Wild Housing Market Reveals New Truths Behind Bidding Wars

Read the original article in the Puget Sound Business Journal.

By Sam Chapin – Contributing writer

In war, they say, there is no such thing as a perfect plan. A residential real estate bidding war is no different.  

Recently, my partner and I negotiated bidding wars for two listings on the same day. The reactions by all involved demonstrated that buyers, sellers and even some brokers, do not fully understand the process.

In the first war, we listed a downtown condo lower than where we believed it would sell. We set an “offer review” for a week later. From the activity, we expected three to five offers. Offer review day brought our first offer – full price, with an escalation clause that would increase against competing offers. We waited for the other offers to come in and trigger the escalation, but none came.  

At that point our client could: (a) accept the offer at our low asking price; (b) reject the offer and raise the asking price; or (c) negotiate better terms from the one buyer-bidder. Our client chose (c), and my partner and I worked with the buyer’s broker to secure a deal at a higher price with terms satisfactory to both buyer and seller. 

In the second war, we listed a Mercer Island “fixer” with the same strategy and offer review day a week out. Unlike the condo, however, we immediately received two offers over asking price with great terms. We could have used these early offers to attempt to garner higher offers, but time was of the essence, urgency was palpable, and the seller was happy to accept the cash offer with the quick close. Then our phones blew up with brokers complaining we sold the fixer too quickly. Their frustration could have been avoided if the brokers had only prepared their clients for a bidding war.

Sam Chapin is a Seattle-area real estate broker, attorney, and co-founder of the Gottesman Chapin Group at Engel & Volkers, a world-wide luxury brokerage.

A bidding war doesn’t just happen by luck. It requires knowledge, a savvy seller, and strategy. The broker must understand the market and price the home low enough to create urgency. True urgency induces multiple buyers to make strong offers and battle. But it doesn’t always work that way. Sometimes you’re the windshield, and sometimes you’re the bug. 

Bidding wars generally play out one of four ways:

  1. Offer review day brings no offers. The listing broker sheepishly deletes “offer review” from the listing and the house remains on the market. Urgency was not created.
  2. Offer review day brings only one offer with an escalation clause. No one else makes an offer to trigger the escalation clause. Some urgency existed, but not enough.
  3. Offer review day brings three offers. Or five. Or ten. The seller may then ask the top two or three buyers to strengthen their offers (increase price, shortening closing, or drop contingencies). There is risk, however, that a buyer withdraws because she feels “played.” A seller can potentially end up with no one left.
  4. Before offer review the buyer makes an early offer too good to refuse. The seller can take the “bird in the hand” or she might direct her broker to start “dialing for dollars” by calling other brokers to advise them a bidding war started early. Dialing for dollars can backfire if buyers feel played. 

A seller may not execute the perfect plan, but if the seller creates urgency, he’ll get a bidding war. And if the buyer acts quickly and decisively she’ll get the house.

Losing a bidding war is never pleasant, but brokers who complain of missed chances were simply unable to motivate their clients to timely action. They had a chance the moment the house came on the market. The winning buyer was ready – why weren’t they?

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