The 3 Day Rule, Bidding Wars, and the Cost of Cold Feet [Earnest Money and MLS Status]

Your Realtor's most critical job is to expertly negotiate on your behalf, as they intelligently and strategically structure a deal. In theory, experienced agents should have a good understanding of how to do so effectively. In practice, many do not, especially when it comes to how to align the contract with rules that govern our industry.  

Oh, there are a lot of rules. Here's one you probably don't know: 
The rules says that if your home is listed for sale on IRES or ReColorado (our dominant MLS's), an agent has three days to change the listing status from when a contract is executed. In practice, if your contract is structured right, the earnest money delivery deadline should occur before this three day period elapses. 

It may be an inconvenience to other buyers, but it's in a seller's best interest to delay the status change until the last possible moment. Why? The answer is lies in understanding a buyer's emotional journey. 

Buyer's Remorse is Costly
Once the initial joy and excitement of winning a bidding war is over, it's not uncommon for some buyers to feel a measure of remorse. This is particularly true for buyers that made their decision without comprehensive market data, while under pressure of a tight offer deadline. 

Here's a real example, recently shared in a Boulder Realtor network (identifying information redacted): 

It's sad to see a buyer's euphoria replaced with self doubt and regret. T
hey won the bidding war but the celebration was cut short. The buyer is worried they're paying too much. Maybe they're not even sure if it's the right house or even if they can afford it at all. If the buyer had a good agent, they would have already had extensive discussions about market conditions, property types, valuations, and opportunity costs. 

The antidote to cold feet is deep market knowledge. For a buyer, it's the only way to feel confident that you're not overpaying and getting the right house for your needs. For sellers, your agent's ability to negotiate contingencies is crucial for reducing the risk of a buyer taking your listing for a test-drive. Buying or selling, choose your agent based on deep market knowledge and negotiation expertise, not because you're friends.   
For the listing agent, it makes sense to wait to change the MLS status until after the earnest money has been received. Writing a check (or wiring money) has a profound psychological effect: it increases commitment to the purchase process. This is why in the old days, we wouldn't submit an offer without having a buyer's check in hand and often included a photocopy in the offer packet. 

What's the Cost?

Look at the data (table above). As of this writing, there are over a dozen listings that were once under contract and later returned to market. This is in the City of Boulder, alone. Of these, five currently remain without a buyer. It's likely some of these deals would not have been tainted by the fickle first buyer, had the property remained actively available, while backup contracts were being negotiated. 

Even for sellers who found a new buyer, it's likely the second contract is lower and contains less generous terms than the first buyer's offer. This is simple human nature. The feeding frenzy of the first bidding war is over. 

The deal may have failed due to no fault of the home or seller, but new buyers will almost universally conclude there is something wrong with the house, not that something was wrong with the first buyer. In a normal market, second round negotiations can cost sellers tens of thousands of dollars. In the current market, especially for homes in Boulder, the cost of cold feet could be $100,000 or more out of a seller's pocket. 

A Final Word of Advice
There are a multitude of ways to structure (or vet) offers and increase buyer commitment to the purchase. If you're a buyer, these techniques will improve your chances of winning the bidding war. If you're a seller, they increase the probability of the deal actually closing. Here's the rub: the terms of these commitments should be written into the contract itself. They mean nothing, otherwise. 

As I explained to a recent buyer's agent who submitted on one of our listings - the telltale sign was when the terms of her contract didn't match up with her sunshine and rainbows advocacy. That's why she didn't get the deal. At the end of the day, her buyer's contingencies remained broad and at their sole subjective discretion, without any sharing of risk with the seller. At the end of the day, the winning offer was the highest price with the highest contractual certainty of closing. The contract is where the rubber meets the road, everything else is just talk. 

This market can be tough for buyers and sellers to navigate. When in doubt, I recommend you rely on the advice of a trusted Realtor, preferably one with a proven track record (Why Us)

Note:  In many states, Realtors aren't allowed to create contracts because it's considered practicing law. Things are a bit different here. Licensed real estate agents in Colorado are authorized to use a Commission approved Contract to Buy and Sell. With that in mind, this post is not legal advice. At best, my attorney says you should consider it entertainment. 

EDIT (4/1/21): This post has been corrected. The "return to market" listings are those which are currently active, and do not reflect the total count since January. 

Osman Parvez  is the Founder and Employing Broker of House Einstein. Originally from the Finger Lakes region of New York, he lives in Boulder with his wife and their Labrador Retriever. He has been a Realtor since 2005.

Osman is the primary author of the House Einstein blog with over 1,200 published articles about Boulder real estate. His work has also appeared in many other blogs about Boulder as well as mainstream newspapers, including the Wall Street Journal and Daily Camera. For more information, click HERE.

Fresh Listings | Our review of the most compelling new listings to hit the Boulder real estate market.| Subscribe

Socials: FacebookTwitterInstagramYouTube

Thinking about buying or selling and want professional advice?  Call us at 303.746.6896. Your referrals are deeply appreciated.  

The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties. House Einstein strongly recommends conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.  

Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.