The following article supplied by Omega Homes:
https://www.omegahome.com/blog/highest-and-best-offer/
You may have recently been told to submit your “highest and best offer” on a home. These warnings are often communicated via the MLS in the following manner:
“HIGHEST AND BEST DUE NO LATER THAN APRIL 19, 2019 AT 12PM”
Sounds a little bit demanding, doesn’t it? Well, situations like this can be common when there is heavy competition amongst buyers and low inventory.
When homebuyers are told to submit their “highest and best offer” the listing agent is indicating that there are multiple offers on the property and that all interested buyers should submit their best possible offer. It’s basically warning potential buyers that the property is going to go under contract very soon and that they might miss out if they don’t submit the best possible offer.
Once all of the offers are collected, the listing agent and seller will review all of the offers and accept the best one. Sometimes, the seller is a bank who makes the decision without input from the listing agent.
Below you will find a comprehensive list of tips and strategies you can use when you’re in a highest and best offer situation.
1: Be smart
The listing agent may be lying about the existence of multiple offers. Regardless of what you might think about this, the listing agent has a fiduciary duty to the seller: it’s the listing agent’s job to obtain the absolute best offer for their client. Therefore, some agents may mislead potential buyers about the existence of other offers in order to manufacture a sense of urgency. Put simply, the agent is not acting in your interest and may ask for your highest and best offer when there are no other offers.
However, you can usually determine if the agent is being truthful by taking the market conditions into account. If a home has been on the market for a long amount of time there are slim odds that other buyers suddenly pop up out of nowhere once you start taking an interest. Conversely, if the property is new on the market and inventory is low there may be a good reason to believe that multiple offers exist.
If the property is owned by a bank (also called a REO property) there’s a lower chance of any funny business. Sometimes, a bank may deliberately list a property well below market value and then immediately call for highest and best offers so that a speedy sale takes place.
2: Terms are key
In a highest and best offer situation, the best offer chosen may not be the highest offer. The terms of the sale are key, as a seller may accept a lower price with great terms.
Consider the following two offers:
$490,000 with a financing and inspection contingency, 45 day close.
$500,000 with no financing or inspection contingency, 15 day close.
Most sellers are willing to accept a 2% price cut if it means they’re getting an all-cash offer that accepts the property as-is without any contingencies. They don’t have to worry about the deal falling through and may be able to avoid another mortgage payment.
Also, you may want to consider an escalation clause. An escalation clause ensures that you’re always the highest bidder up until a certain ceiling is met. This means you won’t end up paying significantly more than what someone else offers and a maximum price is set that will not be exceeded.
Placed in casual terms, the escalation clause would read something like this: “My current offer is $200,000 and I will pay $1000 more than any other offer up until $225,000” You may want to consult a real estate attorney rather than your real estate agent if you’re considering the addition of this clause.
Your goal should be to try to keep your offer as clean as possible, meaning you eliminate as many terms as you reasonably can. Buyers who tack on a lot of extra terms are perceived as flaky and noncommittal. You want your offer to appear strong by showing that you aren’t worried about inconsequential matters.
In some cases, you may be forced to keep particular contingencies. If you’re getting a mortgage, you may be required to attach the financing and appraisal contingency. There’s no way around this, but you can try to keep the loan and financing contingency period as short as possible. Ultimately, you may lose out when bidding against an all-cash buyer.
Here are some additional strategies you can use to make your offer more attractive:
Place a large earnest money deposit
Offer to pay closing costs
Sooner closing date
Shorten due diligence period
Forego an appraisal (if you can)
Forego a survey
Consider allowing them to keep your offer as a back-up in the event the accepted offer ends up backing out
3. Don’t fall in love
You may have a temptation to sweeten your offer beyond a point that is reasonable. Don’t do this. It’s common for buyers to get caught up in the heat of the moment and become willing to give unreasonable concessions.
You should consult with the comps and your buyer’s agent to determine the best offer you can make - within reason. Determine what you’re willing to pay and the terms you’re comfortable with. Always be prepared to walk away and don’t become too emotionally invested in the outcome or else you might get a bad deal. As the old adage goes: never fall in love with real estate!
4. Get your paperwork ready
This should almost go without saying, but when highest and best offers are called you should have your paperwork ready. There will be a deadline attached as to when you can submit your offer and you don’t want to miss out because you didn’t have the necessary documents ready. This means you should have a pre-approval (or proof of funds) letter prepared from a recognized lender that you can attach to your offer.
Timing is everything in real estate. Having your ducks in a row also allows you to act quickly when the listing agent calls for all highest and best offers. Submitting your offer quickly shows that you’re serious and your offer may become the standard for which all subsequent offers are judged.
5. Write a buyer letter
Writing a buyer letter can be an effective way to demonstrate your interest and cultivate a relationship with the listing agent and seller. A buyer letter is merely an attached letter to your offer which details who you are why you’re interested in the property. Presenting yourself as relatable never hurts in a real estate transaction when emotions can run high.
Check out this offer letter I wrote on behalf of a buyer:
(Note: some details of this letter have been altered for privacy)
I wrote this on behalf of my client so we could put forward the most compelling offer. While we weren’t in a multiple offer situation, we did want to put our best foot forward. All of what I wrote was true and came from the heart; I wanted the seller to know that we appreciated their home and were serious in our interest. The letter also reveals some of the logic behind our offer. Notice how we began the negotiation in a friendly and cooperative manner and avoided any negativity.
Allowing the seller to see you as a human being is always a plus. The listing agent may end up advocating for your offer because they’re familiar with you and know you’re serious. Who knows, the seller may be willing to accept your offer over the highest and best offer because they believe their home will be in the hands of someone who truly appreciates it.
This strategy won’t be as effective when you’re dealing with bank-owned properties or with large developers. They sell in bulk and are more concerned about their bottom line rather than who will be occupying their homes.
6. Start a Dialogue
Starting a dialogue with the listing agent or seller can be very productive. Sometimes, the seller has a specific situation that makes certain offers more compelling than others. For example, maybe the seller is moving out of state very soon and offers that can close quickly are placed in higher regard.
The dialogue should continue even after your offer is submitted. Things can change rapidly when there are multiple offers and you absolutely need to stay abreast of the situation. Find out from the listing agent how your offer is stacking up to others and what the seller thought about it. You may be able to see if you can have your offer stand as a backup offer.
Even if you end up losing out on the property it’s still worthwhile to find out why you lost out. You’ll be able to objectively compare your offer to the competition and hopefully learn some information that will keep you better informed going forward.
7. Be prepared to stand firm
The listing agent may counter the “highest and best” offer you submit. Many buyers find this deeply frustrating and insulting since they’re essentially being asked to put forth a better offer than their best offer.
If this happens, there’s a good chance your offer was the best offer and now the listing agent is trying to get you to bid against yourself in a final attempt to squeeze out a better offer for their client. Standing firm may be the best thing to do in this case, as you make it clear that you’re not going to be playing games.
Conclusion
I’ll conclude with perhaps the most valuable tip: stay positive. In hot markets, it’s easy to become discouraged when you craft your absolute best offer and still lose out. Understand that you’ll be the best offer on another home that you like just as much. Remember to stay calm and try to divorce yourself from any negative emotion throughout the homebuying process.
Hopefully, the above strategies put you in a better place when you’re in a competitive, multiple offer situation. I wish you the best of luck in your home search!