Please read this
post
first before reading the content below.
The optimal bidding strategy will need to be optimal in two components: (1)
how to determine the price for your bid; (2) when to submit your offer. This
post will not even try to help you how to determine the price for your bid:
actually you should always be confident and comfortable to determine that price
on your own: if you are not comfortable, then don't submit the offer. Talk to
your buyer agent or do some more research to get there. Alternatively, drop me
a note
here.
Once you have determined the price for your bid, now
let's think about
what's the optimal strategy in terms of when to submit the offer.
Let's use an example: let's say you are interested in a home listed at
$500,000. The analysis you did tells you that the fair market value for the
home is anywhere between $450,000 to $480,000.
1. if you decides that your starting bid is somewhere in the fair market
value, such as $440,000 to $460,000, then your bidding strategy is regular
strategy. In this case, you should submit the offer whenever you are ready,
there is really not much to optimize under the regular bidding strategy.
2. if you decides that your starting bid is around $400,000, which is
significantly below the fair market value, then you need to think about this
question: when should you submit the offer? You will need a little bit of game
theory concept to decide when to submit the offer.
Based on Wikipedia, game theory is defined as "the study of
mathematical models of conflict and cooperation
between intelligent rational decision-makers." It sounds complicated but
its core concepts is very simple. Let's dummy down that concept with a brain
teaser, which I was given when I was interviewing with a wall street firm back
in 2005.
Let's assume 3 cowboys decided to participate in a shootout competition. At
the end of the competition, only one of them could survive. They already know
each other pretty well on how accurate they could shoot: A is the perfect
shooter and can kill people with 100% probability. B is not as good, only at
70%. C at 30%. They also agreed on the following: (1) they will take turns to
shoot at each other, one shot at a time; (2) since C is the worst shooter, C
will shoot first, then B, then A, then back to C, then B, then A, etc. (3) the
competition will end when there is only one people survive.
Question: if you were C, what would you do to maximize the probability of
survival?
This is a typical game theory question and the answer lies in analyzing your
opponents, which in this case are A and B. Let's assume C shoots at either A or
B and missed, what would they do after the shot if they are still alive? B
obviously will shoot at A because A is the much bigger threat than C. B also
knows that if A gets to shoot, A will shoot B because C is much worse than B.
Now given the fact that both A and B perceives each other as the biggest
threat, C could actually sit back and let them fight till one of them is dead. When
C goes into the final duel with either A or B, the most important thing for C
would be to shoot first, which will give C
at least 30% chance in survial.
Otherwise, if either A or B shoots first, C will have
less than 30% chance
in survival.
So the answer to the question is: C should actually intentionally miss his
first shot, which means that he should shoot to the sky. (Yes, that's an option
in case you are wondering).
Again, game theory basically says you should study your opponents and figure
out what they would do and then decide your strategy accordingly. Now let's go
back to the low balling strategy and look at what the seller should do when you
submit a low ball offer.
Let's first assume the house you are bidding just came to the market and you
are among the first few people to see it. You really have two options to submit
your low ball offer: (1) submit right after you see the house (most people
actually will do this); (2) wait for a period of time, such as 3 weeks and then
submit your offer. Which one is better?
Let's again analyze what the seller would do under each of the options. Please
remember the fact that the house just came to the market, which means not a lot
of people have seen it. If you submit the offer immediately, the best strategy
for the seller is to not counter your offer, but wait for other offers to come
in and use your offer to pressure other buyers. The key word is potentially
'use your offer to pressure other buyers', which will really hurt you and is
the worst thing you want to see as the buyer. This is the downside of
submitting the offer immediately. What's making this option worse is that there
is actually no upside at all because
o
no rational seller will give you a meaningful
counter offer or go directly under contract. This is what most low ball
buyers hope but the seller actually wants to wait for a few more weeks at least
to see whether there are any buyers who are regular buyers or overbidding
buyers. Like I mentioned earlier, the seller should just keep your offer in his
pocket and potentially use it against you when there are other inquiries;
o
you are not missing out on any opportunity
cost of waiting for a few extra weeks either because if the house is sold
within the first few weeks, there is almost no chance that it would be sold
under the low ball price.
o
Your overall goal is for the house to be sold
at a lower price, either to you or to other buyers. Yes, even when the
house is sold to other buyers not you, you also want it to be sold at lower
price because chances are good that there will be other homes up for sale in
the same neighborhood. The lower sold price on this unit will lower the
'listing price' for the future sales because the pricing for future sales would
be based on this sale. if you submit the low ball offer and later, there is
another buyer who are regular buyer. Once he learnt the fact from the seller
that there is already one offer pending for this house (just in case you don't
know this already, the other buyer would not know your bid price because the
seller would only tell the fact that there is one offer pending but not the
actual price), he would be pressured to bid up his price a little more, which
is not to your benefit.
o
Your offer would not discourage any other low
ball buyers. let's assume there is another potential 'low ball' buyers who
are also interested in the house. You would hope that your low ball offer would
discourage him from even submitting the offer and go to bidding war with you. I
don't think that would work. Here are the reasons: (1) low ball offer will only
come under contract after the house has been on the market for at least a few
weeks; (2) by then, the other buyer should be able to figure out that the sold
price should be much lower than the listing price and there is no cost of try
to submit an offer regardless.
To sum it up, you should never submit any low ball offers when the house is
on the market for less than 3 weeks. The actual 3 weeks number can still be
debated but the idea is really to wait for the house to be market tested before
you go for it. After 3 weeks, you can do whatever.
Regarding the overbidding strategy, your goal is really try to reach a deal
with the seller as soon as possible to avoid potential bidding wars with other
buyers. The key for success in this strategy is quick and convincing. Quick
refers to the timing and you submit as soon as possible and follow up
aggressively with the seller. Convincing refers to the price should be just
enough to make seller accept it, which should be analyzed case by case. In essence,
the overbidding strategy is to pay a premium on top of the asking price to
avoid the possible bidding wars with others. You should only use this strategy when
you absolutely love the house at your overbidding price.
Thank you for reading this! I want to hear from you. Leave me a note
here.
