong, we would expect prices to gain some momentum in the Spring market.
Inventory. Essex inventory fell again, dropping almost 39% from last year’s first quarter and now down to 5.8 months. We measure “months of inventory” by calculating the number of months it would take to sell all the available homes at the current rate of absorption, and generally consider anything below six months to signal a seller’s market that would normally drive prices up. So the fact that Essex crossed that threshold this quarter augurs well for pricing in 2017.
Negotiability. The negotiability indicators – the amount of time sold homes were on the market, and the rate at which sellers were able to retain their full asking price – suggested that sellers might be gaining just a little bit of negotiating leverage. The days-on-market fell by six days, and the listing retention rate was up sharply. Indeed, for the calendar year, sellers retained over 99% of their last list price. That’s another positive signal of potential future appreciation.
Going forward, we expect that Essex County’s sales activity will eventually have a meaningful impact on pricing. With homes still at historically affordable prices, interest rates low, and a generally improving economy, we believe that low inventory levels coupled with stable buyer demand will drive modest but meaningful price appreciation through a robust Spring market and the rest of 2017.
The Morris County housing market got off to a strong start in 2017, with an increase in sales activity coupled with some promising signs for pricing.
Sales. Morris County sales were up solidly, rising almost 9% from the first quarter of last year. This continued a streak in which year-on-year sales have now gone up for 10 straight quarters, over two years of sustained buyer demand. Transactions were also up 10% for the year, and are now up almost 60% from the bottom of the market in 2011. So sales have been strong for several years now, indicating sustained levels of buyer demand.
Prices. These persistent levels of buyer demand are finally having some modest impact on pricing. For the first time in several years, the average price was up, rising a little over 1%. And even though the median was down 1%, and the yearlong price trend is negative, we believe that sustained buyer demand coupled with falling inventory is likely to drive pricing up through the rest of the year.
Inventory. Morris inventory fell again, dropping over 34% from last year’s first quarter and now down to just over six months worth of inventory . We measure “months of inventory” by calculating the number of months it would take to sell all the available homes at the current rate of absorption, and generally consider anything below six months to signal a seller’s market that would normally drive prices up. So the fact that Morris inventory is now close to that six-month mark indicates that we could be in for some meaningful price appreciation in 2017.
Negotiability. The negotiability indicators showed that sellers are starting to gain leverage with buyers. The days-on-market indicator was down by 15 days, falling over 10%, indicating that homes were selling more quickly. And the listing price retention rate continues to rise, now up to just about 97% for the quarter and the year, signaling that sellers are having more success getting buyers to meet their asking prices.
Going forward, we expect that Morris County’s sales activity will eventually have a more meaningful impact on pricing. With homes still at historically affordable prices, interest rates low, and a generally improving economy, we believe that reduced inventory, coupled with rising buyer demand, will drive price appreciation through a robust Spring market and the rest of 2017.
The Passaic County housing market surged in the first quarter of 2017, with sales spiking and prices showing their first signs of meaningful appreciation in years.
Sales. Passaic started the year dramatically, with sales spiking almost 30% from the first quarter of last year. We’ve now seen sustained increases in buyer demand for over five years, with quarterly sales up in 21 out of the last 23 quarters. As a result, Passaic closed almost 3,500 homes for the calendar year, the highest total we’ve seen in over 10 years, since the height of the last seller’s market
Prices. More importantly, we’re starting to see these sustained levels of buyer demand have their first impact on pricing. Prices were up across the board, rising almost 2% on average and 6% at the median. Prices are still down for the year, due to the lackluster performance in most of 2016, but they seem to be finally heading in a positive direction. With buyer demand strong, and inventory falling, we would expect prices to be going up.
Inventory. The Passaic inventory of available homes for sale fell again, down almost 38% from last year. We measure “months of inventory” by calculating the number of months it would take to sell all the available homes at the current rate of absorption, and generally consider anything below six months to signal a seller’s market that would normally drive prices up. So the fact that Passaic is now down to just over six months of inventory is important, since it presages the possibility of price appreciation for the rest of 2017.
Negotiability. Sellers gained significant negotiating leverage in the first quarter, with homes selling far more quickly and for closer to the asking price. The days-on-market fell dramatically, dropping almost 15%–almost a full month!–and now down to about five months on the market. And the listing price retention rate jumped almost a full percentage point, and is now up to 97%.
Going forward, we believe that Passaic’s fundamentals are sound, with homes priced at relatively attractive levels, rates near historic lows, and a stable economy. Accordingly, we expect these levels of buyer demand, coupled with declining inventory, to continue to drive price appreciation in a robust Spring market and throughout 2017.
The Bergen County housing market showed continued signs of emerging into a strong seller’s market, with declining inventory holding sales back even while driving prices up dramatically.
Sales. Bergen single-family home sales were up about 1% from last year’s first quarter, the tenth straight quarter of year-on-year sales growth. For the rolling year, sales were up a little more robustly, rising 7%. What’s holding sales back right now is not a lack of demand, but a lack of inventory. If we start seeing more homes hit the market, we’ll see sales go up sharply.
Prices. Bergen prices spiked in the first quarter, rising almost 8% on average and 5% at the median. That’s probably not a sustainable level of price appreciation, but Bergen homeowners can certainly start to depend on the 1-2% increases that we are seeing on average and at the median for the last rolling year.
Inventory. Single-family inventory continued to tighten in the first quarter, with the months of inventory falling over 21% and now down to 4.4 months. We measure “months of inventory” by calculating the number of months it would take to sell all the available homes at the current rate of absorption, and generally consider anything below six months to signal a seller’s market that would normally drive prices up. With inventory now well below that six-month mark, and falling into the “seller’s market” territory, we will continue to see upward pressure on pricing.
Negotiability. Homes were selling more quickly and for closer to the asking price, which is what we would expect of an emerging seller’s market. The listing retention rate is now about 96%, and the days-on-market is well under three months. As inventory tightens and the market heats up, we would expect to see sellers continue to gain negotiating leverage.
Condos. Activity in the Bergen condo market was up sharply in the first quarter, with sales up almost 11% from last year. Prices were more mixed, with the average down over 4% but the median up almost 2%. With inventory now down below six months, though, we would expect to see more meaningful price appreciation this year.
Going forward, we expect Bergen County will enjoy a robust Spring market with both rising sales and prices. With inventory tightening, a relatively strong economy, near-historically-low interest rates, and prices still at attractive 2004 levels, we believe that sustained buyer demand will continue to drive meaningful price appreciation through the rest of 2017.
The Northern New Jersey housing market surged ahead in the first quarter of 2017, starting the year with a dramatic increase in home sales coupled with modest-but-meaningful signs of price appreciation. With inventory levels continuing to fall throughout the region, we expect that sustained buyer demand will drive a robust seller’s market through the Spring and the rest of 2017.
Sales surged throughout the region. All the Northern New Jersey markets got off to a strong start to the year, with regional sales up almost 12% and transactions rising in every market in the region: up 1% in Bergen, 30% in Passaic, 8% in Morris, 12% in Essex, and 32% in Sussex. For the rolling year, sales were up over 9%, reaching sales levels we have not seen since the height of the last seller’s market. Indeed, regional sales are now up over 65% from the bottom of the market in 2011.
The number of available homes for sale continues to go down. We measure the “months of inventory” in a market by looking at the number of homes for sale, and then calculating how long it would take to sell them all given the current absorption rate. The industry considers anything fewer than six months to be a “tight” inventory that signals the potential of a seller’s market that would drive prices up — and we’ve now seen this market cross below that line for the second quarter in a row. Indeed, inventory was down from last year in every individual county in the Report: Bergen single-family homes down 21%, and condos down 34%; Passaic down 38%; Morris down 34%; Essex down 39%; and Sussex down 36%. If inventory continues to tighten, and demand stays strong, we are likely to see more upward pressure on pricing. With sales up and inventory down, prices are starting to show some “green shoots” of modest price appreciation. Basic economics of supply and demand would tell us that after five years of steadily increasing buyer demand, we would expect to see some meaningful price increases. And we’re beginning to see some promising signs: the regional average sales price was up almost 1% from last year’s first quarter, and the average price was up in almost every county in the report.
Going forward, we remain confident that rising demand and falling inventory will continue to drive price appreciation through the rest of 2017. Sales have now been increasing for five years, which has brought inventory to the seller’s market threshold in much of the region. The economic fundamentals are all good: homes are priced at 2004 levels (without even adjusting for inflation), interest rates are still near historic lows, and the regional economy is stable. Accordingly, we continue to believe the region is poised for a robust Spring market and a strong 2017.
The Dutchess County housing market struggled through the first quarter of 2017, with sales and prices down after a strong 2016. We believe that this is just a short-term retreat in what will be a strong year for the market.
Sales. Dutchess sales were surprisingly down in the first quarter. Transactions fell over 7%, the first time we have seen year-on-year sales go down in almost three years. For the year, sales are still up over 6%, but the current trend is a little perplexing given that most of the Hudson Valley has been up significantly.
Prices. Home prices were also down, falling about 2% on average and the median, and down almost 3% in the price-per-square foot. For the year, though, prices are still up, so the first quarter results might just be an anomalous blip in the data.
Negotiability. Dutchess inventory continues to decline, down almost 19% and now down to under 12 months of inventory. Although we are nowhere near the six-month level of inventory that usually signals a “seller’s market,” we are certainly seeing some tightening that could support future price appreciation. The other negotiability indicators suggest that homes were selling just a little more quickly and for closer to the asking price — which is what we would normally expect with a tightening market.
Condominiums. The condo market was also down, with sales falling almost 23% and average prices down. For the year, sales and prices are still up, so, again, we might be seeing a short-term blip in the data.
Going forward, we still believe that the Dutchess market will improve in 2017, and that these first quarter results are just a short-term stall. With tightening inventory, a stable economy, near-historically-low interest rates, and homes still priced at appealing 2003-04 levels, Dutchess is likely to see rising sales and prices in the traditionally robust Spring market.