Responding to Highest, Best and Final Requests
Copyright (c) 2013, Deanna & Jim Gilbert
INTRODUCTION
The words from the Listing Agent are exactly what the Selling Agent (Buyer's Agent) and the buyers do not want to hear, "We have multiple offers. Please submit your highest, best and final by ..."
Some buyers will simply back out, because they so strongly fear getting involved in a "bidding war" and doing something they will regret. Actual bidding wars only occur in open outcry auctions on the courthouse steps or the front lawn of the property when it is being auctioned. In an open outcry auction you can both see and hear the competing bidders and gain some insight as to their behavior and demeanor, as well as know the exact amount of their bids.
A highest, best and final request presents an environment with much less information on the other participants and their bids. Furthermore it proceeds not in real time where emotions can get so easily involved. The highest, best and final environment requires decision making underuncertainty as to the number, nature and level of interest of other participants. It maximally benefits the sellers, but is challenging to buyers.
EXAMPLES
Consider a few examples, for a hypothetical property listed at $200,000:
Example 1. Your original bid was $190,000. There is only one other bid. It is a lowball cash offer at $110,000. Your agent is told, "We have multiple offers. Please submit your highest, best and final by the deadline." The cash offeror stands his/her ground at $110,000 when asked for best and final, but you won't know this.
If you back out the seller will wait for a better offer. If you go higher they will take your offer. If you stand your ground they will either take or counter your offer.
Example 2. Your original bid is $190,000. There are offers at $210,000, $205,000, $198,000, $190,000, yours at $190,000, and one at $185,000. Your agent is told, "We have multiple offers. Please submit your highest, best and final by the deadline."
The offerors other than you respond as follows: $210,000 stands at $210,000, $205,000 goes up to $207,500, $198,000 withdraws, $185,000 goes to $212,000. The former least is now the greatest.
If you back out the seller or increase to less than $212,000 the seller will take the $212,000.
You will ask your agent how many offers there are and what their dollar amounts are. The agent will ask the listing agent. If the listing agent is in the mood they may tell your agent how many offers there are. The majority of agents will let your agent know this in the DC Metro market area. They will not tell you the amount of the other offers or their standing relative to yours! This does not matter because as in Example 2 above each buyer's response to the request for highest, best and final is rather difficult to predict. Buyers may withdraw, stand pat, reduce, or increase their offers.
NON-OPTION
You want to figure out "What is the least amount that I can bid and still get the house?" This answer is unknowable except by the listing agent after the fact. And they cannot tell anyone anyway.
WHAT YOU CAN DO
You need to view the bidding environment like a slightly restricted version of ebay.com. You do not get to see the amount of the current maximum bid. There will be (usually) only one round of bidding, not n. You need to decide, "What is the most that I am comfortable paying for this house $X, such that for $X I am happy to buy it and for $X+$1 I am delighted I did not get it?" This is a challenging question for most buyers, but it is the question you need to answer.
ESCALATION OR NOT
Some listing agents will let your agent submit and Escalation Addendum wherein you offer to beat any other offer (less closing help) by $Y as long as the total price to you does not exceed $X. For example you might say that your offer is $195,000 but that you will escalate it to beat any other offer by $1000 as long as the end price is less than $208,000.
Many listing agents and/or sellers will not entertain Escalation Addenda. Using one still requires you to choose your personal maximum $X. If you succeed with one you will have the satisfaction of know ing you only overpaid by an amount less than $Y.
MULTIPLE ROUNDS
In bank-owned environments and occassionally in other situations the listing agent and seller may request Highest, Best and Final in multiple rounds. This often happens if during Round N a new offer higher than all the others arrives and they wish to give everyone a fair chance.
SELLER CHOOSES
Sellers do NOT always choose the offers that give them the highest net. Their decision may be influenced by the kind of financing (e.g. cash is much stronger than financed), the lack of a home inspection contingency, a more desirable closing date, the willingness of the buyer to let them rent back for a few weeks, or other factors. Bank-owned property sellers may choose lower financed offers where one of their own loan officers issues the loan rather than give the new mortgage business to a competitor.
SUMMARY
Buyers do not prefer multiple offer environments. Many buyers can and do succeed in these environments. You have to remember that it is buyer vs buyer and the seller picks the winner, NOT at-the-bazaar style buyer vs seller haggling.
When responding to a request for highest, best and final the best you can do is to decide what the house is worth to you, rather than focussing on trying to figure out the other bidders bids. EVEN IF YOU KNOW THEIR INITIAL BIDS YOU WILL NOT KNOW THEIR RESPONSES TO THE CHALLENGE YOU FACE. Using an escalation addendum or clause may be useful in some situations if the listing agent will consider one.
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