In a hot real estate market, sellers may find themselves determining the best way to engage in an early offer negotiation. We asked Leslie John, the Marvin Bower Professor of Business Administration at the Harvard Business School, to answer a question regarding this topic.
Q: I’m selling my house in a seller’s market. As is the convention in this market, I listed the house at the higher end of its value and specified a deadline for prospective buyers to submit their offers. I was attempting to induce a bidding war. Typically, in this situation, offers come in very close to the deadline. Well, it’s Saturday—three days before our Tuesday offer deadline—and I just received an excellent offer: way over my asking price, all cash, and with no contingencies. The catch: Their offer expires in 24 hours—two days before the deadline. What should I do?
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How to get more from an early offer negotiation without taking a big risk
Professor John: First, you might question the credibility of the offer deadline. In competitive markets such as yours, it’s not uncommon for buyers to have already lost one or more bidding wars for other properties. As a result, your bidders may be particularly wary of losing out again. From that perspective, it’s unlikely that, two days from now, the bidders would be unwilling to pay the same amount. That said, you don’t want to look a gift horse in the mouth. This sounds like a terrific offer, and so you would be completely justified in simply accepting it.
If you are feeling more ambitious and a little more risk tolerant, you might consider one of the following offer negotiation strategies, both of which leverage the information the early-bird bidders have conveyed: They are serious, have a high willingness and capacity to pay, and want to avoid a bidding war. Relative to simply accepting the current offer as is, both of these strategies confer the possibility of achieving a substantially higher price while introducing little additional risk.
Strategy 1: Seller-induced escalation clause. In this scenario, you would ask the bidders to extend their offer until after the standard offer deadline. In exchange for doing so, you would give them a right of first refusal: That is, before accepting another offer, you would give the early bird bidders the chance to beat it. However, you would also convey (politely and respectfully) that such a privilege does not come free: To gain it, the bidders would have to agree to beat the best offer by some pre-agreed-upon sum—say, $10,000. This is value creation in action: You give these bidders something that they value a great deal (the ability to win the house without having to be directly embroiled in a bidding war) with little cost to you. (Presumably, you don’t care who buys the house, only that the buyer pays the highest possible price.) In return, you get something very valuable: the ability to leverage a multiple-offer negotiation situation.
That said, this strategy is not without risk. After all, the Tuesday deadline could come and go without putting more offers in your pocket. Although the early bidders would not necessarily become aware of this fact (you certainly would not want to proactively divulge it), you could be in a weaker position to negotiate with them than you would have been before the offer deadline, which brings me to my second possible course of action.
Strategy 2: Aggressive counteroffer. These bidders are clearly eager to subvert the competition and buy your house. For this reason, they may be amenable to substantially raising their bid in exchange for the certainty of obtaining the house and avoiding a bidding war. Thus, you might try making an aggressive counteroffer and telling the bidders that you will call off the bidding war if they accept.
What might lead you to choose one offer negotiation strategy over the other? You might choose Strategy 2 if you are eager for closure or have an excellent sense of the highest possible price the property can command (thus allowing you to make a sufficiently high counteroffer). As for Strategy 1, the economic rationale for deferring until Tuesday is that you would truly let the market speak, and you may be more likely to assess and in turn capture the property’s true market value. This is particularly the case if you do not have a strong sense of the price your property can command. There is also a psychological rationale for waiting until the offer deadline. If you accept an offer before the deadline, you might always wonder how much more you could have gotten. By waiting to see what, if any, offers come in by Tuesday, you will avoid such regrets.
Do you have a real estate offer negotiation strategy that you prefer? Share your ideas in the comments.
We made an early offer on a house once and it was refused by the seller. We later bought the house for $44,000 less than our offer when the bidding war the vendor expected didn’t eventuate. Accepting the current offer may make sense if the vendor values certainty.
Prof. John rightly believes the acceptance of the first offer is justified. It’s a generous offer presumably above market value. The seller takes the home off the market and accepts the all-cash offer. The deal is consummated and the seller goes to sleep that evening dreaming about the potential uses for the newfound wealth. At 3 o’clock in the morning that sleep is interrupted by a nagging possibility. “Could I have done better?”
Is that not a version of the “winner’s curse” from the seller’s point of view?
A potential risk you fail to mention is that the first bidder may feel like they are being “played” and they withdraw their offer. Be careful “pigs get slaughtered “ therefore I think strategy 2 is the better choice as it still allows you to escalate the price without alienating the Buyer