How to handle multiple offers on your home.
We are about to put our house on the market. In our area multiple offers are pretty common and I was wondering if you have any advice for handling them. I’ve bought and sold several homes so the process doesn’t really scare me, but I’ve also never had multiple offers.
Thanks in advance for the advice. I’ll hang up and listen now.
Eager in Evanston
Ahhhh….multiple offers. It’s like watching little Ralphie drifting off to sleep on Christmas Eve. Big smile, warm bed and visions of the Red Rider BB Gun dancing through his head. It’s truly the fantasy of every home seller in the world. We will talk about how to create them another day, but for now let’s talk about how to handle them once you have them.
I cover the entire state of Ohio and right now it is almost entirely buyer heavy. This means, for the uninitiated, that there are fewer homes than there are buyers. It’s what we call “low inventory” or, more commonly a seller’s market.
When this happens, multiple offers go from being a fantasy to reality. The trouble is that most sellers and many agents have no clue how to handle, much less maximize these opportunities. How bout we break this down and hand you a blueprint, shall we?
First and foremost, multiple offers almost always happen during the first 48 hours of a listing. If you’ve elected to create a Buyer Feeding Frenzy then it could be later in the process. For more on creating a Buyer Feeding Frenzy, drop your email address over to the right and I’ll email it to you. Anyway…
Incidentally, do you know what motivates a buyer more than just about anything else in the entire world? Give up? OK…here goes:
Nothing…and I mean NOTHING…motivates a buyer like seeing another buyer.
Not sure what it is other than some sort of Maslow hierarchy-of-needs thing, but I’ve seen completely rational buyers walk into an open house and remain all aloof like “yeah this place is ok…I guess.” To the casual observer, they look like just another tire kicker who is just being nosy.
Then (dramatic music) in walks another buyer or couple who seems a little excited about the house. Next thing you know, it’s like the annual “Running Of The Brides” dress sale at Filene’s Basement. And then…the stage is set for our multiple offer war to begin.
But, before we begin I need you to direct your attention to the front of the cabin for this important money-saving message about emotions and negotiating:
Emotions are expensive. When emotions run high, prices run even higher, but emotions are for buyers and suckers exclusively.*
Ever see that scene in Trading Places where Dan Ackroyd and Eddie Murphy are at the stock exchange and the whole place is freaking out…except those two? Guess who walks away with the “yacht and private island” money? Yep. The ice-in-the-veins guys, that’s who. That should be you.
The only way to keep the emotions out of this is to be very objective about the offers and that means you need to define what it is you really want out of this deal. Before even listing the house, you need to put pen to paper and come up with the things that would really make the deal a winner.
Price isn’t everything. A high price offer could be masking a lot of ugly terms underneath all that fine print. Your best bet, once you have defined what’s most important to you, is to pull out those terms from each offer and put them on a side-by-side comparison. I like to use a spreadsheet, but a simple sheet of paper or whiteboard will do just fine. Here’s a free example.
If you have 4 offers, make something with 5 columns. The first column will have all the terms like price, financing, inspections, closing costs, commission, net money, etc. and they need to be in the order of importance to you. Start filling in the blanks for offer #1. Things will become much clearer once you start to lay this out on one page. You may even have a clear winner.
If you do happen to have an offer that is just head-and-shoulders above all others, my best advice would be to stop and take that offer. But Glen…Why on earth would we do that???? I’m glad you asked.
When buyers find out they are in a multiple offer situation, roughly half will raise their offers and the other half will walk away.
That means you have a 50/50 chance of your best buyer walking away. I could even argue it’s higher than that. Let’s say I’m your best offer buyer (you should be so lucky). If you told me I was potentially in a bidding war after I gave you a solid offer–I would tell you to piss off.
Wanna know why? Because not only did I give you a great offer, chances are I know it’s a great offer. I would see you as a greedy game player and then, that’s right, the aforementioned off-pissing. I would be a vapor trail before you could say, “But wait….” and I’d be on to my next deal. Roll the dice if you like, but don’t shed any tears if my warning comes true.
For the sake of this response, let’s say there is not clear winner. In that case, continue to fill in the blanks on your offer comparison sheet. Here’s a quick breakdown of the most common terms in a real estate purchase contract:
- Price – pretty obvious.
- Earnest money – how much the buyer is depositing with their agent as “good faith” downpayment money.
- Home sale contingency – whether or not the buyers have to sell their house to buy yours.
- Seller paid costs – seller money contributed to buyer to help with their closing costs.
- Title insurance – usually 4 figures and could be paid by buyer or seller depending on the wording.
- Financing type – cash deal, conventional loan, FHA, VA, USDA, etc.
- Financing status – whether buyer is pre-qualified or pre-approved or for cash, proof of funds. Remember, anyone can offer anything, but if they can’t pay it really doesn’t matter now does it?
- Inspections – what, if any, inspections do the buyers want before they move forward – aka 2nd round of negotiations.
- Personal property – what things are you leaving behind like appliances, furniture, lawn equipment, etc.
- Appraisal contingency – what happens if the appraisal comes in low.
- Home warranty – if it’s included, it’s usually paid by you and the cost should be disclosed as well.
- Closing date – when you get your money.
- Possession – when they get their keys.
- Addenda – what other documents are attached and therefore part of this agreement.
- Termination – all the many many ways you or your buyer could get out of this contract legally and what happens.
- Time limit – how long you have to respond before the offer turns into a pumpkin.
- Commission – how much of your money goes to the agent(s) involved.
- Seller net – how much money, after everything above plus your regular closing costs (deed prep, closing fee, tax prorations, utility escrows, etc.), will you walk away with at closing.
Once you have all these items laying before you on your new offer comparison sheet, you can start to make some sound decisions. Start by ranking them and throwing out the shitty offers.
Price: Do not confuse the offer price with your net “walk away at closing” number. If you have a good agent, they will prepare this with your offers. If you don’t, there are any number of state and county specific seller net sheets available on the interwebs for free. In particular, watch the title insurance costs and county transfer taxes as well as property tax prorations. Even good agents get lost in the forest on these subjects to do your homework and avoid last-minute surprises.
Seller-paid closing costs: These days it’s not at all unusual to find a little clause buried in the contract specifying that the seller will “contribute” up to $XXXXXXX towards the buyer’s closing costs. If this clause is in here, keep in mind that you aren’t really paying their closing costs.
In reality, the buyer is choosing to finance their own closing costs. In other words, by asking you to fund their closing costs, they have less out of pocket at closing. In return, you are simply going to ask for more money for the house so…no matter how you slice it, you’re going to get what you want at closing and the buyer will simply roll their closing costs into their loan.
If this confuses you, don’t feel bad. Just send me a separate email and I’ll break this down for you if the situation comes up. firstname.lastname@example.org is the fastest way to find me, but you already know that…
Cash is king: In my humble opinion, if they are cash, you need real proof of funds like a bank statement or letter from a bank showing they have the cake or no deal. If they provide this, I would be hard pressed to ignore this offer.
Cash offers have the additional serious benefit of avoiding the appraisal pitfall. Anyone willing and able to pay cash for a property is probably not that concerned with the appraiser’s opinion. One less hurdle for you to jump and the odds of making it to the closing table go up with this type of deal.
All contingencies, whether it’s financing, inspections, sale of another home or anything else, are just another off ramp for your buyer to exit the deal with no penalty. Think you’re going to get the earnest money? Think again. 99% of the time the earnest money goes right back to the buyer, but that’s another long answer so we’ll skip that for now.
The top two reasons that deals fall apart are, in no particular order, financing and inspections so don’t take these contingencies lightly.
Financing: I would personally take a lower cash offer over a higher financed offer. Financing is something kills a lot of deals and the hell of it is that it’s not always the financing that’s the problem. Many times it’s the buyer.
Let’s say you’re a banker. You just pre-approved me for a $200k loan. I call you two weeks after making my offer and I have the worst case of buyer’s remorse ever. I’m in over my head and not sleeping because of the many panic attacks I’m having. In short, I tell you I can’t afford to do this.
What was I thinking? Regardless, you as my banker are probably going to help me find a way out of this deal. Once you are on board, the deal is dead. All I would have to do is call you and say that I heard I was about to be laid off and that would be that. Bye bye contract–back on the market we go.
Another thing, if the financing is FHA, VA or USDA, your buyer now has an additional off ramp from your deal. It’s not usually a problem and you can get ahead of this by clicking on the links I’ve conveniently included to see whether or not you will have any issues with the appraisal process. Again, do your homework–forewarned is forearmed; knowledge is power; luck favors the prepared and all those other clichés.
Inspections: No inspections means you’re more likely to close and more money in your pocket. Inspections are huge deal killers and if they don’t kill the deal, they certainly make it worse for you.
The post-inspection process is basically a chance for the buyer to get another bite at the negotiation apple. Even if you believe your house is in tip top shape, you should rank an offer with no inspections ahead of an offer with even one inspection.
Home sale contingency: I hate these and frankly wouldn’t consider one in a multiple offer situation. Trust me on this one. Throw it out or ask them to remove the contingency and provide proof they can still buy. On second thought–just throw it out.
Closing and possession: Closing date and when you have to move (aka possession) are extremely important unless your house is already vacant. If you live in the house you are selling, these issues are huge. If you are giving up the keys at closing and for any reason the deal doesn’t close, you have put yourself in a bind. You are now living somewhere else–presumably not for free–and are likely counting on that money. Now you have two homes and no money.
If you’re going to give up possession at closing, make damn sure you have some strong assurances that this will actually close or that you will be handsomely rewarded if it doesn’t. Maybe instead of the usual earnest money rules, the buyer will agree to a non-refundable deposit. Food for thought.
On the closing, usually 30-45 days is plenty. If they are asking for a much longer time, that could work for you depending on your situation. It could also be a warning sign that they are needing to sell their home before buying yours. If that’s the case, get something in writing from their lender showing they can follow through with your deal either way.
Personal property: If you don’t want your appliances and furniture, they are basically worthless to you, but to the buyer they represent less cash out of pocket and less to move. Win/Win. If, on the other hand, you do want your appliances then you will need to weigh that into your eventual walk away net number. Either way, for negotiating purposes, you should present your buyers with the perception that you will need to buy new ones if you leave these behind.
Commission: Why did I bring this up? Because about 20% of today’s sellers and pretty much all of my clients are in the business of negotiating buyer agent commissions. You should be as well.
If you’re FSBO or a Flat Fee seller, you are familiar with this process of negotiating the buyer agent’s fee. If you are not, I will explain. Here in the good ole US of A, by law…All real estate commissions are negotiable. Let me say that again:
By law, all real estate commissions are negotiable.
In other words, just because “everybody pays 3%” to the buyer’s agent, doesn’t mean you have to. Commission, just like price or appliances, is just another term of the deal. Therefore, when you are dealing with an agent-presented offer, feel free to fire back a counter with the following clause: “Buyer broker fee to be 2.5% at closing” or “Buyer broker fee to be $5,000 at closing”.
I know…mind blowing. It happens all the time. Agents don’t love it and some will even tell you “you can’t do that”, but I’m here with my 20 year pedigree to tell you otherwise. Click here…I dare you.
As they say, if you don’t ask then the answer is always no. If the deal is tight, you might as well take a shot and I would do it in writing because explaining to a buyer that their agent’s fee is standing in the way is, well…pretty freaking awkward for a buyer’s agent. So I say game on!
*Asshole clause: I realize this appears to violate my “Emotions are expensive” rant above, but stay with me here. I keep a special room in my private hell for assholes and their close cousins, the dickheads.
I personally will walk away from a deal if the buyer or the agent fits into one or both of these categories. It’s not because of the emotional thing. It has to do with my extensive experience with these special people.
The relationship between buyer and seller generally erodes as the process gets closer to closing. If a buyer or agent starts out in this camp, don’t think for a minute they won’t turn into full-fledged terrorists as you get closer to closing.
Additionally, these people are far more likely to sue you for something stupid that doesn’t go their way after closing. Water heater breaks 3 weeks after closing and you’re getting a certified letter about small claims court. Do yourself a favor and eject them immediately from your multiple offer party. You’ll be glad you did.
Responding to multiple offers:
So now you have all of the offers you’re keeping and they are all laid out on your offer comparison sheet. Now what? Time to respond.
Once again, before we get started, I’m going to tell you that as a member of the world you need to be fair and show respect throughout this process.
Just like above, I’ve walked away from deals more than once because the other party was disrespectful or playing games or just plain rude. I won’t deal with people like that and neither will most serious buyers.
You do not want to be that person. Your best buyers can smell dishonesty and shenanigans from 100 miles away. Even if you “get away with it”, remember that Karma is a ruthless bitch and always finds a way to even the score in the end. Don’t mess with her and don’t mess with your buyers because…
…If it’s not a good deal for everyone then it’s not a good deal.
Keeping that in mind, let’s continue. The rest is pretty simple.
Alert all buyers: You can and should tell all buyers that there are multiple offers. Some will walk and you need to know that going into the process. The ones who stay are probably very interested and will clearly pay more.
To do this you simply contact each buyer, usually by email, to let them know you received their offer. Thank them and then let them know you are going to consider it along with all the other offers. That usually gets their attention. Be polite, but don’t mince words. You have multiple offers and theirs is one you are considering.
Set an offer deadline: While alerting all buyers and agents to the existence of multiple offers, let them know when you will be making a final decision; usually 24-48 hours from now is good enough. This will give them time to let you know what they plan to do. Their choices are simple: Increase their offer, leave it as is or withdraw and walk away.
Ask for “Highest & Best”: Once you’ve given the offer deadline, instruct all parties that you are requesting they put their best feet forward for the final round. You may reveal the top terms if you like, but that also has its risks. You never know what a buyer will do so be careful before you start broadcasting. Personally the most I would do is reveal that we “have offers above list”, but I wouldn’t put a $$$ amount out there.
Honor your word: If you have an offer deadline and have asked for highest and best offers then don’t screw around after that. Once the deadline has come and you’ve considered the offers, let the winner know they’ve won and let everyone else know you’ve selected another offer. Again, thank them for playing and tell them you’ll get in touch if anything changes.
Do not try to leverage any further or hold a “final final round” of offers. If you pull this stunt you will expose yourself as the greedy bastard you are and risk having all your buyers walk away and get what you deserve.
It may net you a few bucks more if you’re lucky, but the world doesn’t need people like that and if you’re one of those people you shouldn’t be reading my stuff anyway–it’s not for you. I like awesome people who are fair and fun. Go away and don’t come back until you’ve seen the light.
Sorry about that…OK back to business.
Once you’ve responded to everyone, you could attempt to identify a primary backup offer if you like. Just contact the 2nd best buyer and tell them that they came in second. To be clear, you are not trying to renegotiate–you’ve accepted another offer. You are just giving them the opportunity to be first in line if the other deal falls through for any reason.
I would give them some incentives and a giant back door to walk out in case they find another house. In the end, it’s unlikely that a buyer would want to be in that situation, but if they haven’t found another place they love, who knows? They may go for it and you get a little more security.
I’d only let my first buyer know that I have a back up if they start getting squirrelly. Otherwise keep it to yourself. Once it’s clear your first buyer is going to close (all contingencies removed/pending), let your backup buyer know so they can move on to the next house.
Well there you have it. You are now more than equipped to navigate the shark-infested waters of multiple offers and you can do it with style and integrity. You may have developed some connection to one or more buyer, but if you follow my steps here, you won’t feel nearly as bad for everyone when it’s all over.
In the end, you maintain control and I’ve had a number of sellers over the years who have taken the “lower” offer because they simply love the buyer. Like I said, emotions are expensive, but hey…it’s your money and last I checked this is still America so you get to do what you want.
Best of luck and please let me know how things go. I promise you’ll get through this just fine!
Keep the questions coming and I’ll do my best to answer them all as quickly as possible. Send an email to glen@OhioPropertyGroup.com any time. I read and reply to every email so don’t be afraid to ask me anything.
If this doesn’t go deep enough for you or you can’t seem to find the answers to any seller questions, you might want to check out our free guide to selling your own home here. It’s not an encyclopedia, but it will cover many of the basics.