“Highest and Best” Explained
Imagine you’ve fallen head over heels for a charming house that seems to check off all your boxes. You make an offer, only to find out that there are other interested buyers also vying for the same property. This is where the term “highest and best” comes into play. When a seller receives multiple offers on their property, they may ask all interested parties to submit their “highest and best” offers. This is understood to mean the highest price the buyer is willing to pay and the best terms.
The Price
In our market of low inventory, some buyers will offer the full asking price or higher in the hope that the seller will accept their offer without waiting for any others. I actively discourage this if it appears to be a property that will receive multiple offers. When that is expected to be the case, I recommend the buyer to make an offer based on recent, comparable sales which could be the asking price or even less. The point is to submit the offer to inform the seller that there is an interested buyer. Then, if there are multiple offers and the seller requests “highest and best”, the buyer can choose to raise their offer or not.
The Terms
In an offer, the price is accompanied by “terms”. Typically, these include the closing date, contingencies such as inspections, or incentives offered by the buyer to the seller to sweeten the deal. Again, this market has led buyers to offer terms such as waiving inspections, which may not be in their best interest.
My advice to my buyer/clients is to make an offer such that if their offer is accepted, they do not later chide themselves for offering too much AND if their offer is not accepted, they do not regret offering more. An accepted offer above the property’s appraised value presents a set of obstacles that the buyer may not be able to overcome. Terms that leave the buyer with no recourse should the condition of the property not be what they thought is simply a bad idea.
Constructing an offer in a “highest and best” scenario is beyond this blog post. In almost every case, there are unique circumstances, and I would have to post an extensive, confusing list of scenarios. When you have a pre-approval and know your buying power and you have identified a property and have all the available information about it and about comparable sales, then we can sit and strategize.
NOTE: I have had buyers refuse to even see a home if it already has offers. Their concern is that their offer will be used to raise other offers. But, as they say, “You have to be in it to win it.” As I stated earlier, the offer should be one for which there are no regrets later. So, a buyer does not have to raise their initial offer. Perhaps a change in terms will win the day. The alternative to participating in a “bidding war” is to wait until a property has been on the market two or three weeks. If in this market, there are no offers after this time then you can conclude no one who has seen it wants it. Yes, you will then be able to buy a house that no one else wants.