How Should a Home Buyer Deal with Multiple Offers on Property of Interest?

Any buyer who has actively and seriously been involved in the Charlotte area real estate market in the last year or so knows that the inventory of properties is low and there is no shortage of buyers competing for the best values as they enter the market.  It has become commonplace to see multiple offers on attractive homes in desirable areas within a day or two of a listing entering the market.  The agents for interested buyers are then notified that the seller has received multiple offers, and the request is made for each buyer’s “highest and best” offer by a date and time certain.  Buyers in this market can experience this two, three, four and more times as they find homes they would like to purchase.  How should a frustrated buyer deal with this common situation?

Depending on whether you are an investor looking for another project or a homebuyer searching for your next home, emotion can play a large part in how you proceed with an offer.  It is easy to say, but it is also true—try to leave emotion out of it.  Even if the property “checks all the boxes” and would be the perfect home for you, it will also be a huge investment—maybe the largest single investment you ever make.  The last thing you want to do is get the home under contract by overpaying for it.  So how do you avoid this in a multiple offer situation, where other buyers are almost certainly offering more than the seller’s listing price?

One common mistake buyers often make is to focus too intently on the seller’s listing price.  That listing price should be nothing more than an indication of what the seller would be willing to accept for the home.  It is certainly not a statement of the home’s fair market value.  The focus should be on establishing a reliable estimate of the property’s fair market value (“FMV”), not the listing price.  If fair market value is well below the listing price, the buyer is probably best advised to move on to the next opportunity, no matter how much the buyer likes the home.  If FMV is above the listing price, then making an offer at the FMV is a good way to outbid other buyers, while avoiding the mistake of overpaying for the property.  So how do we estimate FMV?

DO NOT rely on automated valuation models like Zillow’s “Zestimates” in attempting to establish a home’s FMV.  Such automated valuation models often rely on old or incomplete data, and they are frequently far off the mark.  That is a very dangerous way to make the single largest investment of your life.  FMV should be estimated by preparing a “Comparative Market Analysis” (“CMA”) for the home from the latest and most complete database available—usually the local multiple listing service database.  This can be done by a competent buyer’s agent who has access to the database.

Let’s illustrate this with a couple of examples:

EXAMPLE ONE: Buyer loves a home just listed for $300,000.  This buyer has not engaged in the current real estate market much yet, and he assumes an offer of $280,000 will get some traction.  All asking prices are negotiable, right?  He asks his agent to prepare the offer without researching the FMV.  The $280,000 offer is presented, and the agent is promptly notified that there are three other offers and seller is requesting the buyer’s “highest and best” offer by 5PM tomorrow.  The agent prepares a CMA and concludes from recent comparable sales data drawn from homes in the same community that FMV is $305,000.  The buyer doesn’t care what the comps tell him.  He thinks he should not have to pay the seller’s asking price.  He does come up to $295,000.  The buyer is promptly notified that the seller has chosen another offer.  When the contract closes and that accepted contract price becomes public record, the buyer discovers that the seller accepted an offer of $307,000.  His offer wasn’t even close.  Did the successful buyer overpay for this home?  Probably not.  In a market in which prices and FMV are on a steady upswing, that buyer probably paid FMV for the home; and by being willing to look beyond the listing price of $300,000 and bid closer to his estimate of FMV, he was successful in getting that property under contract in spite of the competition from other buyers.  He didn’t “steal” the home, but he didn’t overpay either.

EXAMPLE TWO: Let’s take the same home listed for $300,000 and involved in a multiple offer situation.  But in this case, let’s assume a competent CMA estimates FMV at only $285,000.  Our buyer loves the home and decides to make an offer for the full FMV plus $5,000 -- $290,000 to reflect the upward momentum of the market.  He is promptly notified that the seller has accepted a higher offer, and we later discover that the home sold for $307,000.  In this case, I would assert our buyer was smart to limit his offer to a price supported by the data.  He loved the home, but he took control of his emotions.  He bid slightly above the estimate of FMV to give himself a serious chance of having his offer accepted.  But he knew when to “draw the line.”  The buyer who ultimately purchased this home for $307,000 did overpay.  He did get the home, but it will probably take some time for the FMV to catch up to the price he paid for this home.  I would argue our buyer was smart to set a logical limit on his offer price BASED ON FMV, not listing price. 

That is the point.  In a market where buyers find themselves routinely confronted with multiple offers on properties of interest, the smarter course of action is to check your emotion at the door, ignore the listing price as anything more than an indication of what the seller would accept for the home, and establish a fair market value on which to base his “highest and best” offer.  The buyer may still see several opportunities go to other buyers.  This sort of discipline takes perseverance, consistency and patience.  But our buyer can feel confident that he made a fair, serious offer in each case, supported by the data.  When he ultimately does prevail in getting a property under contract—and he will—he can be comfortable that he did not overpay for the home and feel confident that he made a solid, rational investment.

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