“Highest and Best” is how REBNY would like us to describe what the industry knows as a “Best and Final”. Regardless of what you call it, a Best and Final is a strategy agents use to generate offers above market. Currently, many of these Best and Finals are going poorly because we are not currently in a sellers’ market which is where these Best and Finals usually live. In a buyers’ market or a sideways market, you will find the demand driving these bids that make up a Best and Final weak and usually not sustainable through the bidding process.
The only apartments that are able to obtain a Best and Final situation in a buyer’s market is a mispriced property. Properties should always be priced at or very close to their true market value. But when an agent doesn’t know the local market or is unskilled at pricing, we find properties 10%-20% below their fair market value. This leads to a bidding situation over the asking price. Some sellers think of this as a great thing and one to drive price above true value. This is not true at all. Price may rise 5-10% over asking but they never fill the gap to fair market value. So let’s take an example where you value a property at $800,000 but offer it for $700,000. Then you receive an offer of $750,000, you are $50,000 over the offer but 6.60% below the true market value. This scenario sounds good to the seller but not so when you evaluate in the proper context.
Another negative byproduct of this situation is when it goes really, really bad. Many brokers who misprice these properties also have no idea how to handle a Best and Final. Timing is very, very important. You may have 4-6 offers and feel that you are in total control but the half-life on those offers is roughly 1 to 2 days. Buyers interested in going over asking, regardless of the listing price, are very short lived. Think of it this way, if you walk into a store and want to offer $6 for a $4 soda, then the clerk says OK but I want to wait a week to see if I can get $7, you are not hanging around. Yes, this may work in a seller’s market where waiting is part of the strategy and buyers have no other options. But today you can’t hold this type of interest for very long. An owner may want to wait and not hold the Best and Final right away. This is the worst decision ever. There is plenty of inventory and a buyer’s interest quickly moves on to another property, leaving the temporarily hot property cooled off.
Next part of the Best and Final is selecting a winner. Don’t fall into the trap of highest offer, instead, you need to select a buyer with staying power. Buyers often over bid and get cold feet – buyer’s remorse. So select a buyer who has a strong financial statement, who can afford the property, who truly loves the apartment and most importantly, has a real push or need to own. Then you need to get contracts out that day and give the buyer only five days to sign the contract. Also, keep the backup offer engaged during this process because there is a 50%/50% chance that you will be calling them shortly.
All and all, Best and Finals or “bidding wars” are not productive nor do they achieve the desired outcome. They are the result of underpricing and though they may work back towards the asking price, more often than not, they lead to properties being stuck and sold below fair market value. Save a Best and Final for the next seller’s market and in this market hire a real estate agent who knows how to price an apartment correctly.