“What You’re OK With If You Get It . . . . & What You’re OK With If You Don’t”
In my 15+ years selling residential real estate, perhaps the most fraught question I’ve fielded from clients has to do with multiple offers.
Specifically, it’s stressed Buyers beseeching me, “What the $%#@! do I offer?”
After swearing that I don’t (and can’t) know exactly what price will win (at least assuming the listing agent’s any good), I walk Buyers through the following, two-part analysis.
Due Diligence + Ducks in a Row
Part 1: Make sure we/they have done our homework (“due diligence”).
That means: a) knowing the market (having toured at least 8-10 reasonably similar “Active” homes); b) knowing the Comp’s (“Comparable Sold Properties”) for the home they’re bidding on (likely to be revisited a few weeks later by the appraiser representing the Buyer’s lender); and c) having a customized Pre-Approval Letter lined up from a reputable, local lender (emphasis on “local”).
Done all that?
If the answer’s “No,” it’s hard to commit wholeheartedly to multiples — what it takes to win.
However, if the answer’s “Yes,” then it’s time for . . . .
Part 2: Gut Check/Soul Searching.
The answer to this one is necessarily personal.
Key questions for the would-be Buyer to wrestle with include: “How good a fit is this particular home?”; “How long have I already been looking and — realistically — how much more time will it take to find something else I like at least as much?”; “How long do I plan to be in the home? (if the answer’s “forever” . . . bid more); and, “How disappointed will I be if I lose this one?”
That last question is key, and leads to my standard counsel on price.
Namely: “the right price is the amount you’re OK with if you get it . . . and what you’re OK with if you don’t.”
Razor’s Edge (“Point of Indifference”)
Economists will recognize the above as the point of indifference.
The beauty of that concept is that it guides the Buyer to the right number, by minimizing potential regret — which, as psychologists know, is the biggest motivator for most people.
How do you know for sure the number’s right?
By testing it.
“Highest & Best”
So, assume that a terrific new listing for $500k in a hot neighborhood is instantly in multiples.
It’s got everything the Buyer has been looking for — and apparently, many other Buyers as well: there are 3 other offers.
The listing agent has announced that “highest and best” offers are due by 6 p.m. the next evening.
What now?
Odds of Success
I usually characterize Buyers’ options on a continuum, from relatively low odds of success to relatively higher.
So, with three other offers, and the list price at $500k, $480k (or even lower) is likely a non-starter.
Conceding that the house is going to go for over ask, how much will the ultimate Buyer have to overshoot?
Jumping to the other end of the continuum, a preemptively high offer — say, over $550k — likely has a very high chance of success.
Which leaves the middle ground — in this case, somewhere between $510k – $530k.
Distilling the above, my counsel for the above scenario would be to come in in the high $520’s, expecting that that number should be sufficient to beat all but a truly outlier Buyer.
To test it, I’ll then ask my client, “Good! So, you’re going to offer $525k. If that doesn’t get it, how will you feel?”
If the answer’s “Devastated!” . . . they’re not at their number yet.
P.S.: Notwithstanding the above exercise, many Buyers’ knee jerk reaction in multiples is to automatically think they overpaid if they win, or to kick themselves for offering too little if they lose.
