Bigger Bids Aren't Always Better Bids

Bidding wars among would-be home buyers, once a rarity, seem to have become almost routine this frenzied spring. But even now, it's not all about money, money, money.

What both buyers and sellers should understand is that the highest offer is not necessarily the strongest. There are many other terms in a contract that can come into play. Understanding how all these items relate is critical to putting together a successful bid, or choosing the strongest offer.

As real estate agents, we routinely counsel our buyers that they need a strategy to approach bidding wars: Analyze the available information; identify their key concerns; and then structure an offer that is as aggressive as possible yet still protects their interests and keeps the sales price within the range of reason.

Here are some of the most important terms that appear in the "Regional Sales Contract," the Washington area's most common standard contract form, and how would-be buyers and sellers should deal with them.

Price

· Description: This is the amount the buyer is offering to pay for the property. The amount can be more than, less than or equal to the seller's asking price. A common misconception is that a seller is obligated to accept an offer that is at or above the asking price. This is not true: A seller's listing of a property in the multiple listing service (MLS) is a solicitation of offers and not an offer itself. Another common misconception is that in a competitive situation, the offer with the highest price is the one that wins. However, this often is not the case.

· From the buyer's perspective: Price is obviously a major factor in determining the strength of an offer. As a general rule, the higher the amount offered, the more likely the offer will be accepted. To determine what to offer, it is critical to do as much research as possible. At a minimum, a buyer's research should include a thorough examination of comparable sales data, local, regional and national market trends, and, to the extent available, information about the seller, such as motivations for selling, preferred settlement date or the need for a rent-back. The buyer's financial situation and level of interest in the property must be considered, too.

There are two things a buyer should remember when determining how much to offer in a competitive situation.

First, there is no one "right" price for a property. Because a buyer does not know what other prospective buyers will offer, he is operating with imperfect information.

Therefore, we advise clients to think about pricing an offer in terms of a "reasonable price range" for a property. Once the reasonable price range is established, the buyer can determine where in that range he wants to be. The higher the price offered within the range, the greater confidence we have that the seller will accept the offer.

A buyer should never write an offer that has a 100 percent chance of being accepted because that means the buyer is overpaying. By establishing a reasonable price range before determining what to offer, buyers can remain rational.

Second, in a competitive situation, prices are not compared in a vacuum. Sellers will frequently take a less risky, lower priced offer over a riskier, higher priced offer.

· From the seller's perspective: Assuming that a seller has received multiple offers, there are a number of factors, in addition to price, that he should consider.