In hot markets across the United States the status quo presumption is that the highest offer will win in a bidding war. However many agents and their buyers find themselves frustrated, heartbroken, exhausted, and sometimes stuck between buying a home they don’t fully “feel home,” losing out on a new job, living far from family, even worse facing the dread of having to renew a lease on an apartment they’ve been dreaming of saying “good bye.”
Many buyers start out on a home searching journey with hope, optimism, dreams, and a sense of control over what , when, and where they want to call home. They’ve searched Realtor.com, Zillow, Trulia, Redfin, and every real estate website out there to make sure that they haven’t missed out on their dream home. Their mobile phone is charged and always on so that they can be the first to book the next new listing to hit the market. Unfortunately, after losing out on several homes that they want the reality begins to hit hard that there’s a possibility that their dream home will simply be a regular home. It is this fear of losing out on a property or simply losing out to someone else that prompts buyers to become guerilla buyers.
What are guerilla buyers?
Well — A typical guerilla buyer often begins his journey like this. Agent A lists a property on the market. Guerilla buyer receives alert that a new listing has just hit the market. Without even calling a real estate agent, the guerilla buyer is in his car enroute to see the listing. He then emails or texts his agent to book a showing. Within a couple hours of receiving confirmation of the booking, he receives another alert that the newly-found listing had received multiple offers. Guerilla buyer rushes to tour the property only to find a second email or text alert that the Seller had instructed the listing agent for a “Highest & Best” offer with a deadline..
Within minutes of receiving the message Guerilla buyer instructs his agent to perform due diligence on the lowest price the seller might accept. The buyer’s agent is often left with few options that might include reaching out to the listing agent with several probing questions like:
“How has traffic been for property ABC?”
“Do you have any offers on hand?”
“Would the seller consider a contigent offer? Just trying not to waste everyone’s time, if not.”
What can my clients do to make their offers stand out?
Would you consider an offer of $279,000?
“I just have a quick question about property ABC, can you givec me a call me back”
“When will you present the offer to the seller?”
“Is there a closing date that would stand out for your seller?
“Is there anything you can legally share with me that would important for your seller?”
Such questions to a listing agent are often responded with “My seller is looking for the highest and best offer.”
If the seller had received a great number of offers on the table, he will have to first compare them and then attempt to negotiate individually with each potential buyer (or at least the top offers). This requires a lot of back and forth and emotional toll on all sides, as they counter offer, wait, and possibly receive a counter offer from the buyer. And they’ll have to do that multiple times. However– the seller and their agent might choose an easier option. They might send out a call for the “highest and best offer.” This usually comes with a deadline so to create urgency for committment. .
When you hear this from a seller, they’re essentially letting buyers know they have received multiple good offers. And instead of wanting to negotiate with each buyer, the seller wants to streamline the process. They only want the best offer, no negotiating and no counter offer.
Once the deadline passes, they’ll evaluate all the offers they’ve received and choose one.
What are sellers looking for in a “highest and best” offer?”
“Highest and best” means that the seller has multiple offers and feels s/he doesn’t have the time or desire to haggle back and forth or go through hundreds of pages of offers to find the golden offer. Instead he wants to get a final best offer from each buyer, But a highest and best offer doesn’t often mean the highest offer When you’re putting together a highest and best offer, it’s important to remember sellers aren’t just going to look at the amount of money you’re offering. While important — money is only one motimvational factor. Sellers will look at your entire offer as a whole package. Sellers will look at everything ncluding what we call SCARY fees. They’ll weigh everything from Selling commission, closing cost and date, assistance to buyers, repair cost, and yo-yo cost. These cost can add up to 15-30% discount on the price of a property.
Consider these examples:
- $353,000 with $10,000 earnest money, bank financing, 5 day inspection, contingent on buyer selling his home, 60 days to close.
- $340,000 with $35,000 earnest money, with bank financing, no inspection, no contingency, closing anytime, appraisal guarantee up to $10,000.
- $315,000 with $7500 earnest money, with bank fnancnig, no inspection, no contingency, close in 30 days.
- $290,000. all cash with no inspection, no contingency, close in 10 days.
Which one the seller picks will depend on their goals and their urgency to reach those goals. Understanding the “triggers” that motivate sellers can help you put together an offer that will appeal to them and get you the dream home you want.
How to not lose in “Highest and Best Offer” Situations
If you are a guerilla buyer committed to placing the winning offer, you’ll have to go all-out to ensure your offer is the most atractive and not lose. Here are some strategies to help you minimize your chances of losing out on the next round of competitive bidding.
Offer More Money — Money talks and the higher your offer is from the rest of the pack the higher the probability that you will win. However — be mindful that if the offer is too high the property might not appraise which could lead to a bank denial. If you will be offering a significantly higher offer include an appraisal guarantee. An appraisal guarantee essentially means the seller is assured that in the event the property fails to appraise the buyer will pay$XXXXX over the appraised amount out of pocket. Caveat Emptor — you don’t want to get caught up in bidding that your offer will be more than you can afford.
Increase the earnest — the earnest is like a guarantee that the buyer makes to the seller ascertaining the buyer is fully committed to closing. In the event the buyer changes his mind the seller gets to keep a partial or entire earnest money. Given similar offers and terms, the earnest is often the deal breaker for buyers; in particular, first-time homebuyers who may not be fully prepared and properly educated by their agents before entering into a competitive bidding. . .
Pay in Cash — it’s not unsual to hear of buyers with liquid cash or have rich relatives who can help buy with cash. After the property closes the buyer can refinance the house into his name. A cash offer is compelling to sellers because they don’t have to wait for a loan to be approved and all of the paperwork that comes with a loan. It is worth noting that all offers are technically cash offers on the closing day whether they are bank financed or wired out of a buyer’s personal bank account. A geniune cash offer typically means a purchase offer with a quick closing, ii.e, 24 hours, 7 days or less than 10 days. It would not make sense for a seller to wait 60-75 days for a cash offer when a customary bank financed offer can close in 30 days. Flexible sellers may not see the same advantage of a cash offer as someone in need of immediate cash.
Get Pre-Approved — in a slowing market where there are few offers the listing agent or seller may offer a courtesy call to remind buyers to include a bank preapproval letter. In a hot market the seller or his agent may not have the time or desire to request one. ALWAYS INCLUDE A PREAPPROVAL LETTER.
When possible, add an Escalation Clause — if you want to be sure your offer is for the highest dollar amount on the table without overpaying, the escalation clause might do the job. An escalation clause offers to net the seller $xxx over the highest bid or another amount. — up to a specified maximum price. This is often followed by a requirement that proof of a higher offer is provided. For example,if there is a bid higher than yours, you’ll increase your bid in increments of $1,000 above the highest bid, up to $450,000.
Relax on the Contingencies:
Contingencies and concessions are clauses in a contract that will allow you to back out of a sale if the contingency or demand isn’t met. Some contigencies can be written to include or forfeit the earnest money. Common contingencies include:
- Home Inspection: The house must pass inspection. Be careful here — Every preconstructed homes has imperfections and sellers might not want to entertain an offer that could take their property off the market. Sellers know — AND THEIR AGENTS WILL REMNID THEM — that when a property is put back on the market after an inspection it loses a significant number of buyers. Sellers are also aware — AND THEIR AGENTS WILL REMIND THEM — that home inspections are regularly used as a negotiation opportunity to discount price.
- Financing Contingency: a bank loan is customarily accepted but don’t get too creative that the offer becomes SCARY to the sellers. Sellers are not going to take the chance that your Rich Uncle will write a check for earnest money or that you are waiting for an insurance settlement to pay off the house.
- Appraisal Contingency: the house must appraise for at least the offer amount. What if it doesn’t? The appraisal contingency could find a difficult day to win over an appraisal guarantee.
- Home Sale Contingency: you house must sell before you close on this one. This carries a relatively high risk in a hot moving market for sellers because what if something comes along to cancel the sale of your house?
Seller Concessions/Contributions
- Seller financing — asking a seller to carry a note or wait for his money is call owner financnig. In slow markets this may be the only way for sellers to sell a property. In hot markets sellers are less likely to entertain such offers. .
- Seller Contribution: closing cost assistance is important for first-time buyers and buyers without sufficient down payment requirement. Asking a seller to help pay for 2-6% closing cost is the same as asking him to discount his house for 2-6%. Since the builk of closing cost is charged to the buyers, sellers will expect a higher price.
- Home Warranty: before you demand a home warranty from a seller be sure the other offers are not waiving inspections. A scenario that can compell a seller to include a home warranty is a property that has languished on the market without a buyer with an unmotivated seller or one that is financially trapped from selling at less than full price. In this situation a home waranty in exchange for a full price could prove to be successful.
Closing Date
Even if you offerred the highest price you could still lose out on the closing date. Some sellers prefer a quick close, and others prefer a longer closing as they, too, must purchase a replacement home. Perhaps they want to wait to finish a school year or meet a new job start date.
Buyer Agent Commission:
Who is paying the buyer agent commission? While it is customary for the seller or listing agent to pay the buyer’s agent commission, increasing number of buyers are choosing to pay for their own agent. This nets a higher amount to the seller and motivates sellers to consider their bottom line. .
Avoid Sunset Clauses
A Sunset clause typically allows the buyer to exit a contract with a deadline. Few sellers prefer these clauses unless the price and terms are clearly and significantly superior in almost every way. A high cash offer comes to mind. .
A Personal Letter
In tightly competitive markets a personal letter could be your secret weapon to win the hearts and minds of sellers. Remember sellers are humans too and they understand and prefer someone who will carry-on the torch of a place they call home. Put your letter writing skills to the test and connect emotionally with the sellers. Point out things you might have in common to deepen your connection. However, be very cautious about what you include in the letter so as not to violate the Federal Fair Housing Act. Consult with your agent or attorney before writing a personal letter and be mnidful about mentioning whether you belong to a protected class (i.e. race, color, religion, national origin, sex, familial status, disability, affordability, etc..”).
Keep in mind that a seller may counter at any point in the negotiation process. While it is entirely possible to request the listing agent or seller for additional consideration after submitting a highest and best offer, chances are highly experienced agents will advise their clients that highest and best should mean just that. Highest & Best.
Until next time!
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