The Bidding War: When Winning Feels Like Losing

By
Real Estate Broker/Owner with Mint Properties, Lic. #01871795 Lic. #01871795

The Bidding War: When Winning Feels Like Losing

This post was inspired by J. Philip Faranda’s recent featured post, entitled “Keep Your Word or Lose the Deal,” in which he describes a deal where a cash buyer barged in with a better offer (my words not his) on a not-yet-sealed deal only to waffle down the line.  As a real estate professional, I see that type of scenario a lot when things get competitive, and his blog made me reflect on bidding wars generally. Personally, I think something has to be unique about a property to be worth enduring the experience of a bidding war. Unfortunately, in my market, bidding wars break out more so due to availability of homes rather than a property truly being unique.

Before we enter into a bidding war, I always make sure to ask my client whether they have considered how it will feel to know they paid more than anyone else would pay for a particular property. Even though the question is fairly obvious, it does tend to give a buyer a hint of what it feels like to “win” a bidding war. People often get caught up in the moment or the spirit of competition – especially naturally competitive people. However, in a bidding war, part of the prize you receive is a larger price tag. Often buyers concentrate on the thrill of beating out 10 other people for a prime piece of property. But, when that feeling wears off, some buyers may end up wondering – what did I win?  The right to pay more than everyone else? So, unless they are 100% certain about the property and the price – winning a bidding war can feel a lot like losing.

When appropriate, I use escalation clauses in bidding war situations with great success. The client wins the bid and has the assurance that although they paid more than anyone else would, they did not pay any more than they had to obtain the property. The seller receives the highest offer and a deal that will likely stick.  I have had listing agents bristle or attempt to ignore my escalation clauses due to ignorance or inexperience. I suppose they would prefer my client take a wild stab in the dark and then walk out on their bloated bid down the line? Yes, that’s a better plan I suppose. However, experienced agents understand that an escalation clause is an excellent tool in a bidding war – it is precise and to the point.

Why use a chainsaw when a scalpel will do?

Tni LeBlanc is an independent Real Estate Broker, Attorney,Short Sale Agent, Certified HAFA Specialist (CHS), and Certified Distressed Property Expert (CDPE) serving the Santa Maria, Orcutt and Five Cities area of the Central Coast of California.

* Nothing in this article is intended to solicit listings currently under contract with another broker. This article offers no legal or tax advice and is for information purposes only.

Copyright © 2011 Tni LeBlanc *The Bidding War: When Winning Feels Like Losing*

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Tni LeBlanc, Broker
(805) 878-9879 mobile/text

tni@mintprop.com
www.MintProp.com
CalBRE #01871795

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. D B 09/19/2011 02:20 PM
  2. Lenn Harley 10/08/2011 03:04 AM
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Rainmaker
601,072
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Tni - Yeah, bidding wars are pretty common down here in Los Angeles & Ventura counties too.  Personally, I am sometimes shocked and amazed at the POS that garner bidding wars.  Furthermore, many of my borrowers who have fiercely won some bidding wars and only learned that they overbid when the appraisal comes in low.  That's never fun when they end up having to cancel the transaction because they're not willing to make up the difference.

On another note, I have often asked here on AR about how escalation clauses work.  Professionally, I have never seen them except on that HGTV show.  I've never seen anyone down here use this sales tactic.  How does it work?

Sep 19, 2011 04:40 PM #23
Rainmaker
714,311
Ruthmarie Hicks
Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605 - White Plains, NY

I like escalation clauses as well.  I used them in the two deals I had before the market crashed.  Not much need for that around here right now.

Sep 19, 2011 04:48 PM #24
Rainmaker
412,172
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Nancy - I've see that as well.  I have a second post planned on bidding wars, and the theme is exactly that -- Bidding Wars that Backfire.  Hopefully I can get that out soon.

Thanks Charita! They are a great tool.

Hi Rich - Yes an escalation clause cuts through a lot.  Not every buyer will use them, but they are effective for bidding wars.  They also let the buyer know they put their best foot forward.

Thanks Carla - Glad you liked the post (and the picture!)

Thanks Barb!

Margaret - Lucky you!  They were routine about two and a half years ago in my marlet.  They are still a pretty regular occurrence but not as often.

Alan May - Yes, I can imagine that a seller could think that as well.  I do my best to make the seller and listing agent know that the offer was written this way to demonstrate that this buyer wants the home more than any other buyer. 

Jon Quist - I do as well.  Those that aren't ready should really stay on the sidelines.

Sep 19, 2011 04:51 PM #25
Rainer
178,656
Rosalie Evans
Meritus Group Real Estate - Sioux Falls, SD
The Evans Group, Sioux Falls, SD Homes For Sale

This makes me think of bidding on Ebay auctions and overbidding and then having buyers remorse after you win! It is essentially the same thing except with a way bigger budget.

Sep 19, 2011 05:45 PM #26
Rainer
206,484
Marge Piwowarski
Phoenix AZ Horse Property - Phoenix, AZ
Phoenix AZ Horse Property, LLC

I hate bidding wars but see a lot of them, probably 65% of my sales involve them and a higher percentage of the contracts I write, 'cause one loses some of the wars.  I haven't seen an escalation clause used here? 

Sep 19, 2011 06:13 PM #27
Rainer
1,756,848
Conrad Allen
Re/Max Professional Associates - Webster, MA
Webster, Ma, Realtor

Hi Tni - Bidding wars create appraisal problems.  Unless you have the comps it becomes an exercise is futility.  What is with the ads in your blog?

Sep 19, 2011 11:49 PM #28
Rainmaker
1,358,117
Mike Cooper
Cornerstone Business Group Inc - Winchester, VA
Your Winchester, VA Real Estate Sales Pro

Tni, your title says it all.  I don't know how many times I've watched buyers sit around and chew their fingernails waiting for the deal to be inked.  Good stuff.

Sep 20, 2011 12:39 AM #29
Rainmaker
412,172
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Anna - Yes, eBay is good for thrills. But going nuts over a staged home where the furniture doesn't even convey and bidding way over list may not be a good idea.

Karen - Yes, that is what you want to hear from a client before a bidding war -- that they think the property is unique enough to justify getting involved with that type of process.

Tamara - Glad you liked the post.  Yes, buyers are surprised when they find out how competitive the market for foreclosures and short sales can be.

Michelle - Exactly, there is a price where it would not make sense.  That's what I want to hear from my client.  That they understand that and are considering that.  It's not just about winning the bid -- it has to make sense.  Sometimes if others are willing to make a mistake you have to be willing to stand back and allow it instead of jumping in and making a bigger one in the name of "winning."

Charlie - When an REO agent refuses to consider my escalation clause, I challenge them on it.  Most of the time, we get past it.  Other listing agents and REO agents see my escalation clause and think its great and want to borrow my language for their next bidding war.

Michael - Absolutely.  An escalation clause is an excellent tool especially when the buyer is uncertain about how much they would have to pay to win but they just don't want to have to pay any more than they have to.  Losing a house over $1000 is usually very hard to take.

Mark - LOL.  You flatter me.  I love the new picture by the way!

 

Sep 20, 2011 01:25 AM #30
Rainmaker
412,172
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Donne - You are right you do have to keep in mind about appraisals. Escalation clauses are pretty straightforward.  The offer increases by whatever increment selected ($1000, $2500, etc.) to beat the next highest bid.  It is an effective tool and many agents never use them -- which is just fine with me.  There are other details to it but those are the basics.

Ruthmarie - Did you get in real estate right before things went south?  I think we may be similar in that regard.  I got in real estate full time just as things went south - before that I was still working part time as an attorney.  I think its better this way -- it has always been hard work.  A lot of the "good time" agents fell away during the "bidding war" frenzy that we had about two or three years ago.  It was just too much work!

Rosalie - Yes, I try to stay away from eBay.  I'd rather go to the store where I can see the item and know what I am going to pay for it.  Every single time I've gotten an item from eBay it is not exactly what I thought it was.

Marge - Our market was similar years ago.  Sometimes 25 offers on properties.  There is less and less now though.  A home in really good condition or a cheap house will still cause a bidding war.

Conrad - You mean the spam?  No clue - it happens from time to time.

Thanks Mike - Glad you liked the blog!

Sep 20, 2011 01:46 AM #31
Rainer
362,377
James Loftis
RealEstate911.com - West Palm Beach, FL
RealEstate911.com

I allways recomend to my buyers to make there first offer there best and final offer based on the value  of the property and not on the listed price.

Sep 20, 2011 02:37 AM #32
Rainmaker
881,426
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY
Broker-Owner

Thanks for the shout out Tni. Escalation clauses are tricky here because many attorneys want in only after negotiation is over. But we're just...different =)

Sep 20, 2011 02:40 AM #33
Rainmaker
316,001
Sandy Acevedo
951-290-8588 - Chino Hills, CA
RE/MAX Masters, Inland Empire Homes for Sale

This is a great post and on a topic  that I have not personally seen reported on. Nice job!

Sep 20, 2011 04:39 AM #34
Rainmaker
151,643
Faye Y. Taylor
StepStone Realty, LLC - Floresville, TX
Homes for Sale Floresville, La Vernia & San Antoni

Great article.   loved the comparison.   Well made points.

Sep 20, 2011 06:43 AM #35
Ambassador
748,543
Charita Cadenhead
Keller Williams Realty - Birmingham, AL
Serving Jefferson and Shelby Counties (Alabama)

Tni it can be so easy to get caught up in the frenzy of bidding and negotiating.  Someone has to remain level headed and even when others don't we have to.  Ah the thrill and agony of "winning."

Oct 06, 2011 04:15 AM #36
Ambassador
918,797
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

What is an escalation clause? 

I have used, buyer to pay _______over the highest price offer, with proof of the other offer.

Is that what you are talking about. 

 

Oct 08, 2011 02:54 AM #37
Ambassador
3,632,990
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Tni, like you, I try to avoid them, but that isn't always possible. 

One thing I've noticed, though.  It's not always the buyers who get caught up in the compeition but their trusted buyer brokers.  Being competitive comes with our territory, but it's not always entirely appropriate when we are representing the best interests of a client.

Oct 08, 2011 03:50 AM #38
Rainer
87,124
Allen 2222
Austin, TX

Tni, very well written post and well-deserved feature!  I think you are wise to ask the buyers how they will feel if they "win", to make sure they really understand what they are doing.  Some people want to "win" even when it isn't in their best interest.

Oct 08, 2011 06:28 AM #39
Rainer
71,755
Bas Panch
SCV Home Buyer - Valencia, CA

Hi Tni,

I just want to say that you always have the best posts: informative, entertaining, interesting. Keep up the good work as a top Santa Maria short sale agent!

Jun 29, 2012 01:20 PM #41
Ambassador
2,602,487
Katerina Gasset
Get It Done For Me Virtual Services - Wellington, FL
Get It Done For Me Virtual Services

Hi Tni,Hands down one of the best that I have read about this subject.  Awesome job! I know your local Santa Maria consumers will appreciate it!Best Wishes to you!


Sep 01, 2012 05:17 AM #42
Rainmaker
2,456,106
Richard Weeks
Dallas, TX
REALTOR®, Broker

The Texas Real Estate Commission has advised Texas agents that esculation clauses are not to be used.

Oct 17, 2013 09:43 PM #43
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