Last month I posted an article about how to avoid overpaying when several parties compete to purchase a property, especially in a bidding war. Today I want to extend the post and review a couple cases where bidding strategically paid off for the client.
Both properties that I assisted my client’s with securing were on the lower end of the price spectrum in their respective neighborhoods which meant there would be more competition from a host of potential buyers. The properties were distressed and regardless of the end-buyer, would need considerable capital improvements after the acquisition. Active inventory for sale of like-kind properties was low to non-existent when these properties hit the market.
- In both cases, the properties were distressed and or bank owned.
- They were offered by the sellers at prices at or below recent market sales so broker and buyer interest was high.
- Both properties had a large pool of potential buyers ranging from owner-occupy to long term buy/hold to opportunistic investors looking to profit on a flip.
For my clients, ascertaining the current market value was less important than accurately determining the potential value of the properties once they were stabilized and repositioned for a profitable resale.
- Once the potential resale value was determined we could back out the construction and financing costs plus the targeted return (profit) to come to an acceptable buy-in range.
- In both cases, the bids were going to be over the asking price, so not only were we bidding against other buyers, at some point we were at risk of bidding against ourselves assuming we were the high bidder.
- We knew there was an unusually high volume of potential bidders so we were comfortable submitting our bid at the high-end of our acceptable buy-in range.
Initially, we were not the high bidder on either property. Property A, according to the listing broker, received over 20 bids from potential buyers. Property B had multiple bids but the overall interest level was slightly lower than Property A.
- In each case, the seller simply chose the highest bid. It is unknown how the seller weighted any additional contingencies or the winning bidder’s ability to close.
- Both of my clients were disappointed by the process, the level of extreme competition and the dimmed prospects of procuring a potentially profitable opportunity in the current market as this was not the first time either client had lost in a bidding war.
- Obvious questions come up such as, could we have bid higher? Did we properly analyze the potential resale price? Is the market moving faster than we anticipated? Who outbid us and what is their exit strategy?
As it turned out, the winning bidder for each property backed out and the opportunities came back around. After speaking to the listing brokers, I know both winning bidders tried to renegotiate the purchase price with the seller unsuccessfully. In one case, my client’s bid was the 3rd or 4th highest but the seller opted to go with the buyer who could demonstrate an ability to close. We were pleased to have the opportunity to move forward on both deals and extremely pleased that we could go into each transaction knowing that we were not overpaying based on our planned exit strategy.
It's important to note that my client's were successful twice in their respective bidding situations, both when they opted to not over pay and chase the deal and when the deal came back around and they were the eventual winning bidders at the price they set.