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The Bidding War: When Winning Feels Like Losing

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*

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

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

Comment balloon 42 commentsTni LeBlanc, Realtor®, J.D. • September 19 2011 08:28AM

Comments

I like your analogy to a scalpel versus a chainsaw--I've never heard anything like that before.

Posted by Melissa Zavala, Broker, Escondido Real Estate, San Diego County (Broadpoint Properties) about 7 years ago

Tni, this is another great post!  I just want to applaud you for always giving me something great to read. 

Posted by Lorinda Ward, Serving, Hampton Roads Virginia. Norfolk, Chesapeake, Va Beach (Keffer Realty) about 7 years ago

Excellent point, escalation clause is not often used here in Manhattan New York because all offers are not binding until both parties fully executed the contract of sale and deposit is rendered. So if either one of those party received a better offer OR, change their mind, they can just walk. And I suppose escalation clause can still be used by us but I am not sure if that will fare well in our market place.

Posted by Eileen Hsu, LICENSED REAL ESTATE SALESPERSON (Douglas Elliman Real Estate) about 7 years ago

Excellent post (as usual!) - escalation clauses are such a great tool in our market, yet so often agents either do not use them or don't think about using them, but I think they are terrific. I love the chainsaw vs scapel line - good one!

Depending on the condition of the home and the preferences of the buyers, terms can also be used to a buyer's advantage - I recently "won" a bidding war, not on price, but because my clients were going to rehab the house, anyway, so we went in with an "as is" contract, no home inspection. 

Posted by Susan Haughton, Susan & Mindy Team...Honesty. Integrity. Results. (Long and Foster REALTORS (703) 470-4545) about 7 years ago

Like Eileen, we do not see escalation clauses a lot here.  What I do ask my buyers to consider is to try to take the emotion out of it, decide how much they want to pay for THIS property but also to think about how they would feel if they lost it over just $1000 or something. 

Posted by Christine Smith, Exclusive Buyer Agent & Attorney, Canton, MA (Buyers Brokers Only LLC - www.BuyersBrokersOnly.com) about 7 years ago

Then there's the other side of the bidding war.  The buyers who lose who would have gladly paid higher than the winning bid.  It's a double edged sword.

Posted by Chris Ann Cleland, Associate Broker, Bristow, VA (Long and Foster REALTORS®, Gainesville, VA) about 7 years ago
I hadn't thought of it in just those words before, but have also seen how often the "winner" of a bidding war does end up full of second thoughts and regrets. And if that does end up causing them to rethink going thru with the sale, sometimes the other buyers are no longer as caught up in emotions either...and the result may be no immediate sale at all.
Posted by Nancy Conner, Olympia/Thurston County WA about 7 years ago

I don't have the knowledge to advise a buyer about escalation clauses so I can't speak to it, but I'm guessing that this post will be my lesson on the subject.

Posted by Charita Cadenhead, Serving Jefferson and Shelby Counties (Alabama) (Keller Williams Realty) about 7 years ago

Tni,

The escalation clause works well here too. The buyer decides how much more he/she is willing to pay over the next highest bid. It is a terrific question though, asking the buyer how they would feel. I'll have to put that one in my toolbox.

Rich

Posted by Richard Iarossi, Crofton MD Real Estate, Annapolis MD Real Estate (Coldwell Banker Residential Brokerage) about 7 years ago

I've used escalation clauses before and it does work well.  This is a great post about winning, but at what price (what comfortable price).  Love the graphic.  Perfect!!

Posted by Carla Muss-Jacobs, RETIRED (RETIRED / State License is Inactive) about 7 years ago

Great info!  Very useful tool to put in my arsenal.  Thanks!

Posted by Barb Merrill, GRI, Associate Broker (Cactus Mountain Properties, LLC) about 7 years ago

Thanks Melissa -- I think we can really make a mess of things when buyers are encouraged to make wild bids in very competitive situations.  I prefer a more conservative approach to it.

Thanks Lorinda!  I always enjoy seeing that adorable picture you use as your photo.  Is that your daughter?  Love those pom-poms and I remember wearing them myself as a girl -- although I don't know if I did them as much justice.

Hi Eileen - Yes, Phil wrote a follow up piece explaining your contract process.  From the outside looking in -- it seems pretty hard to navigate, and I can see why an escalation clause would not be as helpful there.

Susan - Yes, they are a great tool. You have to have the right client and right situation -- not everyone has the stomach for them.  But yes I've won quite a few wars by using them.  Winning on terms is impressive and shows your expertise.  Figuring out what that particular seller wants most can pay off big for your client.

Christine - Great advice.  I find escalation clauses tend to eliminate losing a house over $1000 -- which is why I use them.  Sometimes buyers just don't get over losses like that.

Chris Ann - Oh the shoulda woulda coulda crowd huh?  I don't know about those folks.  They SAY they would have paid more but would they have?  I had a buyer once who tried to tell me that.  He was in a "negotiation" with a seller that took about a month so it turned into a bidding war.  He had so much opportunity to get that house it was simply nutty.  When he told me he would have paid what they paid -- I looked him dead in the eye and said  "No, you would not have!"  LOL.

Posted by Tni LeBlanc, Realtor®, J.D., Tenacious Tni (805) 878-9879 (Mint Properties, Lic. #01871795) about 7 years ago

Wow - a bidding war!! Haven't seen one of those around here for a while.  But when I do, I will remember what you have said about asking the buyer how they will feel about possibly over paying.  That's a great question that should make them think hard about their decision.

Posted by Margaret Goss, Chicago's North Shore & Winnetka Real Estate (Baird & Warner Real Estate) about 7 years ago

I have found the escalation clause to be a double-edged sword.  I have had sellers accept the other offer, because they felt that the others were willing to "name that tune", rather than "a hundred dollars more than the next guy"...

they're also a little concerned about whether the escalation winner will become remorseful later on, thinking they'd been forced to pay more than they truly wanted.

But I have also seen them used effectively.

Posted by Alan May, Helping you find your way home. (Coldwell Banker Residential) about 7 years ago

I try and caution my buyers about getting involved in a bidding war. And that isn't even including the J. Philip scenario. Best to sit and watch.

Posted by Jon Quist, Tucson's BUYERS ONLY Realtor since 1996 (REALTY EXECUTIVES TUCSON ELITE) about 7 years ago

...and if the buyer wants the thrill of the bidding war, s/he could sign in to the eBay account and buy something. If it turns out not as great as they thought, they can always trun around and resell it...

This was great info Tni, thanks!

Posted by Anna Tolstoy (Coldwell Banker Residential Brokerage) about 7 years ago
Tni, I asked my clients this very question when they were offering on a property with 3 other offers. " are you ok knowing you paid more for the property than anyone else? Because if you didn't, it won't be you with a ratified contract.". Their answer was spot on. "We want that view, and will pay more to see that it's ours."
Posted by Karen Crowson, Your Agent for Change (Coldwell Banker Residential Brokerage) about 7 years ago

I loved the title of this post Tni.  Great points here.  There are usually multiple offers in my area when it comes to foreclosures.  People start out wanting a deal, then get surprised when they find out.....other buyers are looking for a deal too.  Who knew :-)

Posted by Tamara Inzunza, Close-In Alexandria and Arlington Living (RE/MAX Executives) about 7 years ago

Tni, 

Great blog post and we are seeing more and more bidding wars these days.  I talk with my buyers about what price if they hear the home sold for and they didn't get it will they be upset?  There have been some deals that went in bidding wars that still were cheaply bought.  And after the fact, my buyers said, gee, we would have been ok paying more!  

Lesson learned.  Now, at some price the house doesn't make sense and folks have to figure out where they are on this!

All the best, Michelle 

Posted by Michelle Francis, Realtor, Buckhead Atlanta Homes for Sale & Lease (Tim Francis Realty LLC) about 7 years ago

Great post and so timely.  We have been seeing multiple offer on and for a while now. Mainly bank owned properties so it's often hard to use a price escalation addendum because the bank will often not allow them. Might be too complicated for them. But to me, they are the only true fair way to play the game and lead to much less guilt, remorse or a sense of losing down the road. 

Posted by Charlie Dresen, Steamboat Springs, CO e-Pro (Steamboat Sotheby's International Realty) about 7 years ago

Tni -- you are so right --- sometimes winning is not a good thing.  Like you, I frame the "what if" question to buyers --- what if you lost this home by x, what if you paid x price for this home, what if that, what if this --- through asking questions and listening to their responses you can learn a lot.   

Posted by Michael Jacobs, Los Angeles Pasadena Area Real Estate 818.516.4393 (Coldwell Banker Residential Brokerage) about 7 years ago
Tni, your blog is insightful and well-written as usual. I'm starting to wonder if you write blogs that DON'T get featured?
Posted by Mark Delgado, Benicia and Vallejo, Property Management, rental h (houses for rent, Solano County & Glen Cove) about 7 years ago

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?

Posted by Donne Knudsen, CalState Realty Services (Los Angeles & Ventura Counties in CA) about 7 years ago

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.

Posted by Ruthmarie Hicks (Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605) about 7 years ago

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.

Posted by Tni LeBlanc, Realtor®, J.D., Tenacious Tni (805) 878-9879 (Mint Properties, Lic. #01871795) about 7 years ago

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.

Posted by Rosalie Evans, The Evans Group, Sioux Falls, SD Homes For Sale (Meritus Group Real Estate) about 7 years ago

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? 

Posted by Marge Piwowarski, Phoenix AZ Horse Property, LLC (Phoenix AZ Horse Property) about 7 years ago

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?

Posted by Conrad Allen, Webster, Ma, Realtor (Re/Max Professional Associates) about 7 years ago

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.

Posted by Mike Cooper, Your Winchester, VA Real Estate Sales Pro (Cornerstone Business Group Inc) about 7 years ago

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!

 

Posted by Tni LeBlanc, Realtor®, J.D., Tenacious Tni (805) 878-9879 (Mint Properties, Lic. #01871795) about 7 years ago

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!

Posted by Tni LeBlanc, Realtor®, J.D., Tenacious Tni (805) 878-9879 (Mint Properties, Lic. #01871795) about 7 years ago

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.

Posted by James Loftis, RealEstate911.com (RealEstate911.com) about 7 years ago

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 =)

Posted by J. Philip Faranda, Broker-Owner (J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY) about 7 years ago

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

Posted by Sandy Acevedo, RE/MAX Masters, Inland Empire Homes for Sale (951-290-8588) about 7 years ago

Great article.   loved the comparison.   Well made points.

Posted by Faye Y. Taylor, Homes for Sale Floresville, La Vernia & San Antoni (StepStone Realty, LLC ) about 7 years ago

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."

Posted by Charita Cadenhead, Serving Jefferson and Shelby Counties (Alabama) (Keller Williams Realty) about 7 years ago

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. 

 

Posted by Missy Caulk, Savvy Realtor - Ann Arbor Real Estate (Missy Caulk TEAM) about 7 years ago

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.

Posted by Patricia Kennedy, Home in the Capital (RLAH Real Estate) about 7 years ago

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.

Posted by Allen 2222 about 7 years ago

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!

Posted by Bas Panch (SCV Home Buyer) over 6 years ago

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!


Posted by Katerina Gasset, Get It Done For Me Virtual Services (Get It Done For Me Virtual Services ) about 6 years ago

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

Posted by Richard Weeks, REALTOR®, Broker about 5 years ago

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