Multiple offer situations occur, as you might have guessed, when several buyers have submitted offers on the same house. This typically happens in a seller's market where inventory is low and demand is high (usually six months of inventory or less). This could occur all at once, or some listing agents selling the home will 'hold back' all offers for some period of time to accrue these multiple offers upon instruction of their client, the seller. Clearly, having a multiple offer situation is beneficial to the seller and a detriment of sorts to the prospective buyers.
While it is common practice for the realtor to disclose if there are currently other offers on the property of interest, it is important to note that they are only permitted to disclose such information on instruction of the seller. The seller may or may not choose to share if there are other offers on the property, whether the other offers were brought to the table by the listing agent, another agent from the listing agent's brokerage or by another broker. It is even up to the seller's discretion to allow the listing agent to disclose the terms and conditions of the other offers.
Upon receiving multiple offers, typically the listing agent will ask the buyers' agents (technically known in the industry as selling agents) to have their clients submit their 'best and final' offers by a certain date and time - normally a day or two out. The listing agent explains that he or she will sit down with the seller at that date and time, for the sellers to decide which buyer they are choosing to move forward with. Keeping in mind that the listing agent may or may not have the liberty to disclose the terms of the competing offers, it is important as a buyer to be represented by a selling agent who is knowledgeable with the market trends in the area to give them an edge and ultimately, to secure the house.
This is where it can get tricky on the seller's side; let's say they've received 8 offers in the first week of a new listing. Their hypothetical day and time to review the offers, Friday at noon comes around and now they have to use all of the given information gleaned from the buyers to make the critical decision as to which buyer to go with. While many sellers and listing agents can fall for simply taking the highest priced offer, there are many other factors to consider for a successful transaction.
A buyer's pre-qualification letter which should be submitted alongside their offer is a very useful tool in assessing the candidates position. When an offer is submitted without a pre-qual letter and no explanation as to why or when it should be expected, that raises some concern about how serious the buyer is. A listing agent (or seller) is able to pick up the phone and call the mortgage broker that gave the buyer the pre-qual to determine the strength or weakness of the buyer. If you are looking at 8 different offers from the seller's side, you'll want to know any extra pertinent information about these buyers' true ability to qualify for a loan as this will hopefully lead to selecting the most qualified buyer and a successful closing. Substantiating which buyer can actually afford the house is essential. Seller's do not want to be forced to put their home back on market because of the buyer's inability to obtain the proper financing.
This is particularly important because the vast majority of offers that come in will be offers contingent on mortgage financing. There are times when you get all cash offers or even offers that are not all cash, but are also not contingent on mortgage financing. In both of these situations, it's imperative to get their proof of funds and to thoroughly scrutinize those proof of funds. In the state of Texas, it's not normal to ask for proof of funds, if the buyer's agent submits a pre-qual letter from a bank. In states with higher priced homes such as California, listing agents will typically ask for the proof of funds along with the pre-qual letter.
A new addendum has been promulgated by the Texas Real Estate Commission which gives buyers the ability to state that should the house not appraise they are willing to a) pay the sales price regardless of the appraised value 2) pay the difference as long as it appraises at a certain amount or c) are not willing to pay the sales price if the property does not appraise. This new addendum is another layer to heavily consider when reviewing multiple offers.
Let's take those theoretical 8 offers into example once more. If some of those are over list price but do not have the appraisal addendum included saying that the buyer is willing to pay the agreed upon sales price regardless of the appraisal, then you are relying very heavily on the appraisal to come in at the sales price. Keep in mind that appraisers work six months in arrears when comparing the subject property. This means that while you are purchasing a home right now, the appraiser may be comparing that home to one that sold six months ago under different market conditions and trends. While the house in question may be in line with the pricing of the market today, it may be out of touch with what was going on six months ago.
An offer in that stack of 8 that checked the second option in the appraisal addendum may be considered as a candidate who is willing to negotiate. Another offer in that same stack who opted for the third option in the appraisal addendum saying they will not be paying if it does not appraise could be considered as a take it or leave it candidate. This is just one piece of the puzzle, but one that has become extremely important when comparing offers to see who the best fit would be.
It's valuable as a listing agent in a multiple offer situation to understand the subtle complexities of the real estate contracts (which are written by TRELA and promulgated by TREC). Understanding what is considered a strong amount of earnest money, how long local vs. big-box lenders take to close their loans relative to the bank that will be underwriting financing for the buyer, who is paying the survey or home warranty, how long until the deal closes , how long their objection period is, how long is the contract contingent on mortgage financing, what title company is being used (is it your clients' preferred title company or a title company of the buyer's choosing), what kind of loan is it (such as VA, FHA, conventional) are just some examples of the intricacies involved in crafting a real estate contract.
You'll also have times where buyer's agents will include a personal letter written by their client. The information to be extracted from these letters are minimal - as anyone with a brain will simply say the good things about themselves and leave out the bad. A more useful way to extract information about a buyer is to simply pick up the phone and ask their agent. Once the offer is submitted by the buyer's agent, his role at this point is to convince the listing agent, in just about any way possible that his client is who should be chosen. At this point, a buyer's agent is deleveraged to some extent and usually very willing to be forthright in answering any questions posed to them within reason. As a listing agent or selling agent (buy-side) it's imperative that you act as a fiduciary and not give away any material information about your client that you don't have permission to, especially if it hurts them in any way. All agents should be cautioned to always think first and speak last. With that said, asking probing questions such as where does their client work and for how long will almost always elicit a response.
As a listing agent you'll want to ask the selling agent how bad their client really wants the property. You'll want to know if the buyer loses the multiple offer situation - will they be willing to put in a backup offer. My response to that question has always been and will always be, "No, backup offers are for losers."