Wednesday, May 04, 2005

"Multiple Offers" - Roll the Dice!

"Are there no rules?", is one of the questions many buyers ask when they've become involved in a real estate transaction that turns into a "multiple offers" situation. If you've never been involved as either a buyer or a seller in a multiple offer real estate deal, you very well may be one day soon in today's hot real estate market.

From the buyer's perspective the scenario is usually an unpleasant surprise. The buyers have made a decent offer to purchase real estate, put up reasonable earnest money on a property that is actively for sale. They wait for the seller's answer and learn from their Realtor that that they are not the only party making an offer, or worse, that they have "lost" the deal to another mystery buyer. "But we were there first!" is the most common reaction, and that's understandable. The second question usually is, "Is that legal?" Well, yes, it is. Legal and acceptable practices as discussed further in Ethics.

The listing agent, if representing both buyer and seller, really gets it from the buyer. "Why didn't you tell me you had other offers before I made mine?" That's a reasonable question. The answer doesn't do much to help in that the seller's agent can only reveal that there are other offers on the property IF the seller permits him to do so.

If the agent is representing the buyers only, many buyers will accuse the listing agent of "lying"-- trying to push up offers, increase his commission and they ask to see the other offers, firmly believing they don't exist. Well, the seller doesn't have to reveal the nature or quantity of the other offers. Not to the other buyers or the buyers' agent.

Whether or not to reveal the status of multiple offers is up to the seller. The plain truth is that the buyer has to wait for a response from the seller during and up to the time they gave the seller to respond. Essentially, the buyer has no "right" to know if there are more offers.

The National Association of Realtors' Code of Ethics has several Standards of Practice (SOP) that instruct how multiple offers are to be handled. The first is that a Realtor "shall submit offers and counter-offers objectively and as quickly as possible." Accordingly, all offers must be submitted until the seller has made a final decision. "When acting as listing brokers, REALTORS shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. REALTORS shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord..."

Multiple offers situations became so prevalent that a short time ago the NAR instituted the following instructions in its SOP: "REALTORS, in response to inquiries from buyers or cooperating brokers shall, with the sellers' approval, divulge the existence of offers on the property."

The salient wording in this instruction is "in response to inquiries." Clearly this is a "don't ask, don't tell" situation for the listing agent. He/she is not going to tell the buyer about multiple offers if the buyer doesn't ask -- and, in reading the SOP further, one can see that the Realtor is not obligated to divulge the presence of multiple offers, either, without the sellers' approval.

In a seller's market (less houses, more buyers), some agents put a deadline on when all offers must be submitted. Once the offers are submitted, the agent then settles in with the seller for a marathon contract offer review. The core area of contention occurs when offers float in one after the other over the period of a few days. Hence, the standard practice of dealing with multiple offers would proceed in this manner:

  1. Each offer is presented to the seller for consideration.

  2. The seller will hear all offers before making a decision.

  3. A seller can accept or begin countering more than one offer at a time; however, she/he must set an order of attention, i.e., primary offer, first backup contract, second backup contract, etc.

Multiple offers are a modern fact of Real Estate life. In this fast-paced market, they are considered fairly normal; and their existence inflates pricing. The buyer who is working with an agent who understands the aggressive and hard-charging techniques needed to escalate their offer, will win. However, buyers may pull contracts during multiple offer situations because they want to deal in a less competitive and roller-coaster environment.

It's understandable that buyers who've lost in a bidding war complain about "fairness". The situation is similar to being the first to buy a high-priced ticket for a front-row seat, walking down the aisle to find others vying for the seat, being asked to pay MORE for the seat, or finding no seat at all.

But, in a hot real estate market, the seller doesn't care when you got there -- he or she is interested in one thing -- what's the net dollar he'll get for that seat.