The real estate market is rarely in a state of equilibrium. Sometimes the market favors buyers and other times it favors sellers.
As we move into spring, the time when the housing market traditionally is at its hottest, it is very much a seller’s market. Many potential buyers are looking for homes now, because interest rates are still favorable and, with the persistent threat of possible rate increases, they want to lock in today’s rates. In addition, the economy appears to be heating up and as incomes rise, more people are able to afford homes.
At the same time, the inventory of homes available to purchase is extremely low in most markets. When demand exceeds supply, sellers can obtain more money – often even more than a home’s asking or appraisal price. Additionally, sellers are able to hold out for the best terms (dates, exclusions, waiver of inspections and more).
When a property is desirable, we are often seeing bidding wars, in which multiple interested buyers bid up the price of a home and remove their contingencies to become the winning bidder.
When purchasing a home in today’s market, it is especially important for potential buyers to be educated about what to expect. They should be prepared to be in a competitive bidding situation – it is more often the norm right now than the exception. They should also work with an agent who can get them into properties quickly and help them position their offer favorably.
Ultimately, a home is worth whatever someone is willing to pay for it. However, when the potential buyers offers more than the appraisal price, there can be glitches during the financing process, since the bank will only lend based on the appraised value. When this occurs, three possibilities exist:
• The buyer and seller renegotiate based on the appraised price
• The buyer contributes a larger down payment to make up the difference
• The transaction falls through
When buyers offer to make up the difference in these situations, they should be prepared to stay in the home more than a couple of years, because if they decide to sell the home in a year or two, they may find that they can’t get back what they paid for the home.
When it’s a sellers’ market, potential buyers also have to be careful about including too many contingencies when they make an offer. Even when a buyer’s offer is higher than someone else’s, it may be rejected if the buyer places too many demands on the seller. Expecting the seller to pick up closing costs or include appliances in the sale, for example, could kill the deal.
The best strategy for winning the bidding war is to become educated about what to expect and to make decisions based on logical expectations, not emotions.
A Winning Bid
One of our agents, Judy Butler, recently told me about a case in which the buyers she represented won a bidding war. Sarah, age 23, and Jeff, age 25, were tech savvy and knowledgeable about today’s market. They took Judy’s advice and were pre-approved for a mortgage.
By submitting all necessary documentation to a lender even before beginning to look at homes, buyers can act quickly. They know how much they can spend and the seller will know that they are qualified buyers.
While they knew how much they could spend, given their pre-approval, Judy cautioned them that there were few properties available and noted that they may have to exceed the asking price if they found a property they really wanted to buy.
“I also explained the difficulty with this over-the-asking-price tactic,” Judy said. “If we go too high, we could end up with the house not appraising for that price, causing financing to possibly fall through, or having to buy the house for more than it’s worth because they really want it and love it. I explained that this could affect them negatively should they have to sell unexpectedly, in say a year or less, due to a job transfer or other reason, as they likely would not get their purchase price back.”
That’s just how it played out. The buyers fell in love with the first house she showed them. She went to the first open house for the property and there were several other potential buyers who were obviously interested in the property. Within an hour after leaving the open house, the buyers called and said they wanted to write up an offer.
Judy met with them within 15 minutes, then called the broker to say she was writing up their offer. She was told the sellers were expecting another offer, but it hadn’t come in yet.
Judy suggested that her clients make an offer significantly above the asking price. They agreed but only wished to offer $100 above the asking price. When she called to say she was sending the offer, another offer had already come in.
She asked the buyers if they wanted to go higher, but they said they didn’t. After submitting their offer, Judy learned that four offers had been submitted in just three hours.
They waited anxiously, but soon learned that the offer was accepted – not because of their strength as buyers, but because their offer was $100 higher than the other three.
It’s rare when as little as $100 can make a difference in winning a bidding war, but in this case it did.
If a buyer’s bid is accepted over yours, have your agent keep in touch with the seller’s agent. In the current environment, the buyers could decide they overbid during the initial bidding frenzy and once they get to home inspection, they could back out. If the top bidder offered more than the appraisal price, financing could fall through as well.
Even if you lose the bidding battle, you can still win the bidding war.