What does "highest and best" mean?

Great and helpful post.  I have a testimony to the exact opposite, though it does help prove your point.  I represented a buyer who was financing through Rural Development (fairly common in northern Michigan).  This is a government funded program with low downpayment ($0), and lots of hoops to jump through.  The seller of this bank-owned property got five offers, but my buyer offered more money than the others, so her offer was selected.  Her offer was a few thousand dollars over asking price, but with financing and inspection contingencies. 

Now, she had no down payment except the earnest money, the loan program stipulated a minimum of 60 days to close, and their inspectors raised many, many issues with the subject home.  Long story short, 45 days into the process, the lender had to rescind their pre-approval, and we had to cancel the deal.  Truthfully, I was absolutely shocked when our offer was initially accepted.  At least two of the other offers were cash purchases.  To me, I would have taken less money if it meant lower risk.  But the seller got greedy, accepted the higher but riskier offer, and ended up getting burned. 

To me, it makes great sense to weigh the pros and cons of each offer and evaluate the risk.  I agree with your order of financing preferences, and in my opinion, the seller should have taken the best offer with the lowest risk of failure.  I had even counselled my buyer that her offer was unlikely to be accepted because of its terms.  So, the moral of the story is that highest and best offer doesn't just mean highest dollar, but most dollars at the best terms.  Let the seller beware if they get blinded by dollars and ignore the risk.

Good post. The best offer may be assumed to be the highest price. But the reality is that BEST is the one most likely to close.

Good post. The best offer may be assumed to be the highest price. But the reality is that BEST is the one most likely to close.

Great explanation of this term. We throw things like this around and the buyers only somewhat get it. I'd keep this as a list of things to give them.

Well, your list makes sense if things were "logical and typical" but this market is neither.  I found out that my offer which was a #4 on your list was accepted over a cash offer and we were only $100. more.  I don't think $100 would have made anyone choose ours over cash.  And technically it was an investor purchase because the buyer's daughter is living in the house, so you can't always tell. My theory is that the negotiators are getting tired of investors spritzing the market with cash offers and then backing out of all but one and if they've been burned a few times, they choose another offer if it's close.

Excellent info and synopsis, I'm going to share it to my new agents at an upcoming training session.  Very good!

In my market I would NEVER recommend a strategy of 'no inspection' but rather an 'as-is' purchase.  If the house has problems that aren't evident from a basic walk-through then the buyer is stuck.

I also noticed that you did not include anything about an appraisal contingency.  I often recommend to my clients that a waiver of appraisal as a contingency is a solid strategy as long as they have deep enough pockets to cover any difference between appraisal and purchase price.

"Highest and best" always applies to bank owned homes, but can apply to "normal transactions" as well.

Along with considering the probability that the buyer can actually buy, a seller might consider the closing date or possession date to be a higher priority than a few thousand extra dollars.

I hate when I have to talk to my clients about 'highest and best'. In reality, they may have offered more if they knew they weren't just bidding against themselves. And when they don't win, they usually don't know why. 

Make your best attempt would seem a better phrase.  You'd never get me to recommend no inspection for any reason.

Highest and best can be tricky, but you have them covered.

A good list. I have used at one time or another 1/2 of your list. Sellers still at times surprise me and developers have too; I have submiited offers that I didn't think would go through without a counter and did; others good offers w/CMA to backup offer and didn't even get a counter (these have sat longer & LA would email weeks later to see if my buyers are still interested). I agree that you have to know your seller/buyer's reason for buying/selling and what range they need to deal with.

Russ,

I think most of us REALTORS understand "highest & best", but not all Buyers do!  The Buyers are under the impression that he who offers the most money gets the deal!  Not always so!

Sadly true!  Can you get an FHA without a Termite these days?

Russ - You just described my market here in Los Angeles & Ventura counties.  While it's hard enough explaining best and highest to buyers, it's even harder explaining three weeks later that "best and highest" was a cash offer 30k lower than the one your buyer made.  When they learn that tough lessen, it can be devastating to their morale and their desire to continue looking.

Around here, financed buyers, especially FHA buyers (most of my clients) are pretty low on the totem pole and it doesn't take them long to learn that.  I spend more time keeping my clients motivated and out there looking than I do on their actual escrow.  I can close an FHA escrow in a few weeks, but those buyers have probably been looking for several months.  The real work is keeping them looking and not letting them give up.

If a buyer waives an inspection, I require them to sign a "hold harmless" letter against my firm.  In my opinion, it is penny wise and pound foolish to blindly make an offer on a home - whether as an investment or for personal use - that you are not fully aware of the issues confronting you.

I recently viewed a foreclosed home that was being flipped.  The guy (an out of state private "investor" bought the home, which had been foreclosed upon, for $171,000 when the house had been winterized and all systems and water shut off - and was trying to flip it for $259,000 (which is what the market will bear for a similar home in "move in condition").  However, in doing so, the guy spent all of his money replacing the stairs and bringing the electrical and heating systems up to code (and otherwise fighting with the Building Inspector), that he couldn't redo the floors which had some water damage from the leaking ceiling, the appliances he put in were used, the bathrooms were not redone and the exterior siding was not repaired.

Do you think he got offers for this home?  No.  It's been sitting on the market for 281 days and the current listing price is $164,000 "as is".  My clients still do better at this price (but they don't want a fixer-upper in progress).

I wish this was easier to explain to the fha buyers.  They just don't seem to understand why their offers keep getting beat out by the investors no matter how many times you explain it.

That's a good list. Now if everyone would just think as clearly as you........

Very good points indeed.  Buyer's definitely need that explained to them before they make a final decision on "highest and best."  Otherwise they will often find themselves out in the cold looking in at the other buyers enjoying the house they wanted.