Multiple Offers Multiply

Finally, the wave of inventory shortages that has swept the country for several years has made it to Connecticut.  In our case, years of not building new product, and a delayed generation of first-time homebuyers has combined to create a scarcity of homes for sale in South
Central Connecticut.  That means that those looking are jumping on whatever new listings there are, and causing immediate offers to occur on many homes. And we all know what that leads to--multiple offers!

Maybe surprisingly, many real estate professionals find markets like that as stressful as, or even more stressful than, poorer markets,where nothing is selling and sellers are unhappy and sometimes demanding.  In the markets where inventory is scarce, people are forced to make quick decisions on offers, both making and accepting them, and that is difficult as well.  Buyers may get caught up in the thrill of the chase, or may start to bid high in order to stay in the game, often after losing other bidding wars.  This creates a feeding frenzy, maybe not quite like tulips in Holland hundreds of years ago, but the same idea on a smaller platform.  Buyers drive prices up with bidding wars, sometimes using escalator clauses, which I will discuss in another column.  Sellers may counter more than one buyer, and then have to be careful not to sell a home twice; alternatively, they may accept an early offer, then regret it, and try to accept another one later, by getting out of the first one.  Negotiations on inspections and mortgage delays are complicated by backup offers in the wings, and will change the dynamics of any discussion.  That can leave buyers in a situation that they either can't afford, or didn't really want as much as they thought they did.  Both scenarios lead to unhappiness down the road.

If you are a seller, think in advance about the number you will accept, and don't be a pig.  Take that offer if and when it comes along, and don't negotiate with more than one person at a time.  If you are a buyer, decide how high you will go up front, and don't get sucked into going up, if you can't afford it.  Don't then think that you deserve to ask for the moon during inspections, because you may have paid more than you expected.  If all of these guidelines are followed, then both parties should be happy--the sellers with a quick and successful sale, and the buyers with a happy new home.

Renegotiation is the New Normal

Sellers may be surprised, and not particularly happy, to learn that today, more often than not, the sales price listed on the first contract signed is not the same as the sales price at the closing.  It's just a fact of life for us now, because so many issues can arise between the accepted offer and the final transaction that occurs.

Inspections come right after the offer is signed, and today's buyers are likely to expect that everything that gets pointed out as an issue in any inspections will be paid for by the sellers.  That wasn't the case years ago, when buyers viewed work to be done as something that they were taking on in the purchase, unless the problems were structural.  Although the sellers don't always agree to every item, especially when it involves questions of taste and preference, but they often are asked to give money back.

Mortgages now can also provide for funds from the seller.  Various programs differ greatly, but there is a range of items, from inspections to closing costs, that banks and mortgage companies may allow the buyers to have paid by the sellers, and that range goes up to 6% of the mortgage amount on the high end.  While everything must be disclosed in the closing documents, it can prove to be an additional hit to the sellers.

Appraisals, usually ordered for the lender, can cause changes, if the home does not appraise for the amount being requested in a mortgage.  If the sellers can't pay the difference, the sellers might decide to lower the price.  This, as with money toward inspection items, is less likely to occur if there are backup offers that could be accepted, if the buyers do not want to leave the contract price alone.

Finally, things that break or go wrong between the time of the accepted offer and the closing are the responsibility of the sellers, and, while it doesn't happen that commonly, the reason for the preclosing walkthrough is to make sure that the home is in the same condition as when it went under contract.

Although this list may strike fear in the hearts of sellers, the real lesson is that you shouldn't be angry or unprepared with an answer if any of these items are raised.  Once you know that there can be bumps along the way, it's easier to accept changes, or at least consider them rationally.

Multiple Offers

With supply down and interest up, there are many more multiple offers on houses being seen this spring.  They are, obviously, more complicated for both buyers and sellers (not to mention agents!).  Sometimes, they can lead to a feeding frenzy on a property; other times, buyers can all walk away, not wanting to get drawn in.  So what's a seller to do?

If you price your home correctly, that price will be a call to action.  In other words, buyers, who are very sophisticated about the market in the Internet age, will know that it won't be on the market long.  If they are interested, they will need to act quickly.  They also know that they can withdraw during the inspection process, so they may act, even when they haven't fully committed(sellers should take note of this!).  They also know, pretty well, what the house is worth, so they will bid at least full price, figuring that other people will as well.  In fact, we often tell them to make their "highest and best" offer--I say that people should offer what they would be upset to learn that someone else bought the property for.  This often takes place in a second round of offers, where everyone who has expressed interest has a chance to put in one last contract.

The seller should set a date to consider all offers, and make that soon; most offers are only good for a period of hours or a few days.  With multiple offers, sellers should assume that buyers are continuing to look at other properties, and should not feel that they are in the driver's seat, and can think about things too long.  S/he should choose one offer, using price and terms to pick the best one for them, and negotiate it through to a signed contract.

 Then the inspections begin.  That's where it might be good to have a back-up offer, which often makes buyers less insistent during the inspection negotiation.  Sometimes, if a buyer plans to do enough work to the property, s/he might even waive the inspections.  Often, buyers waive the mortgage contingency, although that doesn't always mean that they don't plan to get a mortgage.  If they don't, they often ask that the house "appraise out", meaning that there is an appraisal anyway, to make sure that they don't overpay, although that's a subjective term.  If they are getting a mortgage, the bank will do an appraisal, so the same vetting process on value will occur.  We don't consider the home sold until the contingencies are satisfied, so keep your fingers crossed both as buyer or seller, and don't let up on the timeline.

This explanation assumes that the sellers proceed with one contract at a time.  While it is legal to ask for all offers, and then sign one, or to negotiate (but not sign!) with more than one buyer at a time, it gets confusing and frustrating for everyone.  Final advice:  Don't be greedy.  If you have an offer at or above what you would have sold for, take it.  Those last dollars aren't guaranteed, especially if it doesn't appraise at that higher amount.  Take the money and run to your new home!

Escalating Offers

So my last blog was about the return of multiple offers, a sure sign of an improving market, but now there's a new twist, and one we've rarely seen before.  It's call an "escalating offer", and essentially it says that the offerer will exceed any other offer made on the property, sometimes up to an amount certain, and usually for a specific amount over the other offer.  For example, if the home is listed for $550,000, I might offer $5,000 over any other offer, up to $600,000.

These escalators are problematic, legally and ethically.  If I'm the listing agent, I can't exercise your higher bid  without proving to you what the other offer is. Does that violate the privacy of the first buyer? Also, how do we know what makes a better offer? Will you also match the mortgage, inspection, and closing clauses?  If the first offerer responds in kind, don't you now have an advantage, since you know what the terms of the first offer are?

Additionally, if I am the listing agent, acting on behalf of the seller, shouldn't I be assuming that your offer is for the highest amount that you'll go?  So, if you say you'll match up to $600,000, and an offer needs a fixed price to be legal, wouldn't that be the only fixed amount you've indicated?  So isn't your offer really $600,000, since you've indicated that that's how high you'll go to get the property?

All of these questions are food for thought, and likely to be settled over time through a combination of convention and controversy.  In the meantime, however, I just wanted to make readers aware of the newest trend in real estate offers.  And show you how complicated it is!