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Thursday, March 31, 2016

Listing Agents Seem Confused About How to Handle Multiple Offers

Now that multiple offers are common on homes that are priced to sell, listing agents seem confused about how to handle what can be a confusing and awkward situation.

Section 5.8 of the state-mandated listing contract has a box to check indicating whether or not the listing agent will “disclose to prospective buyers and cooperating agents the existence of offers on the Property,” but that section doesn’t provide any guidance as to disclosing the details of each offer. 

One long-standing model has been to inform each buyer or buyer’s agent that there are multiple offers and request them to submit their “highest and best” offer, without any guidance as to how good their highest and best needs to be.  This remains the standard procedure when the seller is a bank or other institution which obtained the property through foreclosure.
The “highest and best” method is certainly the easiest process. It gets the bidding over in a single step with no back-and-forth discussion or negotiation. 
For the individual seller, however, I have concluded that open negotiation and disclosure of competing offers yields the best and fairest result for all parties.  I describe it as similar to conducting an auction but without the sing-song voice (which I could never do anyway).
This “auction” model of negotiating multiple offers begins before the first offer is received. That’s because buyers’ agents don’t blindly submit offers on listings, especially on new ones that are priced to sell.  They call the listing agent first to ask if any offers have been received.
If the listing agent believes he or she has priced the house right to get multiple offers, the response to the first such call would be, “Not yet, but I’m expecting multiple offers.”  (Note: Listing agents should — and do, in my experience — always answer truthfully.) 
Given this response, the buyer’s agent (also known as the “cooperating agent”) naturally wonders how to price his offer, so I add the following: “Let me tell you how I handle multiple offers. You will not be blindsided. If your offer is not the best offer at any point, I will let you know, and I will let you know what it will take to become the best offer.”
I have found that buyer agents appreciate this approach more than the “highest and best” approach.
After one or more offers have been received, then my response to the next call is, again, to be totally transparent.  I will let that agent know that we have “x” number of offers in hand and the best offer is “x” dollars.  Once it becomes apparent that the house may sell for more than it might appraise for, I add that I’m expecting the winning bidder to have a provision waiving appraisal objection.
Under this “auction” model, each subsequent offer is likely to ratchet up the price, and it’s important to let the previous bidders know when they have been outbid so they can decide to improve their offer or drop out.  In doing so they deserve the same transparency. I let them know what they have to beat.
Think for a moment about how a live auction works.  Every bidder knows exactly what the current high bid is.  In many states and localities, including Denver, auctioneers, like real estate agents, are licensed and are not likely to endanger their license by misrepresenting the existence of other offers.  Even where not regulated, auctioneers, like Realtors, have a code of ethics to follow and a reputation to protect.  That’s why I’m pleased to report that I cannot recall, in my 14 years of practicing real estate, being misled in this regard, and I certainly have never misled another agent.
Later in the bidding, it’s appropriate to let the buyer’s agent know the existence of any escalation clauses.  Thus, instead of saying to an agent that “our best offer is ‘x’ dollars,” I might say, “our best offer is ‘x’ dollars, with a provision that they'll beat any competing offer up to ‘y’ dollars.”  I also share if a competing offer has waived inspection or the buyer will only object if major health & safety problems are found.
Call me at 303-525-1851 if you’d like to know more.

Published Mar. 31, 2016, in the YourHub section of the Denver Post and in four Jefferson County weekly newspapers.

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