New York City is generally considered the big leagues of real estate, where buyers (and their brokers) need sharp elbows to secure a deal. Now the city is becoming even more cutthroat for apartment seekers, thanks to a shift in the way bidding wars are resolved, brokers told The Real Deal.
In this low-inventory environment, sellers are receiving numerous last-minute offers on their properties, causing them to backtrack on prior agreements to sell, sources said. In bidding wars, which have become increasingly common, the concept of “best and final,” in which brokers ask buyers to submit their highest offers, is no longer an effective tool to get a deal completed, they said, because sellers are frequently ditching those deals at the last moment.
“[Best and final] doesn’t work anymore because someone gets ‘gazumped,’ ” said Steven James, president of Douglas Elliman’s Manhattan brokerage. “[A better offer] could come from someone else who put in an offer in best and final, or it could have been from someone who didn’t even put in a best and final offer.”
For buyers, the shifting landscape is causing frustration.
“I came into the industry in the days when a handshake was a handshake, and if you said, ‘yes,’ you meant, ‘yes,’ ” said Michele Kleier, head of boutique residential brokerage Kleier Residential. “Now there are people who, for an extra $10,000, will pull out of a deal. Sometimes the first person gets so irritated, they don’t want to match it. They just walk away.”
Low inventory and heavy sales volume appear to be driving competition between buyers. Buoyed by those two factors, Manhattan condo and co-op prices remained consistently high in 2013, according to a Douglas Elliman market report released last month.
The average sales price for a Manhattan home inched up by 1.9 percent, to $1.44 million last year, a modest year-over-year gain, but an increase which brings the average price close to 2007 record levels. Meanwhile, inventory fell to a 14-year low, and sales volume hit its second-highest level in 25 years.
In 2013, sales activity surged by 21.2 percent year-over-year to 12,735 apartment sales, while listing inventory fell 12.3 percent, to 4,164 units. The absorption rate — the number of months it would take to sell all existing inventory at the current pace of sales — dropped to just 3.9 months from 5.4 months in 2012, according to Elliman’s data.
The low inventory accounts for why sellers are entertaining last-minute offers.
“There’s one apartment per 10 buyers as opposed to one apartment per three buyers,” said Jason Haber, CEO of Rubicon Property, which was bought by Warburg Realty last month.
Years ago, “best and final” offers were far more formal, Kleier said. Buyers and their brokers would present their offers simultaneously at the listing manager’s office at a set time. The offer letters were opened and considered with the buyers present. Now they are delivered over email and the purpose is not often to secure a final deal.
“ ‘Best and final’ doesn’t mean ‘final,’ ” said appraiser Jonathan Miller, who prepared the Elliman report.
Nick Jabbour of Nest Seekers International said the process is more an informational tool for the seller rather than a service to the buyer.
“To me, the purpose of best and final is not to have a firm commitment in place,” he said. “It’s a way [for the seller] to get all the information you need from all parties who are planning to throw their hats into the ring to avoid things trickling in later.”
In this environment, it’s important to make it clear to the winner that a deal is not a deal until the ink is on the contract, Haber said.
“We’re very careful with the term ‘best and final’ because you get a ‘best and final’ in, and then someone blows that offer out of the planet, and what are you supposed to do?” he said. “You can’t have your client not take the better offer. We encourage sellers to offer last licks to the jilted party.”
Haber said he hates informing a “best and final” winner that they’ve been ousted by a higher offer. “I hate making those calls. They’re painful because you know that you’re killing someone’s hopes and dreams,” he said.
There are still some sellers who will stick to their word and honor their handshake agreements, but only to a point, Jabbour noted.
“You can generally tell the type,” he said. “You have the analytical seller and the more emotional seller. The analytical seller is more apt to try to capitalize as much as they can, whereas the emotional type tends to honor their commitment.”