Bidding wars, are they worth it in the Mad River Real Estate Market?

I’ve never had someone walk into my office and say “lets go to war over this property” or “ let’s have a really nasty negotiation and put everyone involved on the defensive”. And the reason you never hear that is that no one really wants negotiations to be hostile. No one wants the person (or people) on the other side of the transaction to be on the defensive. It’s counter-intuitive and irrational. So what is the deal with bidding wars, and why on earth would you want one?

To start, every Realtor has an opinion on this subject. There are some who love them and there are some that hate them. Those that love them generally enjoy the fight and feel as though they have performed their job to maximum efficiency. Those that hate them have probably been involved in one that went terribly awry, and the experience left them sitting alone at the table with more questions than answers – generally from their client.  Those that do not have an opinion on bidding wars have never experienced one, plain and simple. To answer the first question, though, you need to answer another, more revealing question: who benefits?

A bidding war, by definition, is when two competing offers are presented on the same property, during an overlapping time period, thus allowing the opportunity for a competition between two buyers, resulting in a higher sale price for the property. In theory. So the short answer is that the Seller benefits by getting more money for their property. The Realtor benefits collaterally because his client does well and is generally happy with their experience and gives the Realtor a glowing recommendation – this is known as organic marketing, and you can’t buy better advertising. The Realtor also benefits by earning a higher commission but, professional ethics aside, the fractional increase is so negligible that it is not an incentive for entering into such a venture. After all, the Fiduciary obligation of Obedience to Client prevents the Realtor from acting in the best interest of anyone in the transaction other than his or her Client (the Seller, in this case). Back to the beneficiary’s – one buyer benefits in the sense that they “win” the bidding war, but probably paid an above market value for the property. So maybe they won, maybe they didn’t. In the end it is really the Seller that stands to benefit, but if most sellers in the marketplace have never been involved in one, and the outcome can be so unpredictable, how can they reasonably feel that it will benefit them in the first place? Since the seller is, in 92% of all sales, represented by a Realtor then it must be the Realtor that advises one way or the other, and the question becomes, what realtor would accept such risk for such a small reward? What if the deal falls through and NO ONE buys the property? Who benefits then? At that point, the more appropriate question should be “who is responsible”?

What if the deal falls through and no one buys the property? | Anthony Easton 12/26/07 Flickr

What if the deal falls through and no one buys the property? | Anthony Easton 12/26/07 Flickr

Early in my career as a Realtor I was faced with an opportunity to present a Seller Client with competing offers. They were not traditionally linear in that they were not both active at the same time – an offer had been made, had been countered and we were in a period of time where discussions had cooled and there were no active negotiations. Shortly thereafter another real estate agent showed the property to a buyer who was seeing it for the second time. Sensing an opportunity, I asked my client if they wished me to “shop” the other offer to this new prospective buyer. We didn’t discuss risk. I felt I was doing my job. Best price, what’s the downside. They said “of course” and I immediately told the other Realtor that we had received another offer, but that there was some disparity between offer and ask. They immediately jumped in, I was able to return to the Realtor representing the initial offer, and the bidding war was on. There was a winner, a loser and a beneficiary. The winner got a great property, albeit one that they paid a bit more for. They were the first offer, and paid mostly for their slow-playing of the initial negotiation. The loser learned only too late that there was actually another offer (by the way, shopping a bogus offer is both unethical AND illegal) and the beneficiary – my seller client who got about $20k more than the initial offer and a bit above full-asking price. I felt good about the job I had done for my client. I felt good about the advice I had given, and I felt good about how I had outmaneuvered the more experienced Realtor on the other end of the negotiation. However, they don’t all go that way. My broker at the time cautioned me not to expect the same outcome next time. There was tangible risk that I had not fully presented to my Client.

A year or so later I was faced with another complex negotiation working for a seller Client. A buyers agent informed us that they would be presenting an offer in the next day or so, and to let us know if there was any competition. Despite the reality that there were no other offers, there were several second showings and increased interest in the property at the same time. My client asked that I let the prospective buyer know that we were receiving indications that another offer MAY be coming in, which was our belief. I advised my clients as to the risks involved in bidding wars, and they informed me that this was a risk they were willing to assume.

What's the deal with bidding wars? | Unlicensed Google Images

What’s the deal with bidding wars? | Unlicensed Google Images

Because of the other interested buyers, when the initial offer came in we considered countering at full-price (which is a way of declining an offer without declining an offer) but eventually decided to make a moderate counter-offer and engage the other buyers. Acting upon instructions from my client, we told the other buyers when we had received another offer. We informed them that if they wished to get involved, my client was eager to move on before this turned into a bidding war with an uncertain outcome. They made an offer, but one that was quite a bit lower than the first offer. At the same time we informed the people making the first offer that another offer had been received. They immediately withdrew theirs. They informed us that they were moving on, but that we should let them know if the other deal fell through. When we countered the second offer, they told us that they would only increase their offer if we ensured them that no one else was involved in the bidding. Since the other offer was effectively dead, we indicated that there were no other current offers, and they made their best and final – one that my seller clients were willing to accept, but which was still lower than the offer they had turned down and bid out from the first buyers. In the end, the Sellers had effectively bargained for less money. I was disappointed, despite the good nature of my client who understood the risk and actually told me that they had made a poor choice and apologized.

On the extreme end, I have seen bidding wars where everyone walked away and the property didn’t close at all. Obviously, this is the worst possible outcome for the seller of the property who likely took the advice of their real estate broker. So the real question becomes not are they worth it, but what is the point and where lies the motivation. I have seen nearly as many successful bidding wars as failed ones. In the failures, the seller either did not close, or received less money. In the best case scenarios the Seller made enough money above and beyond asking price to cover their real estate fees, which they were already prepared to pay. In most cases the seller made a fractionally significant sum above the initial offer. Of course they were happy about the increased revenue from their sale, but would they have done it if they fully understood the risk involved? Probably not.

There are real estate agents who call everyone in their Rolodex the moment they sense an offer. They feel it is their fiduciary duty to drive the price up and get maximum dollars for their seller client.There are agents who are driven by the fight, and thrive on the adrenaline of complex negotiations. But when I sit and meet with a prospective client and discuss the value and marketing strategy of their home, I pause for a moment and think what exactly my duties are to this prospective client; to provide a detailed and professional analysis of the market; to establish an asking price that reflects said market, and provide the greatest opportunity to meet the goals of the Client; to be obedient to their instructions so far as they violate no law; to be loyal to the client and act in only their best interest; to disclose any specific information in a negotiation that may benefit that client, and to advise on the risks associated with various courses of action; to be accountable for my actions and to take reasonable care in representing their best interest. Those are my obligations, and they form the cornerstone of the foundation I build my business upon.

I find no business model in the real estate market that I make a living in which indicates that it is either beneficial or wise to advise unwitting clients into high-risk negotiations with uncertain outcomes. It turns out, my job is to sell their house. Nothing more, nothing less.