June 1st 2012
Mann Report Residential
Five years ago on 4/30/07, I wrote a column about Best and Final offers. The real estate market was at its peak, and competitive bidding was commonplace in all price ranges and categories. Discretionary Wall Street bonus money jingled with frothy cash payments, interest rates hovered at 6%, buyer demand was high, and quality inventory was tight. Open houses were crowded with as many as 30 people showing up in an hour, and activity was brisk. Apartments were not staying on the market very long, often trading 10-15% above asking prices.
Fast forward to 2012. We’re deep into a strong spring selling season, and multiple bidding has returned, but its flavor is very different. Prices are stable and except in the “uber” category north of $25 million, buyers are more restrained, and sellers are more realistic. This time around, short supply, high demand and historically low 4% interest rates are combining with rising rents to push up buyer confidence. Non-financial professionals are being favored over Wall Streeters, all cash offers continue to trump all others, and direct buyers are testing the boundaries of dual agency.
Though the climate is decidedly different, the steps required to navigate competitive bids remain largely unchanged. In my view, there are four critical steps: 1) Hire A Pro, 2) Line Up Your Ducks, 3) Go The Distance and 4) Rush To Contract.
Hire A Pro
Today more than ever, it’s important to collaborate with an experienced real estate professional. Although sales information is readily available online, the principal who goes it alone is at a disadvantage—even more so when there are multiple bids. Contrary to lay opinion, veteran brokers acknowledge that when each side has separate representation, the transaction proceeds more smoothly and with less risk of derailing. While NY State recognizes dual agency, in a direct deal, both buyer and seller give up the right to an agent’s undivided loyalty.
Line Up Your Ducks
Pre-approval is essential for purchasers who intend to finance. Though neither binding nor a guarantee that an actual commitment will follow, being pre-approved by a lender serves as evidence that a borrower’s credit score was checked, income and employment histories were reviewed, and asset and liability statements were documented—all satisfactorily. Buyers who are able to waive a contractual financing contingency but need bank funds to complete the transaction, should have their mortgage agent qualify the building in advance and also order the appraisal to ensure that the report doesn’t fall short of the contract price. Those purchasers who will not remove the financing contingency should offer a short 14-21 day timeline.
There are factors besides money to make an offer more attractive than a rival’s. The highest bid is not always the best. In competitive situations, the terms of the deal matter, and the buyer’s qualifications weigh heavily especially in co-ops where board approval is required. Your offer should include a clear net worth statement and employment profile to give it substance. If you can, express flexibility that matches the seller’s time frame for closing and occupancy dates. Personal notes help to humanize negotiations. If a common ground is discovered with the seller, such as schools, charitable interests or club memberships, do include this reference. When everything else is equal, intangibles can tip the scales.
Go the Distance
In a best and final scenario, there are no second chances. The difference between a winning and losing bid is sometimes insignificant. When I’m representing purchasers, I advise they go to the last dollar at which they will feel good about entering into a contract of sale, and beyond which they won’t kick themselves for having lost the property. When I’m representing co-op sellers, I often raise the subject of conditional approval for a buyer whose liquid assets may be low or whose income history may be volatile. I look for a willingness from the prospective buyer to enter into a side agreement to put maintenance in escrow should the board request this and grant conditional approval.
Rush To Contract
When your bid is accepted, instruct your attorney to complete due diligence promptly. With back-up bidders in the wings, delay could cost you money and the property. Once an offer is accepted, it’s best for a seller to stay with the deal and continue to show for back-up only. Sellers should be prepared to issue a contract to the buyer’s attorney within 24 hours along with supporting documents including the last two year’s financial statements, house rules, proprietary lease, offering plan and amendments. Set a time limit for a buyer to return a signed contract. Five business days is realistic. If your buyer pulls out for whatever reason, sellers should go directly to the first back-up bidder.
Unlike the Best and Final scenarios of 2007 which brought out the boldest of bidders, today’s buyers are demonstrating more restraint and deals are getting signed just below, just above or at more realistic asking prices. Skillful broker management remains key.