5 Steps To Win A Bidding War
Multiple bids are back in a big way and not just on distressed and bank owned property. Demand from buyers entering the market in 2012 is far outstripping supply across many asset classes. If you’re in the market to purchase income and multifamily property in Chicago and you want to compete, here’s what you need to do.
Step 1:
Understand that the market has shifted and this is no longer a buyers’ market for multifamily and income property in primary and secondary neighborhoods on Chicago's north side.
Step 2:
Talk to a lender. Get pre-approved by a strong lender or mortgage broker. You could likely face cash buyers in a bidding war and they will win every time unless you agree to pay more and can prove you are qualified to do so. A lot of buyers like to put on their poker face when it comes to pre-approval letters. They believe reducing their max 'approved' purchase price will give them an edge when negotiating with a seller, i.e. “we’re maxed out and can’t pay a dollar more.” This is the wrong strategy if you expect the property to get bid up. If you offer $500,000 and are pre-approved up to $550,000, send a pre-approval letter up to $550,000. This will at least allow you to get into a second round of bidding and a seller will appreciate your sincerity.
Step 3:
Shorten or eliminate contingencies and close quickly. The two big contingencies are the mortgage contingency and inspection contingency. If you need financing, you can’t eliminate your mortgage contingency but you can ask your lender or mortgage broker to write a letter ensuring the seller they are capable of completing their underwriting expeditiously. Personally, I would never eliminate the inspection contingency unless the property needed a full rehab and I fully understood the scope of work but I would shorten it to a two day period if I thought it would give me an edge. You can always request an extension during the attorney review period. Proposing or agreeing to purchase the property “as is” could also strengthen your position.
Step 4:
Recon. This is very important. You toured the property, saw at least one other interested party, probably a few and now you have a feeling the price could get bid up. You or your broker should have a frank conversation with the seller or the listing broker about their expectations moving forward. I’ve never run into a seller or listing broker who could resist the opportunity to say how much ‘action’ or ‘interest’ there is in the property. This is a classic tactic used to get buyers psyched up and let’s face it; people in real estate like to brag.
Ask them how they plan to proceed with offers, respond to offers and what they will do with a potential multiple bid scenario. If the seller receives multiple bids, you want your offer to be considered and you definitely want a second chance to put your best foot forward if they make a request for ‘highest’ and ‘best’ offers.
Step 5:
Your offer price. Your contingencies are eliminated or reduced, you are a cash buyer or have strong financing and you have an understanding how the seller might respond to offers they receive, so how do you position yourself on price?
If this is your first experience with a potential bidding war, you are likely going to be somewhat reserved, maybe you offer at the list price even though you or your broker expects the property to sell over ask. If you have been in this situation before and have missed out on an opportunity, you might be inclined to come out of the gate with your highest and best offer and urge the seller to accept your offer and explain that you will walk if he decides to engage all bidders in a second round.
Regardless of your experience, know that you are probably bidding against someone who has bid and lost out and they do not want to lose out again. Because you know this and you understand that the current market does not favor buyers you will be in a position to make an offer you feel comfortable with.
So how high do you bid? Real estate values are very subjective and will always be. In fact, the price you pay cannot be proven as the true market price until you resell the property yourself. Luckily, the industry has a lot of faith in comparable sales and rightly so.
Currently, in mid 2012, if you are basing your offer on comparable sales that closed within the previous 6 -9 months, you could be limiting your odds of winning a bidding war. Pricing is trending up quickly and significantly in some Chicago neighborhoods but most indices that track real estate values calculate them on a 2-3 month trailing basis so what’s happening in the market today is not necessarily what is being reported. You either need to know and have an understanding of the trends in your market or find someone who does to represent your interests.
Brent Hall is a Broker Associate with Jameson Sotheby's International Realty, Chicago. Contact Brent Hall to discuss buying or selling real estate in Chicago.