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I have been involved in many multiple offer situations as a buyer, seller and listing agent. I just made an offer on a short sale late last week where they received multiple offers and they have asked for highest and best. There are many different strategies you can use when trying to win a highest and best situation. It is tough to decide how to revise your offer and how much to raise your offer in a highest and best situation. The biggest problem in any multiple offer situation is you don’t know what other buyers will offer. All you can do is analyze the situation as best you can, and make the best offer you can based on your own numbers and needs.
As an investor myself, I have won and lost many highest and best situations. A key to my investing strategy is buying homes below market value and I detail many of my strategies in my complete guide to purchasing long-term rental properties.
What does highest and best mean?
Highest and best has become more popular in the last few years due to decreasing inventory and increased buyer demand. I am a HUD and REO listing broker as well as a real estate investor, and I am in highest and best situations all the time on my listings and as a buyer. Highest and best is when a seller receives more than one offer on a property, and they decide to give everyone a chance to submit there best offer. In the seller’s formal request, the seller gives each buyer a chance to raise their offer and a date and time all offers must be received by the seller. The seller will review all offers at the same time and pick the offer they like best.
I list a lot of bank foreclosures, and banks use highest and best in almost every situation when they receive multiple offers. Banks can take a long time to respond to offers, and some banks have policies that they will not review offers until a home has been on the market a certain amount of time. Because of these policies, banks end up with multiple offers on many of their properties. The banks started asking for highest and best to give every buyer a fair chance to revise their offers. In a highest and best situation, the bank notifies every buyer they have multiple offers, and to submit their highest and best by a certain date and time.
I am seeing many traditional sellers (not banks) using highest and best as well. In the past, most traditional sellers may let all buyers know they received other offers, but not officially ask for highest and best. Even if a seller does not formally ask for highest and best, I would treat any situation where a seller gets multiple offers as highest and best.
Do not be scared off by multiple offers
Many buyers do not like it when a seller asks for highest and best. I hear buyers say; “I don’t want to get in a bidding war” and they withdraw their offer. If you want to get the best deals you have to take part in highest and best bidding wars. The worst thing that can happen is you get beat out, so why not try? Why not leave your offer the same as your original offer and if you get it great, if not move on. For more detailed tips on getting your offer accepted here is a great article on how to make an offer that will be accepted.
Why do sellers ask for highest and best?
Highest and best situations can make buyers mad, but the sellers have a good reason to use it. The biggest reason is they want to formally give every buyer notice of multiple offers and give them a chance to raise their offer. Banks, in particular, have been sued a lot and they want to do everything by the book, with paperwork to prove it. Highest and best is usually the fairest way to handle multiple offers.
Banks and traditional sellers also use highest and best to try to get the most money they can for their house. They are the owner of the house and they have every right to try to maximize their profit or cut their losses.
Can you get information from the listing agent about other offers?
If you are dealing with highest and best, you most likely have a real estate agent, and the seller has their own listing agent. You can’t exactly talk directly to the listing agent, but you need your agent to get as much information as possible. Here are some great questions to ask:
1. How many offers are there?
2. Are any of the offers cash?
3. When is highest and best due?
4. What is the highest offer you have now?
5. Is there anything special the seller is looking for? Closing date, financing, rent back?
If you have any experience with highest and best, you know the listing agent will not answer most of these questions. It doesn’t hurt to ask and see if they will answer. As a listing agent myself I won’t answer any of them, except how many offers there are.
How much should you offer?
There is very little chance the listing agent will tell you how much the other offers are and even if they do, the other buyers could raise their offers. It helps to know how many offers there are, but It only takes one offer to beat you. Whenever I am in a highest and best situation I make the highest offer I can based off my buying criteria and profit potential.
I don’t try to guess what the other offers are in a highest and best situation. My theory is that I would rather pay a little more, and get a great deal than try to save money and get beat out. Having said that, don’t pay more than your numbers say you should. Most of this advice applies to investor offers if you are an owner occupant you have many factors to consider. You need to look at supply and demand, how much you love the house, and what neighborhood prices are. Emotion will come into play much more with an owner occupant offer than with an investor offer.
Remember that the list price is not the only thing you should base your offer on in a highest and best situation. Some buyers will think of the list price as the most they will offer, but this may be a huge mistake. I try to think of a multiple offer situation in this way: What is the most I would pay for the home if the house did not have a list price. If someone is willing to pay more, then I am confident I made my best offer and gave it my best shot. I won’t regret trying to save a few bucks by offering less than I was ultimately willing to pay.
How does your loan affect the chances of getting the house?
For myself, I have the option of offering with a loan or cash on most properties. On my long-term rentals, I like to use financing, but I may use a cash offer to give myself a better chance. On fix and flips, I will always offer cash, even though I have bank financing on them. The reason I do this is that I can pay cash if needed and my bank doesn’t require appraisals on most of my loans. If you can offer cash, it almost always looks better than a financed offer. Just make sure you can produce a proof of funds letter showing you have the cash. In some situations like with HUD, financing does not matter. HUD only cares about the net price to them.
How else can you get your offer accepted?
- I always explain my financing if I submit a financed offer in a highest and best situation. My portfolio lender does not require an appraisal or repairs on most of my properties. I make sure I tell this to the seller so they know I will close quickly without having any appraisal issues.
- Sometimes I will ask for the seller to pay closing costs in my offer to save cash. In highest and best I usually remove the closing costs, because it increases the net to the seller and makes my offer stronger.
- I will remove my inspection contingency on some properties. Usually, I only remove my inspection contingency on newer homes that I have a very good idea about the repairs needed. If a home has had a few offers fall apart because of inspection issues this can be a great way to get the seller to accept your offer. Only remove your inspection contingency if you are experienced with repairs and evaluating a home.
- An increase in earnest money can also get the sellers attention in a highest and best offer situation. If you raise the earnest money and remove the inspection contingency, this can really increase the chances of your offer being accepted.
What is the seller does not ask for highest and best?
Many times traditional sellers will receive multiple offers, but not ask for highest and best. In many states, the listing agent is required to tell all buyers when the seller receives other offers. When you are informed that there are multiple offers, don’t wait around to see if they will ask for highest and best. There is a chance they will never ask for highest and best, but you can still revise your offer. If I am notified a seller has multiple offers, I immediately ask if they are asking for highest and best. If they don’t know or say no, I will revise my offer right away. If you revise your offer right away, they may accept your offer without asking for highest and best and giving other buyers a chance to raise their offers. Another tip is to always ask the listing agent to notify you if they receive other offers after you have submitted your offer. I hate it when I find out I lost out on a house, and I was never notified they had other offers!
Should you use an escalation clause?
An escalation clause is when a contract states the price will be this unless a higher offer is received, then the price will raise this much over the next highest offer. For example:
Contract price: $100,000
Escalator clause: If the seller receives any offers higher than $100,000, this offer price shall increase to $1,000 more than any higher offer up to $110,000. Any other higher offers must be given to buyers agent to confirm the higher price.
Many buyers feel this is a great way to get the lowest price on a home in a highest and best situation. However, there are many problems with an escalator clause and it may actually cause the buyer to pay more than they would have otherwise.
1. The seller is not obligated to show any other offers to the buyer or their agent. Yes, it can be asked for in the offer, but the offer is not signed by the seller and they are not bound to it.
2. The buyer has stated in writing they are willing to pay $110,000. A smart seller will simply counter the buyer at $110,000 and does not have to show any other offers to the buyer or their agent, because they did not accept the original offer with those terms. I also do not know how legal it is to show a confidential offer from one buyer to another buyer without their permission.
3. Some offers may ask the seller to pay for closing costs and this will change the net price to the seller. Even though this offer is $100,000, another buyer could offer $105,000 with the seller paying $6,000 in closing costs. The second offer is actually lower than the $100,000 offer, but because of the escalator clause, the first offer would raise to $106,000.
4. Most banks simply will not accept an escalator clause. It may actually hurt your chances of getting the house and if your agent argues that they have to accept the escalator clause, it could make the banks and listing agent mad, hurting your chances even more.
It is tricky to know how much to offer in a highest and best situation, but stick to your numbers and do not let emotion get involved. It is better to lose out on a home than pay so much that it stops becoming a great deal. Another tip is to always ask the listing agent to notify you if they receive other offers after you have submitted your offer. I hate it when I find out I lost out on a house and I was never notified that they had other offers.