Kevin Graham8-minute read
UPDATED: January 30, 2023
So, you’ve been lucky enough to find a house you love. Great! But a lot of other people might love it, too – and you could find yourself in a bidding war. To narrow down the field and discover who’s serious, a seller may decide that they need to ask for everyone’s highest and best offer.
In this article, we’ll take a look at how a highest and best offer bidding process works as well as how it differs from best and final offers. We’ll also discuss various ways to make your offer stand out from the rest when buying a house.
A highest and best offer request is usually made when a seller has received multiple offers on their home and asks all prospective buyers to submit their most attractive bids within a specific time limit. Once the seller has received all the offers, they will review them and pick the best one.
It’s important to note that there are really two separate pieces to this. Sellers, of course, want to see your highest offer in order to get as much money as possible out of the sale.
However, they also want your best offer. Although money is a big piece of that, it’s not the only consideration. Sellers also want certainty. The second-highest bid in terms of dollars could win if it has fewer contingencies or there are better terms associated with the sale like flexibility around moving dates or offering a certain amount above the appraised price.
When sellers use this strategy, they’re giving you one shot to make your best and final offer, which is the offer that’s going to yield your highest bid and the one with the fewest conditions inhibiting a sale.
This is different from the highest and best offer strategy, because with the highest and best offer, you’re still inviting room for negotiation. When they have multiple bidders in the highest and best offer scenario, the seller may try to play buyers off each other. It may help to think back to when you were a kid trading ice cream on a hot day.
Let’s say that I have a highly coveted strawberry shortcake ice cream bar, and you and your friend both want it. Your friend offers me an ice cream sandwich, while you offer an ice cream sandwich and a Creamsicle. I go back to your friend who offers all that and a Drumstick. You may think that’s too steep a price for an ice cream bar, so your friend gets my strawberry shortcake.
When you ask someone to make their best and final offer, you’re asking someone to come to the table with the highest price they’re willing to pay on the most favorable terms. You’re dispensing with the back-and-forth and trading for the ice cream sandwich, Creamsicle and Drumstick so your friend can have their strawberry shortcake and eat it too.
It’s worth noting that one of the places where you might see more best and final offer scenarios is an urban area. Residences near restaurants, attractions and public transport that might attract people to the city often tend to be in limited supply and there can be heavy competition.
There are a few common scenarios where a seller and their listing agent might ask for the best and final offer from prospective buyers. Let’s briefly touch on them:
One method that you as the buyer can use to get the best deal is the counteroffer. In real estate, a counteroffer describes a return offer given by the seller in response to the buyer’s original bid.
A buyer can counter after a final offer as long as no contract has been signed, but it all depends on the market conditions, which could make this method a little complicated and sometimes risky. Depending on the market, countering after a “final” offer could work to your advantage.
Making a counteroffer a few days after the “final” one was presented allows the buyer and seller to reopen negotiations and improve the terms of the deal. It's important to know that once the buyer accepts an offer and signs the contract, they can’t make a new offer – the offer is then legally binding. Counteroffering days after the final offer may not be a viable strategy in a volatile market where homes are selling faster than buyers can find them.
Your real estate agent can help you determine how to negotiate the best offer with your seller regardless of the market.
Getting chosen in a multiple offer situation isn’t easy. To begin, you want to bid enough to win without going over your budget and forcing you to pay for an overpriced house. You also don’t want to get into a situation where you’re bidding against yourself by making an offer that you and your real estate agent are sure no one else could match. That’s a good way to overpay. These tips will help you make a winning offer.
There’s no doubt that the purchase price you’re offering has to at the very least be competitive with the other offers being made. However, it’s certainly far from the only thing that matters. There are other ways to make your offer stand out.
You can do this by working with your buyer agent to communicate with the listing agent and determine what’s most important to the seller to prevent the deal from falling through. Here are a couple of examples:
When the buyers find a house they want, they should make their offer as soon as they can. It shows that they’re serious. On the other hand, an offer that comes in past the deadline will probably be rejected. Sellers have timelines, so it’s a good practice to act fast.
Make sure you know what your top-end offer is based on your budget and the market for the home. Additionally, you should stay in constant contact with your real estate agent. They act as an invaluable go-between in negotiations and a source of market knowledge.
If you’re worried about being outbid but you also don’t want to overpay by betting against yourself, an escalation clause could be the answer. An escalation clause says you’ll go X amount over and above any higher offers a seller might get up to a level that you set. It’s best to illustrate this with an example.
Let’s say you’ve put an initial offer of $450,000 on a house. In order to protect yourself in a potential bidding war, you’ve said that you’d go $5,000 over any other offer up to $480,000. In this way, you’re putting your best foot forward, but you’re not overpaying if there are no other offers. It’s a good idea to consult with your real estate agent on the suggested budget and the level of escalators.
In the past, it’s been standard advice that it’s never a bad idea to write a buyer’s letter to the seller. This humanizes you and can help you explain why you’re interested in the home. However, many agents are now advising their clients not to look at these letters. It can present an ethical quandary at best and could potentially open the seller up to liability.
Why, you might ask? When sellers read the letters, they may be drawn to those with a good story that reminds the seller of themselves. It’s natural to be drawn to people whose experiences and values are similar to our own. However, there’s the possibility that this leads to a form of unintentional discrimination, which can potentially open the seller up to legal issues.
Forgetting those implications, some real estate agents will advise their clients not to look at these letters because if you start to develop sympathy for a person’s story, you might not make a deal that’s in your best interest. They don’t want sellers to leave $10,000 on the table because someone included the cutest photo of their children.
If you choose to write a letter, make sure to keep the tone friendly but professional. Say how interested you are in the house, but don’t go too in-depth with personal details.
You can also use that letter to highlight the strengths of your offer, like your purchase price or the fact that you’re willing to put down a larger earnest money deposit compared to a competing offer. Also, mention any contingencies you’re waiving or concessions you’re making.
The bidding process can happen very quickly, with a flurry of activity happening in hours. For this reason, it’s important to be prepared.
It’s a prerequisite in many markets to have your financing lined up with a mortgage lender before making an offer. You should submit your preapproval letter with your offer as proof of funds. You should also have in mind the offer you’re going to start with and the top line of your budget.
It’s important to edit your preapproval letter to only show what you’re willing to put in on the offer. They don’t need to know how high you’re going to go out of the gate unless it’s a best and final offer scenario.
In the heat of the bidding war, it can be difficult to know when to walk away from a property. Emotions run high in the moment, and it can be easy to get overwhelmed. Know your top line and how much you’re willing to concede in advance because it will be easier to avoid crossing the line in the sand at that point.
Also, sometimes there’s nothing you can do against a cash offer – sellers often love the certainty of that. However, you can take heart in the fact that most people likely aren’t going to have those kinds of resources at their disposal.
If you do intend to withdraw from a bidding war, communicate this through your real estate agent. You can also put in a backup offer to be next in line in case the original offer falls through and you’re still looking for a home. At the same time, don’t wait around hoping for something that might not happen. If you find another house you like, don’t hold back.
It's not easy to buy a house in today’s hot market. According to a July report in 2021 from the National Association of REALTORS®, the average home had more than four offers by the time it sold.
With these conditions, homeowners may be looking for potential buyers to give their highest and best offer. This is when they challenge home buyers to come forward with the best price and terms. A variation of this is when a seller asks for someone’s best and final offer. In this case, they don’t really want to negotiate and will pick the best offer from the ones they get.
When structuring your offer, it’s not all about price. Sellers want certainty and flexibility. Sometimes waiving certain things like inspection contingencies and giving them more time to move out can put you over the top. You should also be prepared to use an escalation clause in a bidding war and have your finances in order.
Lastly, a real estate agent can help you through the intricacies here. If you’re feeling frustrated, you can also check out our tips on how to bounce back after your highest offer is rejected.
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