Transparency in Bidding… A Question That May or May Not Be Hypothetical

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Let me tell you a story. It may be fiction, it may be nonfiction. It’s about a man, who may or may not be a Ivy League-educated lawyer who is the chief counsel for a Democrat Congresswoman with enormous power in the House. Let’s say his name is Dave. He may or may not be a law school friend of mine from NYU, who has now been a DC insider for a couple of decades. All kinds of names and facts and circumstances may have been changed to protect the innocent.

The Story

Dave and his wife, who may or may not be a highly successful pediatrician, decide to move from DC to a suburb as their children are getting older. They start looking for a house and after a few weeks, they find their dream house somewhere in Northern Virginia. They talk it over with their REALTOR — oh yes, they use a REALTOR, someone recommended to them by a friend. She’s professional, courteous, helpful… she sends them to all the websites to look for houses by themselves, gets them information, has inside knowledge of the neighborhoods and schools. They love her.

She tells them that the house they picked is a gem; it’s probably going to be a multiple bid situation. The house is listed for $1.2 million, but she thinks it’s really unlikely that it’ll go at list. Dave and his wife tell her that they love the house, so make a strong offer at the full $1.2 million asking price. They know, and their REALTOR tells them, that they’re really strong buyers with great credit, low debt to income, stable and important jobs (remember, chief counsel to a high-ranking Democrat Congresswoman), etc. Mortgage won’t be a problem. So Dave tells his REALTOR, negotiate hard and get us that house, and up the offer from the $1.2 million opening bid if need be. But don’t go past $1.5 million, because at that price, the 20% downpayment goes beyond $300K and they would have to liquidate some investments they really would rather not have to.

A few days later, Dave gets a call from his REALTOR: “Congratulations, the seller accepted your offer at $1.5 million. Start packing!” While he’s happy that he got the house, Dave is a bit nonplussed that the accepted offer was right at his absolute maximum price. So he asks his REALTOR whether there were multiple bids; she says, yes, there were half a dozen other bids, and she had to up her offer until she got them the house. Did we have to go right up to my max? he asks her. What was the next lowest offer?

She tells him that she doesn’t know: the offers are sealed and confidential. She tells him that she went back and forth with the listing agent a couple of times, going from a “that’s a good offer” to “that’s a strong offer” until the listing agent called for “best and final” offers. She thought, in her professional judgment, that she should just go all out and make sure that Dave and his wife got the perfect home of their dreams. So that’s why the price was at his maximum.

Dave asks, “Okay, so now that we bought the place, can I get the list of losing bids from the listing agent so I can see just how close or far apart we were?” She says no; all bids and offers are confidential. She has no way of getting that information from the listing agent, and it would actually be a violation of the Code of Ethics and the law of fiduciary duty for the listing agent to disclose that information to anybody. Dave drops the subject.

Dave and his wife move in, but he can’t help but feel like maybe he got worked. He wants to trust his REALTOR, she’s been great with him and his wife. He doesn’t think that she screwed them. But… he doesn’t know what actually happened. He wonders how many other people feel as he does, so he goes and asks some friends and colleagues. Given the extremely competitive market around Washington DC, he’s not surprised that virtually everyone he speaks to has the same kind of story, and the same reservations.

Like I said, the above may or may not be nonfiction.

Transparency In Real Estate Legislation?

Suppose then that Dave calls me, because he knows I’m a consultant in the real estate industry. He thinks that maybe his boss — a very powerful and influential legislator — should propose legislation, or perhaps go talk with HUD or CFPB, about making the process of buying a home more transparent.

Specifically, he asks about requiring that all offers on a home be made public. The actual personal identity of the bidder won’t have to be made public, but the amount and terms of the bid would be. At the very least, he thinks it might be a good idea to require that all bidders for a home be informed of competing bids, and eliminate the practice of “best and final” offers. He says he can’t see how it helps sellers to have a “best and final” since a really motivated buyer might actually go higher. He wants to know why real estate doesn’t work more like an auction where the bidding isn’t done until there is a clear winner, and all potential buyers know where they stand.

His question to me, as an industry expert, is if there are any negatives to what he’s considering. He can’t see a downside for buyers or sellers or for that matter, for REALTORS, but he knows REALTORS can be prickly and that they’re politically active.

My question then to you, the best informed audience in real estate, is… well, the same. Is there any downside you can think of to requiring that all bids on a home be disclosed at least to all bidders, if not to the public? Is there any reason to oppose such a piece of legislation or regulation? If yes, what are some of those reasons? I honestly can’t think of any.

  • The Buyer benefits since he would know exactly where he stands in any multiple-offer situation. Maybe he doesn’t have to go all the way up to his max offer, if other bidders drop out after a certain point.
  • The Seller benefits since transparency might lead to really motivated buyers going well above and beyond what the “best and final” could be.
  • The REALTOR benefits if open and transparent bidding results in a higher sale price, well, the REALTORS make more money.
  • The REALTOR further benefits since transparency leads to trust. As above, Dave likes his REALTOR; she was a great REALTOR, from his perspective. He wants to trust her. He really wants to believe that she didn’t just come to an arrangement with the listing agent. But today, he can’t; there’s always that worm of doubt in the back of his mind.

So suppose that such a legislation or regulation is proposed. Who is hurt by this? Why don’t we do things this way already?

Your thoughts and comments are particularly welcome for this one.

-rsh

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