Multiple Offers, and when a second buyer brings an offer in the middle of negotiations with the first buyer

It may surprise people to learn that we still get lots of questions about multiple offer situations. While the market has definitely slowed down in the past year or so, listings where two (or more) buyers competing to buy the property still happen. As my friend Pat Crosby, a 35+ year real estate veteran frequently said "a well-priced home that is well presented and in great area can sell quickly in any market conditions..." And yes, flat fee MLS listings are just as likely to see multiple offers as other listings.
While I haven't had the absolutely off the hook months of 2002 where I remember within one month I had 1 listing that received 11 offers in the first three days, followed by another listing that had 9 offers in the first four days. I remember explaining to those sellers that traffic control at offer presentations was a very rare problem to have, and certainly one of those problems that is nice to have. Yes, both of those properties sold for significantly more than their listing price. I have to wonder if we will ever see conditions like that again in my lifetime.
So the main concept I preach for multiple offers is fairness. Sellers often want to know what the applicable rules or laws are for multiple offers, and there really aren't any that apply directly. Of course, sellers can't discriminate in accepting offers based on protected classes, and need to follow fair housing laws. That doesn't give a seller much guidance. I believe the guidance for how to act in a multiple offer situation is ethics and common courtesy.
Fairness, ethics, and common courtesy sound good, but how should a seller apply those concepts to their specific situation? Let's get specific:
Offer Situation #1: Multiple Buyer Offers from the beginning.
This situation presents itself when before an offer is presented the flat fee seller gets the call from more than one buyer or agent who says they would like to present an offer on the property. Right away, when the seller gets the second such call, let both agents/buyers know that you have two parties planning to present offers. If time is short, I recommend offering them additional time if they wish to revise their offer now that they know they will be bidding against another buyer. This helps the seller because buyers will generally increase their offer amount--their mindset changes from "how low can I get this home for" to "what is the most I will be willing to pay for the home/at what price will I later wish I would have offered more for" if they lose the home to the other buyer. To be fair to the first buyer/agent who told you they have an offer, the seller should call that buyer/agent right away to let them know there is another offer. Again, offer to give them a little more time to revise their offer (usually 3 to 24 hours depending on the situation).
Some sellers have a temptation in situations like this to try to turn the offers into an open auction to the highest bidder. I generally don't recommend that course of action because it tends to make all the buyers feel like they are being taken advantage of--that the seller is trying to emotionally and financially manipulate the buyers to get the last nickel out of them. Even the winning bidder in such a situation often has a bad taste in their mouth (not to mention more likely buyers remorse compounded by a fear that they paid way too much) and there is very little goodwill left in the transaction.
My opinion is the better, and more courteous way is to make sure each bidder knows to put in their best offer, and that the seller will choose what they feel is the best match for their needs. Telling bidders of your plans is reassuring to buyers in what is usually an emotional roller coaster of bidding for a home they really want. And my opinion isn't based on the principal of just being nice. In my experience it is critically important to get the best buyer through a bidding process that the buyer doesn't see as patently unfair or a deck stacked against them. In that way, the transaction still has goodwill between buyer and seller to get them through any unexpected issues that arise in the future. I have seen more than one seller who could have tried to squeeze the last nickel out of a multiple buyer but didn't, and that later that fact saved the transaction when the air conditioner stopped working the day before closing. Instead of having a resentful buyer who felt manipulated by the bidding process who suddenly sees the tables turned where the seller is at their mercy to accept a proposal suitable to the buyer, the buyer approaches the situation with balance and goodwill towards the seller.
Special important guidance for flat fee MLS listing sellers
Flat Fee MLS Listing Sellers may have other information important to share with a buyers agent. Since flat fee sellers will pay zero buyer agent commission if they accept an offer from a buyer with no agent involved, they need to let a buyer agent know this fact if they have an unrepresented buyer bidding against a represented buyer. Of course, the represented buyer's offer will require the seller will pay a buyer agent commission. Disclosing this information will generally help the seller, as it makes the represented buyer understand they may need to bid more to have a more attractive bid.
This disclosure is not necessary when all the buyers are either represented (where a commission would be paid), or all the buyers are unrepresented. This disclosure is also generally not necessary for sellers who are not flat fee listed, because the typical full priced traditional listing agreement doesn''t give the seller any commission savings if the buyer is unrepresented--the listing broker simply gets both the buyer and listing portion of the commission.
Offer Situation #2: A second buyer arrives while seller and the first buyer are negotiating an offer.
This offer situation is usually more challenging then a simple multiple offer because of timing involved. The most common situation is that the first buyer makes an offer which the seller wants to counter offer, or maybe has already counter offered the offer. Then the second buyer appears ready to put in an offer, usually with the knowledge that they are bidding against the first buyer.
The seller may have a counter offer extended to the buyer. If this is the case timing can be particularly difficult, especially if the seller would like to withdraw the counter offer to see if buyer #2 has offered a better deal. If this is the situation, I generally recommend immediately communicating to the buyer/agent #1 that you withdraw the counter offer because another buyer has made/will be making an offer in writing (via fax and/or email), then following up with a phone call to the buyer/agent. I recommend making this communication in writing as a way of documenting the time your withdrawal was communicated.
An important exception: A few times since I started in real estate in 1989 the second buyer has appeared with a better offer, but the buyer and seller have verbally agreed to terms and are in the process of getting everyone's signature. This is a completely different situation, and I strongly believe that the seller must follow through in finalizing and signing off on the verbally agreed to terms. I believe not doing so would be unethical and unfair, as well as potentially creating a big mess with lots of upset people.
At this point, assuming buyer #1 has confirmed that they understand the counter offer has been withdrawn, you can proceed with the basic process outlined in Offer Situation #1 above: Make sure both parties know they are bidding against another party, encourage their best offer, etc.
Multiple Offer Emotions
nI think the National Association of Realtors says it best on the emotions: "Finally, buyers and sellers need to appreciate that in multiple offer situations only one offer will result in a sale, and the other buyers will often be disappointed their offers were not accepted. While little can be done to assuage that disappointment, fair and honest treatment throughout the offer and negotiation process, coupled with prompt, ongoing and open communication, can enhance the chances that all buyers -- successful or not -- will feel they were treated fairly and honestly." Well said.
The importance of timing in multiple offer situations.
A few times in my career I have also had a seller that wants to "sit on" one or more offers in hopes of getting even more offers. This is rarely a good strategy, as buyers understandably feel like they are being manipulated if a seller sits on their offer for days in an attempt to get more or a better offer. I believe a buyer/agent making an offer should always be told within an hour or two, when they can expect a response from the seller. Of course, the expected response time may change if another buyer wants to make an offer, but that also will be promptly communicated. If the seller doesn't remember the emotions usually involved in making an offer on a house, it is almost always an emotional and stressful time for the buyer, even without the fear that they are being manipulated or not treated fairly.
If another offer may be reasonably expected, I generally suggest that the first offer be reviewed. If the seller thinks they can do better, they can do either or both (1) counter offer with terms that they would find acceptable, or (2) tell the buyer they are not ready to accept the offer at this time, but may consider it in a few more days. That treats the buyer fairly, as they know what is going on and have the option to increase their offer, withdraw it, or wait for a few more days to start negotiations. This is also a good strategy if the first offer comes really quickly and there are other showings scheduled for the next couple of days that could also bring offers.
Disclosure: If you need legal advice or representation, see an Attorney. This blog is not representation or legal advice, it is sharing of one broker's experiences and opinions.