Without fail, when a client wants to buy a house that has multi-buyer interest on it, they always ask “How much do I have to pay without paying too much?” Then right after that, they ask, “if we put in a lower bid, will they counter us if there are other offers, and they don’t like our initial offer?”
As much as we appreciate your faith in our clairvoyance, only the listing agent and the sellers know exactly what’s going on with the other offers. But then of course, they don’t really have any idea what’s really going on inside of the minds of the buyers. They ask the mirror questions to the ones I just mentioned. “So do you think the buyer will go higher?” or “Will we scare everyone away if we counter again?’
When it’s someone other than you, it’s almost comical, because everyone is trying to play the same game without understanding what’s “really” going on, and what “really” matters.
If you’re a buyer looking at a house in a multi-bid situation the real questions you should be asking yourself, is “what is the most this house is worth to me in the current market conditions?” And…what’s the best overall ‘strategy’ to get leverage on the house.
Now part of your brain probably went “wait…uhh…what? What does that even mean???” Don’t worry, answers are coming.
First…what’s the max you’re willing to pay? Remember that the house is the same home it was before you found out about the multiple offers. The “perception” has changed because other people want it. Now we’re dealing with a bio-psychological motivator called “social proof” that changes your thought processes radically. We are a social creature that thrives through group coordination. We learn from each other. Our survival is largely independent of where we fit in the larger social structure. To that end, nature has seen fit to ad a biological driver to our mental make up that says “if someone else wants a thing, I should want it more and if scare I should compete to win.” That’s the phenomenon behind the trampling of a pregnant woman caused by hysterical race to get the last of the cabbage patch dolls that were so popular in the 80’s. You see the most primative parts of your brain don’t understand that this isn’t the last house there will ever be. It just goes into cave man mode and starts laying about with a club. Now if you’re saying “no way…not me…I’m smarter than that and I resent you’re saying so” well….I get it. But the reason you’re thinking “that” is the biological driver that says “find a way to be a unique contributor to the group or risk being replaced”. Our need to be unique and feel superior to the “average” is tied to the same set of social rules. Sorry.
If it makes you feel better….I secretly think I’m smarter than that too. 🙂
Ok, ok…so what does this mean? Simple….you have the max you can pay for a house no matter what. That’s courtesy of the bank. Now you just have to set a max you’re comfortable paying for “this” house. “So what’s that number? ” You ask. Here’s the beauty….it’s TOTALLY subjective and there is no wrong answer. There is a number that ‘right” just pay attention to it. There is also a threshold number that feels “wrong”. The first number is the one you hope to get. The second is the one you stay under no matter what. This is where we get into the ‘structure’ of the deal.
To properly structure an offer, you have to think about what the sellers value. Sure…they want the highest net possible. But they also want “certainty” and they want to maintain the lowest possible stress level they can. Things they worry about will range from the viability of your financing, to the good faith deposit, to the settlement timeline, whether you have a house to sell, to the repairs they’re likely to have to make.
The good news is that all of these are ‘knowable’ things. If you have a good agent, there is nothing to stop them from talking to the listing agent to get an impression about all of these things, if not a straight out statement of position. A good agent can also infer quite a bit from the types of questions the listing agent asks. Questions give you a peek into the mind of the seller. IE: “How soon can your client close?” which might indicate that the seller is in a hurry and might favor a quick settlement. VS. “How soon does the buyer “want” to close?” That one turn of phrase tells me that the seller is reluctant to settle quickly, and would prompt an additional line of investigative questions. That’s just one of hundreds of questions that the seller might ask that have deep meaning to an experienced agent. You can use that information to structure an offer that starts out being 90% exactly what the seller wants.
Getting your price without giving up all the goods is trickier. The best tool we have found to give you the best of both worlds is something called an escalation clause (check to see if this is available in your market right now). This allows you to offer one thing, but have a fallback position that automatically beats other competing bids in pre-determined increments up to a max level. It might look like this:
Offer price $250k with an escalation clause guaranteed to beat competing bids by $1000 up to a max offer price of $255k. In this way you are certain you never pay more than $1k over the max competing bid, and simultaneously make sure you never go over your maximum comfort level.
The biggest take away is that you have to change your mindset to “putting in offers” to one that says “let’s make a strategy that has the best chance to get me the house without undue risk or expense”.
If you’re shopping for a home right now and have had limited success with getting a home under contract, come talk to us. We have decades of combined negotiating experience and have bought and sold hundreds of homes with our clients. Being an avid watcher of real estate reality shows will not make you a skilled negotiator. those shows are meant to entertain and provide some drama with a tidy solution in a 30 minute window. In real life, there too many rabbit holes down which the deal can run, and it would amaze you to learn how deep those rabbit holes go.