Multiple Offer Situation versus Bidding War: What are they, and why do they happen?

If you’re a home buyer and looking for information on how to win a bidding war (or “multiple offer situation”), check out my insight by following that link. For an academic discussion of the difference between the two terms, read on….

Ardell recently posted on this subject. She noted there really isn’t that much out there about this now-common aspect of buying or selling a home (common, that is, for MLS-listed homes, you can avoid the frenzy by looking for homes on MLS alternatives). She and I then engaged in some typically spirited discourse, which in turn helped me to further frame and analyze the issues raised.

Multiple Offer Situation and Bidding War defined

First, some definitions.  A “multiple offer situation” is where a seller receives two or more written offers on the property. A “bidding war,” in contrast, typically refers to oral negotiations between the listing agent and two or more of the buyers’ agents. A bidding war typically erupts, if at all, after the seller has received several written offers. The listing agent then “shops” the best offer in an attempt to negotiate the absolutely best contract possible. (Note that a listing agent can also “shop” the first offer received and before receipt of others, particularly where the seller will not be looking at all offers on a specific date.)

Sellers encourage multiple offer situations by telling buyers that the seller will look at all offers on a particular date in the future. In response, most buyers will submit an offer that includes an escalation addendum (which automatically escalates the offer amount above some competing offer) as well as waive some or all of the usual contingencies (inspection, financing, title, and information verification). So the seller can expect to receive better offers that bid against each other, resulting in a winning offer at the highest offer amount. The seller can sign the winning offer, and the house will be under contract.

If you’re looking for information about how to win a multiple offer situation or bidding war, I’ve written about the topic on the Quill blog.

When a Multiple Offer Situation becomes a Bidding War

Sometimes, the seller might counter one of the buyers in an effort to get even slightly better terms. If it stops there, not a  bidding war. But if the seller – or more accurately the listing agent – then calls ANOTHER buyer’s agent and gives THAT buyer the chance to beat the first buyer… Well, that’s a declaration of “war.”

It sucks to lose a multiple offer situation. For the losing buyers, of course, but also their agents who invested time and effort in the now unpaid endeavor. Bidding wars? That’s acid in the face of buyers and their agents. They are inherently unfair, as not every buyer is included in the bidding war negotiations. So buyers and their agents frequently cry “foul!” when they are subjected to a bidding war.

So is a Bidding War legal? Or ethical?

But is it a “foul” for the seller to instigate a bidding war? No, it is not.

First, the law. A real estate broker owes very few legal duties to the other parties to the transaction. And a broker has no legal obligation to keep the amount or the terms of any offer confidential. So can a listing agent legally shop an offer? Absolutely. Can a listing agent legally call one buyer’s agent, then another, then another, revealing details along the way in order to extract the best offer possible? You bet.

OK, well, what about ethical considerations? Does a broker have a professional ethical obligation to not shop an offer, or not instigate a bidding war? Nope, no formal ethical obligation either.

In the world of real estate, professional ethics are generally set by the National Association of Realtors. Most – but not all – real estate brokers are members of this association, thus earning the title “Realtor.” It is generally accepted that the NAR Code of Ethics sets the parameters of professional ethics.

The NAR notes that offers “generally aren’t confidential.” The Code of Ethics requires a broker to protect and promote the interests of the client. Thus, a seller may “even disclose details about [a buyer’s] offer to another buyer in hope of convincing that buyer to make a ‘better’ offer.”  While the Code requires honesty in dealing with others, it does not require “fairness” given that term’s inherent subjectivity. On the other hand, the preamble to the Code notes that the title “Realtor” has “come to connote competency, fairness, and high integrity.” So at least arguably, if a broker discloses the facts of an offer to one buyer, the broker should disclose to all buyers, particularly if that broker is a “Realtor.” [All information in this paragraph pulled from linked sources.]

But that’s a long way from prohibiting a bidding war in the first place. So in fact, there is no legal or professional obligation to avoid a bidding war. Instead, if the seller so instructs the listing broker, the broker has an obligation to instigate one.

So why doesn’t every multiple offer situation result in a bidding war? First, because there are strong informal professional ethics in play, as well as personal ethics. Almost all agents represent both buyers and sellers at various times. So we’ve “walked in the shoes” of a buyer’s agent, and we know first hand how unfair a bidding war can be. And since most of us are in the industry for the long haul, we may need to work with the same agents again down the road. If we treat them poorly today…. Plus, most folks just have a general distaste for this sort of ruthless negotiating.

Second, and perhaps more importantly, bidding wars – like any war! – can end in disaster. If the listing agent shops the offer but all of the buyers are turned off by the aggressive negotiating, then the seller will have wasted the momentum of the multiple offer situation. So there is a good argument to be made that a bidding war, being so exceptionally aggressive, isn’t in the seller’s best interests.

I hope you found this information useful! And if you’re a buyer, hang in there. While inventory is unlikely to improve much today, it certainly will over the next year, or two or three. And if you must buy in the meantime, recognize that it will be a tough row to hoe. Best of luck.

12 thoughts on “Multiple Offer Situation versus Bidding War: What are they, and why do they happen?

  1. Is it ethical? Of course not. What you just described was a PR piece for the slimiest industry in existence… this is one sliver less than the “ethics” of the medical insurance industry. Let me replace your pie in the sky scenarios with real situations I’ve dealt with in S. California.

    Unlike your dream world where the listing agents are “walking in the shoes” of the buyers from time to time, representing them… There are listing agents here and buyer agents. The two don’t mix often. The listing agents I’ve had to deal with do this little game:

    – House is listed on the market
    – Offers come in (in S. Cal, there are always multiple offers)
    – Listing agent tells my agent that “the seller would like to see this home go for 5k above list, if I can do that, they are SURE the seller will take the offer.”
    – Like a dope, I up the offer 5k… guess what happens… come on you can guess it, because i’m sure you know… the seller agent took my offer + 5k and passed it around to all the other buyers… Now they all up their offers. It’s like a slimy back room poker game in Vegas.
    – This repeats until everyone is knocked out of the game.
    To you this must be ethical… The idea of “ethics” is that you engage in activity that you wouldn’t mind having done to you. Got it? Simple ethics 101. Would you want this scenario played out to you? What about in reverse? What if we had a market where buyers were in control and they attempted to lowball sellers? Would you like that? Probably not. Would you like it if you try to buy a home and after 12 times of making 12 different offers this same tactic was repeated? Probably not.

    So it is unethical, on the grounds that it’s a tactic none of us want to experience against us.

    It’s also a reason we are going to head to another real estate crash. Homes are overvaluing and selling for inflated prices, just like in 2008… remember that? Instead of the mortgage lenders being the bad guy, this time around it’s the listing agents.

    END RESULT
    Apart from my views, the reality that does play out, is when the banks come in to appraise the property. Let’s go back to my example, and someone ends up paying 60k over list price. That “winner” is in for a shock when the bank who is giving the loan returns with, “Ok we valued the home at 3k UNDER list price, we will not fund a loan for 63k over list.” Now what? Now the stress isn’t over, it’s just beginning. Now the seller either has to concede their greed and pull back on the list price, OR the buyer has to pay more up front! Sure they can meet in the middle at some dollar amount, but it sucks on both sides.

    SCAM
    I call this a scam because we have no transparency. How do I know that there were other offers at play? Can I get a list from the agent? Is there an official body to represent both sides and show that there were real offers coming in? Since it’s a black box that no one but the listing agent knows, it’s a scam. It’s nothing different then a shady backroom poker game. There’s no “house” in this poker game to verify everything is on the up and up. I can’t call the agent and demand to see the offers that came in and for what value. That’s all hidden from me, giving the power of lies to the agent.

    OFTEN
    This is played out in almost EVERY situation I’ve attempted to buy a home in S. California. Over the past year I have put out 12 offers – most of these ended in a situation like this (about 75%.)

    I have offered above asking on several situations, only to be told “another buyer is in play.”

    LEGAL vs ETHICAL
    is it legal? So far it is. Should it be? No. When the market again crashes and people who are putting in mortgage payments on properties with inflated prices due to the greed of listing agents, laws will be put in place after the flood of short sales hits the market. Laws, just like in 2007 that hit the banks, will then prevent this idiocy.

    Is it ethical? Of course not. Remember, ethics is about relative right and wrong. It’s about, would you feel that this activity would be “ok” if done to you? If you feel you wouldn’t enjoy it, then it’s wrong to do it to someone else.

    • Brian, I don’t agree with your definition of “ethics.” First, the term is used here to mean “professional ethics” which differ from ethics generally. But even if we’re talking about personal ethics and the moral compass that should guide our actions, I still disagree.

      Yes, you are right, the Golden Rule is the foundation for any ethical consideration. But it is not the only thing to be considered. After all, life isn’t fair sometimes, and we feel like we got the short end of the stick. But that doesn’t necessarily mean that someone else acted unethically.

      • Life isn’t fair – sure, you’re right, but when you go out of your way to make bad situations worse, you are acting unethically. When you say “life isn’t fair,” I can think of that as a situation that just exists but isn’t personal – like two offers and one guy has more money. There’s no cruelty here, it’s just two guys with different amounts of cash in hand. What I’m talking about is the manufactured unfairness – the lack of ethics that imbrues the entire industry. Example: if you have a listing agent who says to a buyer “Oh I have another offer 5k more than yours can you give me 6k more?” How do I know this to be true? There is no transparency. In my case, what if there was no other offer, and this is a bluff? That would be unethical. Why? Because they would be choosing to create an action that you wouldn’t want done to your own self. “But i’m being professional, it’s professional ethics.” Huh? You’re creating a subset of ethics and ignoring the core meaning of being ethical. What about a case where an agent says “look if you can agree to an offer of $510k I’m sure they’ll take it,” when they have no intention of even sending the offer to the seller… they take the offer – pass it around to every other off with, “so we have a higher offer right now, can you go above it?” That’s also unethical. This unfairness isn’t a product of life, it’s a manufactured unfairness… as unfair as a drunk driver taking out the side of your parked car and fleeing the scene. That’s someone’s choice, not just simply “life isn’t fair sometimes.”

        What’s the result of all this manufactured greed… One quick response is the bank will return with “the house isn’t worth that much we’re not going to fund it’s entire value of your inflated price.” Now what? Now either the seller has to backup or the buyer has to pay all or a portion of this difference. You know how unethical real estate agents are? You know wha they do? They cull the buyers even before getting this far.. they’ll know that the bank won’t fund a loan for an inflated value target…. so they’ll tell prospective buyers: “We need 20% down on this house.” Why do they care how much is put down? Because Craig, by focusing on buyers who have 20% cash in hand, they know this “mark” can pay up once they get in a situation with the bank appraisal! Or another little trick of agents I’ve worked with, “Ok, let me see your bank statements…” what? Why do you need to see my bank statements I ask… they tell me that they want to make sure the loan will fund… but that’s between me and the lender… if the lender (who knows my bank account value) is fine with it, what’s going on here? Again, it’s another scam to trick home buyers into revealing if they can afford pay cash difference between the inflated value and the bank appraisal. One tricky listing agent found out who my loan was being funded with, called him up and got out of him how much he was willing to fund me… they tried to up the price on me. Again, manufactured unfairness… which I call a lack of ethics.

        When this nonsense happens enough, we suffer an entire real estate market collapse. Last time it was lenders and appraisers at fault… this time it’s agents.

  2. Brian, I disagree strongly that “ethics are ethics.” Professional ethics are different, and they are the standard that should be applied to real estate brokers.

    Most of the conduct you describe is consistent with the NAR Code of Ethics (an acceptable standard, albeit a debatable one in some instances). The broker’s duty is to the client. The broker must not be dishonest to others in advancing the interests of the client.

    In most of your examples above, the broker talked and cajoled her way into a better position without being dishonest to the buyer. That is totally consistent with good ethical practice as a real estate broker.

    If the broker was dishonest to a buyer? For example, where the listing agent told one buyer he had an offer in hand, when in fact he had no such thing? Yes, that is unethical. But even then, it hardly rises to the standard of “serious offense.”

    Real estate has at its core a massive conflict of interest (the seller-paid buyer agent’s commission). As a result, it is very easy for a broker to put his own interests ahead of his client’s. I will never get too worked up by a broker who is being a little over-zealous on behalf of his client, in the big picture that isn’t a big deal.

    But it sucks as a buyer. And I also agree, on a personal level, that it is unethical. I, personally, wouldn’t treat buyers as you describe if I were a seller. But will I do so on behalf of one of my client’s? You bet.

  3. I’m sorry but I fail to see how this is even legal? A house cannot be advertised for “sale” if the sellers really intend to “auction” it. These are two different commercial operations and if the real estate agencies and sellers are doing this, then they are willfully misrepresenting the operation and engaging in false advertising. Definitions: To Sale: 1.give or hand over (something) in exchange for money. To Auction: 1. a public sale in which goods or property are sold to the highest bidder.

    If a seller says they want 500,000 for their home and my offer provides the full amount, they should be legally bound to sell me the home for the advertised amount. Have you ever walked into a store and found the last pair of shoes for $99? Imagine you took the shoes to the register and the cashier says to you “You can’t have it for the advertised price. Let’s wait and see if someone else wants to pay more for it!”. This is exactly what is happening and it’s certainly false advertising if a property is offered for “sale”, but the real intention is to do a blind “auction”. If you apply this example to any other situation, you will see how ridiculous and illegal this is. I can tell you that a court of law will force them to hand over the price at the offered price. There is an infinite of case law backing this assertion. If this happened to me and the seller sold to someone under the same conditions but at a higher price, you bet I would be suing for damages and I would most certainly win. You cannot engage in an auction-based transaction if you advertise the transaction as a “sale”. Any commercial law attorney will tell you this.

    Now I am aware that there may be conditions attached to offers and this is something we can discuss separately. But even so, if a buyer claims that they did not sell it to me for 500k because it was subject to bank approval, then they should not be able to sell it to someone else for 510k if it also required bank approval. Otherwise, it’s just a lame excuse.

    • If there were in fact only one offer, you would be correct. A seller cannot list a home for less than they are willing to sell it for. But if there are 6 offers, then the seller can accept a price that is more than the asking price.

      In fact I have had a listing where a buyer offered more than the asking price when they were the only buyer. It seemed a bit odd, but the seller accepted it and the buyer paid it. No law against that as far as I know.

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  5. Dan, I am all for your thoughts. This is exactly how I feel. I have compared the process of a “Silent Auction” to buying a house for sale. This is ridiculous. If the house is cash only and we pay that asking price, we should Own It!!!! Totally disheartened in buying my first home!!!

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