Multiple Offers: How to Win the Bidding War
Multiple-offer situations have long been a fact of life in Bay Area real estate. When a desirable home attracts five, ten, or even more offers, buyers naturally tend to focus on one question:
How much do we have to offer to win?
But that isn’t always the right question.
The better question is:
How do we make ours the offer the seller is most willing to accept?
Those two things are not necessarily the same.
The Highest Offer Doesn’t Always Win
Years ago, we listed a Belmont home at $900,000 and received four offers during the first week. The highest offer was $1,003,000—but it contained an inspection contingency.
Another buyer offered $976,000 with no contingencies.
The sellers accepted the $976,000 offer.
Why would a seller voluntarily accept $27,000 less?
Because they weren’t simply comparing two prices. They were comparing price against risk.
The sellers had previously experienced two transactions in which buyers backed out. Having already endured that frustration, they placed considerable value on knowing that the next transaction had a very high probability of closing.
They weren’t giving away $27,000. In their minds, they were protecting the $76,000 they were already receiving above their asking price.
If they accepted the higher contingent offer and that buyer subsequently canceled, there was no guarantee the $976,000 buyer would still be there. Worse, putting the home back on the market could cause subsequent buyers to wonder what had gone wrong.
A seller who reaches too far for the highest number can sometimes end up with considerably less.
Price Is Only One Component of an Offer
This is one of the most important concepts for buyers to understand in a competitive market:
Sellers don’t necessarily choose the highest offer. They choose the combination of price and terms they believe produces the best outcome.
That calculation can include:
- Purchase price
- Financing strength
- Down payment
- Proof of funds
- Appraisal risk
- Inspection contingency
- Loan contingency
- Appraisal contingency
- Length of escrow
- Seller occupancy or rent-back provisions
- The buyer’s demonstrated financial capacity
- The perceived likelihood that the transaction will actually close
A buyer offering $2,800,000 with significant contingencies and limited cash reserves may therefore be less attractive than a buyer offering $2,775,000 with stronger financing, greater liquidity and fewer opportunities to cancel.
The difference between those offers isn’t simply $25,000.
It’s $25,000 versus certainty.
What Is a Contingency Actually Worth?
That’s where multiple-offer strategy becomes interesting.
Suppose the strongest non-contingent offer is $2,750,000.
Another buyer offers $2,775,000 but retains an inspection contingency.
Is that additional $25,000 enough to compensate the seller for the additional uncertainty?
Maybe.
What if the contingent offer is $2,800,000?
Or $2,850,000?
At some point, most sellers will accept additional risk in exchange for enough additional money.
But where that threshold lies is entirely dependent upon the seller.
That means a contingency has an economic value, even though nobody writes a dollar amount next to it on the purchase contract.
In a competitive situation, a buyer retaining a contingency may effectively have to pay for that protection through a higher purchase price.
And sometimes, as our Belmont buyer discovered, even the higher price isn’t enough.
Down Payment Can Send a Message, Too
The same principle applies to the down payment shown in an offer.
Imagine two otherwise identical offers at $2,750,000:
One shows a 20% down payment.
The other shows 30% down.
Assuming both buyers are fully qualified, the 30% offer may appear financially stronger to the seller. It suggests greater liquidity and potentially greater ability to absorb an appraisal shortfall or other unexpected issue.
That perception can matter considerably when offers are pushing beyond recent comparable sales.
Importantly, however, a larger down payment represented in the offer should be legitimate. If a buyer submits an offer showing 30% down, the buyer should actually have the financial capacity to make that down payment and be prepared to provide the required evidence of those funds.
The ultimate obligation is to close the transaction according to the contract. Depending upon the circumstances and lender requirements, the buyer may subsequently decide to finance the purchase differently—but representing financial strength that doesn’t actually exist is an entirely different matter.
Appraisal Risk Becomes Increasingly Important
This is particularly important when bidding takes the price into what we sometimes call uncharted waters—a price range that may not yet be clearly supported by comparable sales.
Suppose a buyer offers $2,750,000 with 20% down.
The anticipated loan would be approximately $2,200,000.
If the appraisal comes in below the purchase price and there is no appraisal contingency, the buyer may have to contribute additional cash to complete the transaction.
Now consider a buyer with enough liquid assets to put 30%, 40%, or even 50% down if necessary.
Even if that buyer ultimately intends to finance the purchase with only 20% down, the seller may view that buyer very differently.
The buyer has demonstrated the financial capacity to deal with an appraisal problem.
That’s what the seller is really evaluating: not simply the percentage down, but the probability of closing.
Should Buyers Remove Their Contingencies?
Not automatically.
Contingencies exist for legitimate reasons and provide buyers with important contractual protections. Removing them should never be treated casually or merely as the price of admission to buying a home.
The appropriate strategy depends upon the property, the disclosures and inspections already available, the buyer’s financing, the buyer’s financial capacity, the competitiveness of the offer situation, and the buyer’s individual tolerance for risk.
In some situations, careful review and investigation before writing the offer can allow a buyer to make an informed decision about removing certain contingencies.
In others, retaining a contingency may be the prudent choice—even if doing so reduces the likelihood of winning the property.
The objective isn’t simply to win.
It’s to win intelligently.
Winning a Multiple-Offer Situation
Buyers sometimes assume that winning a bidding war means being willing to pay more than everyone else.
We’ve seen enough multiple-offer situations over the years to know that it isn’t that simple.
The strongest offer is often the one that gives the seller the best combination of:
Price + Financial Strength + Terms + Certainty
A sophisticated buyer therefore doesn’t ask only:
“How much higher should we go?”
They also ask:
“What can we do to make the seller more confident that our offer will close?”
Sometimes the answer is price.
Sometimes it’s a larger demonstrated down payment.
Sometimes it’s addressing appraisal risk.
Sometimes it’s shortening or removing a contingency after appropriate investigation.
And sometimes it’s simply structuring the offer so cleanly that the seller believes accepting it is the safest path between signing the contract and closing escrow.
In a multiple-offer situation, the goal isn’t necessarily to be the highest bidder.
The goal is to be the buyer the seller is most comfortable saying yes to.
We hope you find this informaiton useful!
Drew and Christine Morgan are experienced REALTORS® and longtime Mid-Peninsula real estate professionals based in Belmont, California, where they own and operate MORGANHOMES, Inc. They help buyers and sellers navigate important real estate decisions with experienced guidance, thoughtful strategy, and highly personalized service. Their achievements include RE/MAX’s prestigious Diamond Club Award, recognition among the Top 50 RE/MAX agents nationwide, and ranking among the Top 3 in Northern California.
To speak directly with Drew or Christine, call (650) 508-1441 or emailinfo@morganhomes.com.
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This article provides educational information and is intended for informational purposes only. It should not be considered real estate, tax, insurance, or legal advice; it cannot replace advice tailored to your situation. It’s always best to seek guidance from a professional familiar with your scenario.
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