“Highest & Best,” Defined

[Note to Readers: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced. If you need legal advice, please consult an attorney.]

With scarce inventory and low rates once again spurring multiples offers in the Twin Cities now, at least one thing is guaranteed: at least a few home Buyers and Sellers (and their agents!) will misunderstand the rules.

The unfortunate result?

For Buyers, it could mean missing out on their dream house.

For Sellers, it could potentially jeopardize an offer from a dream Buyer.

In both cases, the parties’ strategic mistake is not understanding how area Realtors ” observing local customs ” conduct multiple offers.

Background

So, unlike other housing markets, where the listing agent (representing the Seller) presides over an “auction-style,” multiple round sale, in the Twin Cities, multiple offers purposefully go just one round.

Called “highest & best,” the logic of such an approach is that it efficiently flushes out Buyers’ best terms.

Prospective Buyers know ” or should ” that if they leave money on the table, their offer will be bypassed in favor of a better one.

Meanwhile, well-advised Sellers understand that, once the dust settles, the rules of engagement preclude their going back to the triumphant Buyer for still better terms.

Mirror-Image Misconceptions

Of course, it’s not uncommon for Buyers and Sellers (and their agents!) to misunderstand all that.

The biggest Buyer misconception?

Runner-up Buyers who mistakenly assume they’ll get a chance to sweeten their offer.

Unh-unh.

A disappointed Buyer who protests that “they would’ve gone higher” . . . didn’t understand the rules.

“Highest & Best”: Wash, Rinse & Repeat

Also misunderstanding the rules: the delighted Seller, who tells their agent: “Great, the winning Buyer really wants it! Now, let’s see if they’ll go $10k (or $50k!) higher.”

Nope.

By definition, if the Buyer was willing to go $10k (or $50k!) higher . . . their offer wouldn’t have been their “highest & best.”

While it’s OK for Sellers to fine-tune (improve) such terms as the closing date, earnest money, or financing deadline, it’s considered out-of-bounds to push for a materially better offer.

At least in Minnesota, Sellers who do that risk being accused of negotiating in bad faith by the annoyed (or worse) Buyer, who may decide that their offer was already (more than) generous ” and walks . . . (note: Sellers who unduly delay responding to a serious offer risk the same outcome).

P.S.: Surprise, surprise, local Realtor custom hardly stopped banks selling foreclosures in the wake of the housing crash . . . that they brought on.

Then, the typical m.o. was for the banks to grossly underprice their foreclosures, wait for the inevitable feeding frenzy to materialize, then announce a deadline for “highest and best.”

When Buyers duly obliged, the bank selected the highest 6-8 offers (out of potentially dozens!), then announced “Highest & Best ” Round 2″ (effectively).

Wash, rinse, and repeat ” sometimes three or four times(!), until the field was winnowed to one, lucky(?) winner.

Prospective Buyers wise to this manipulative game shrewdly declined to play . . .

See also: “Seller Disclosure Options in Multiple Offers: Tell Some, Tell None, Tell All“; “Getting the Edge in Multiple Offers“; “Why Smart Listing Agents Defer Discussing Multiple Offer With Home Sellers”; and “What Buyers’ Agents in Multiple Offers Should Always Ask the Listing Agent.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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