Low mortgage rates and chronic inventory shortages have created market conditions that are good news for homeowners who’ve been waiting for a strong sellers’ market to list their homes. Bidding wars — where more than two buyers compete for a property with offers and counteroffers ― usually occur more in luxury property sales where competing parties have large bank accounts to escalate to a winning price point. However, as today’s supplies of affordable homes have dwindled and prices for even starter homes have soared, current bidding wars have become common even in lower tiered price ranges. But, are sellers to blame?
The Burden of Buyer Bidding
Conditions in the current real estate market heavily favor sellers, and bidding wars are an effective way for a sellers to maximize profits. Real estate agents who represent sellers in these markets know how to manage them so that their clients realize every potential dollar of profit.
But sometimes the winners of these bidding wars become the biggest losers if they can’t borrow enough to cover an aggressive bid. As a result, first-timers of bidding wars often find themselves overstretched financially. They may end up “house poor” and struggle for years to pay the mortgage, or they may be so short of cash that they don’t have enough emergency cash reserves to handle a medical crisis or loss of employment.
The Sellers Playbook for Successful Bidding Wars
Sellers want to attract as many bids as possible, select the best ones for counter offers and select a winner from best-and-final offers from a handful of finalists.
Bidding wars arise when a property is priced slightly below its market value to achieve the most significant number of buyers who look at properties by price tiers. Open houses with cocktails and hors d’oeuvres are common, and give buyers a chance to meet the owners and see how much “competition” they have. No bids are accepted until after the open house is held to give buyers time to put together their best offers.
Experienced bidding warriors know that the highest bid may not be the best offer. Often buyers bid so high that their lenders won’t lend enough to cover the final sale price. Appraisal issues kill more deals during real estate more than any other cause. “Low appraisals” are on the rise during these times of rapidly rising prices. Getting to closing only to have the deal fail because the buyer couldn’t make up the shortfall is a real possibility. Many sellers’ agents actually caution their clients against taking the higher bid over one that is more solid.
The Buyers Playbook for Current Bidding Wars
Since sellers are in control, there are not many buyers can do to ensure victory. Thus, advice to buyers usually boils do to “Put down as much as you can and concede as much as you can.” All-cash offers or offers with a higher down payment are safer bets these days. Many buyers’ agents insist that their clients put down 20% or more in a bidding war.
At the top of the list of concessions are contingency clauses. These include The Home Inspection Contingency, which protects buyers should the home inspection reveal a deal-killing problem; the Appraisal Contingency, which lets the buyer out of a contract should the property appraise too low; the Financing Contingency, which protects the buyers; earnest money in the event the financing falls through.
Then there are the:
- Radon contingency
- Pest or rodent contingency
- Mold contingency
- Asbestos contingency
- Lead paint contingency
- Septic system inspection contingency
- Well water inspection contingency
- Wetlands contingency
- Land survey contingency
Add to the list:
- More earnest money
- Decrease the due diligence period
- Make up the difference between the appraisal and offer price
- Buyer pays for the title search or other closing costs
- Home warranty waiver
A contingency-free contract leaves the buyer bare, with little protection. But, for sellers, it dramatically improves the chance of the transaction proceeding quickly to closing, and thus it’s more appealing.
Are Sellers Getting Too Greedy?
There’s nothing fair about a bidding war, especially current bidding wars. The seller is in charge, and he or she can choose any offer for any reason. Buyers can only do their best to make an offer as attractive as possible even if it increases their risk.
Bidding wars that are well managed from the sellers’ point of view can bring in $50,000 or more over list price—amounts that are not justified by the house’s value.
So is it fair to think that sellers are getting greedy? That might depend on the market, and here’s why:
Some markets have not yet recovered to their peak values since the Great Recession.
Many of today’s sellers, especially Baby Boomers, bought their homes at the peak of the 2006-2007 boom. When the housing bubble burst in 2007, six million went into default while the rest were left eating their losses, but stuck it out. The recovery was painfully slow, and not until a couple of years ago did the national median price return to the 2007 peak. But, several markets, including Dallas, Hartford, Fresno, and Las Vegas, have still not yet regained everything they lost.
So another way to think about current bidding wars is that they are making up some of the equity millions of pre-Recession homebuyers would have gained in normal times. Fair? That’s open to interpretation. Understandable? Absolutely.
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Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.