It's the Best Time of the Year for Real Estate Buyers

 Every year, we post some version of the same message to buyers:  If you want to buy a house, the best time to make an offer--if you are serious and can move quickly--is between Halloween and Thanksgiving.  Sellers who really want to sell are beginning to come up against winter, and the end of the calendar and tax years.  They have begun to heat their homes, and sometimes plow their driveways.  There are fewer active buyers, and not all properties have as much curb appeal once leaves have fallen and flowers are gone.  

All of those factors taken together give buyers a last chance to buy in 2021.  The number of multiple offers have declined in most areas, yet mortgage rates are still attractive.  The choice of listings may be smaller, but more of them are actually going to be available for more than a day or two.  If house hunting has been discouraging this year, think about giving it another chance this fall.  

That means that you need to start now, at the beginning of October, so that you can be ready to go to contract in a month.  Buyers, make your lists, set your priorities, and make sure that you are prequalified.  Serious buyers are good buyers, and more likely to be decisive.  If you use that logic to your advantage, you may be spending the holidays in your new home!

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.

Handling Multiple Offers

The first thing buyers probably want to know is why we have so many multiple offers, when the real estate market doesn't seem overheated?  The answer is that consumers today know the market very well, often as well as their agents do.  They have been to many open houses and/or showings, and they have a sense of how quickly a home will sell.  We advise sellers, in the pursuit of a high selling price, to price their homes in the sweet spot--i.e., where the buyers will perceive that they need to make a good offer right away, if they want to get that house.  Since many properties on the market are overpriced, those homes priced aggressively stand out, and buyers know that.

So, here we are.  We have a new listing, priced to sell, and three different sets of buyers have made offers.  What do we do now?  The most important realization for most people is that the seller is in control.  The agent advises, but there is no law on how to handle multiple offers, so s/he can accept any of them, ask for each of them to present a new offer, or simply state what they would take, and sign with the first party who agrees.  If I am allowed to give advice, I tell people to negotiate with one party at a time (especially since the only real danger in multiple offers is that the seller might inadvertently accept more than one, or the buyer might have offers accepted on more than one home, if they are not paying attention to the details).  It might be the highest price, but it's also possible that it's the cleanest offer with the fewest contingencies, an offer without a mortgage requirement, or an early closing date.  If you are the buyer, then, you should make the cleanest offer that you possibly can.

Many times the agent asks each of the bidders to come in with their "highest and best" offer.  In that case, I tell people to offer the highest price that they would be sorry not to have bid, if someone else got it for that amount.  That means, of course, that buyers shouldn't be sorry if they went as high as they could afford to go.  In a multiple offer situation, buyers should not expect, however, to be able to renegotiate much, if at all, after inspections.  When there's another buyer, or buyers, in the picture, the advantage here goes to the seller.  Also, in a multiple bidding environment, you should not count on a Hubbard clause to win the bid, since a clean offer will almost always beat it. 

The last important note to strike is that it's very common for buyers to doubt that other offers exist, or that they are being treated fairly.  Agents, in my experience, don't lie about other bidders, nor do they do anything that would interfere with the seller getting the best offer (which may, of course, not be the highest in dollar terms).  Most Realtors are very careful to give the same information and opportunity to all parties, since we are bound by the Code of Ethics to treat all parties fairly, and to act in the best interest of our client.  No one is happy to lose a bid, but it can happen under the best of circumstances, and buyers should learn from any mistakes (like delaying), and move on. 

For Sellers:  Price to sell, and be fair to everyone.  Don't be greedy.
For Buyers:  Do your homework ahead of time--know your limits and your preferences.  Act quickly!

What's an Escalator Clause?

When a property receives multiple offers, some motivated buyers may try to make sure that they are the successful bidders, by putting in an "escalator" clause.  This is a new development, that sometimes replaces the old standard system of going back to all bidders, and urging them to put in their highest and best offers.  That can go on for more than one round, when more than one buyer is still interested, or can be stopped at any time by the sellers selecting one buyer with whom to negotiate further.

The escalator clause circumvents the old system, by including future bids in an addendum to the sales contract.  For example, let's say that the home is on the market for $400,000.  A buyer who expects, or is told, that there will be multiple offers may choose to offer full price, but add an escalator clause, offering to pay, say, $2000 more than the highest bidder.  So, if s/he offered $400,000, and someone else offered $410,000, his/her bid will automatically adjust to $412,000.  There should be, and usually is, a cap above which the buyer will not go; in this case, let's say that it's $415,000.  If the cap had been $410,000, then it wouldn't be triggered, because the buyer didn't consent to go above that, and there is already a bid at that amount.  If the other offer had been lower, then $410,000 might have gotten this buyer the property.  Most clauses require the seller to prove the other offer, which can be done with a copy, from which the names have been redacted (crossed out).

The above paragraph may be a little hard to follow,  without a specific example to plug in.  The basic premise, though, is simple:  you as the buyer offer to go above other offers, up to an amount named.  If that offer is not triggered, you can buy for the amount on the original sales contract.  If it is triggered, the amount offered under the formula stated will be inserted into the addendum, along with a copy of the other offer.  In either case, the seller should get more money, and without the back and forth of multiple offers.  The downside is that, when there are no other offers, the buyer who offered the escalator may feel that s/he overpaid, causing buyer's remorse.  There's no perfect system, but buyers and sellers should be aware of the possibilities that are out there, and know to talk to their agents about the options they have.

Bidding in a Market with Tight Inventory

Currently, the Greater New Haven market is experiencing a shortage of inventory in some price ranges.  Although most of the country has been like this for a while, it has been a long time since it has occurred in Connecticut.  Many local buyers are not accustomed to needing to, or may not even believe that they need to, compete with other offers.  Some people that real estate agents mislead potential buyers about other buyers, in order to encourage interested parties to act quickly, or bid higher.  We are amazed now at how often a house that has been on the market for months, without any interest, suddenly may have two or even three parties competing to buy it.  Once a certain point in the spring has been reached, people feel that they have seen most of what might be coming on, so that they no longer feel that they should wait. Of course, homes that are well-priced and desirable attract interest, and usually these days multiple offers, almost right away.

So my advice to buyers is simple, and fairly obvious.  First, make a list of what you require in a house.  Keep a running preference order for what you’ve already seen, with your first three choices clear.  If those choices don’t change every time you go out, it’s probably time to stop looking. Be honest with yourself, and your agent, about your limits.  It’s amazing how often people tell us their upper price range, and then exceed it. Then, make the cleanest offer you can, with the fewest contingencies and for the shortest amount of time.  Assume that there is other interest in the property,  and follow this important rule:  Bid the highest amount that you would be sorry to hear that someone else paid.  If your reaction to a later record of the sales price is that you couldn’t, or wouldn’t, have matched it, then you did the right thing.  If your immediate thought (never mind what you told your agent about the highest you would go) is that you would have paid that price, then you should have bid more.

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!

More Confirmation on Pricing

The lead article in yesterday's New York Times Real Estate section confirmed yet again what real estate practitioners know, but are often unable to convey persuasively to others. It gave examples of sellers who priced their units aggressively in today's market, and kept lowering the prices without success. It contrasted that with sellers who priced so as to seem to be a "good deal", and told about the bidding wars that have been taking place in such cases.

Underlying this phenomenon is a change in the marketplace from the past: Now buyers, who get more information through the Internet and by looking at more places before buying, are more educated about prices than they used to be. They can tell when something is priced to sell, and they know that they have to move quickly. They also know that, often, there will be multiple offers; therefore, if they want to get the property, they may have to bid over the asking price.

This has happened to us so many times that we can all attest to its effectiveness. We cannot, however, seem to convince sellers that they will actually receive higher offers by pricing the property lower. It's not unlike the psychology of pricing store items at sale prices, to stimulate demand and encourage prompt purchases. Of course, the seller can always reject an offer, if it does not meet his or her specifications. The point is to get offers, particularly to get enough offers to assure that fair market value is established.

Separating oneself from the pack is key in this market. Unfortunately for our business, pricing aggressively does that!

What's Selling?

Although it may sound as though nothing is selling in the current real estate market, there are some pockets of strong activity. The market is almost bifurcated, with most homes sitting and a few receiving multiple offers. I checked with two of our offices, our New Haven office and our Wallingford Regional office, to see what common threads exist with the quick sales we've had. There are three factors: price; condition; and location. Price means two things--the price must be considered a good value, and lower prices are more likely to attract first-time home buyers (the most active segment of the market now). Condition usually means that the property should be clean, freshly painted, and clutter-free. Location is the normal location, location, location. The worse the market, the closer you can get to the ideal location, and status does matter.

Having said all that, we are seeing strong interest particularly in East Rock, where demand outstrips supply now. Stefanie Rank has a listing on Livingston Street that has been shown over 50 times since the end of last week, and multiple offers. Fran DeToro sold a Whitney Avenue condo in less than a week. Mary Jane Burt has sold two high-end condos recently.

Hamden is also seeing demand. Eileen Smith has three times cleaned out a house top to bottom, shown it from Thursday to Sunday, and sold it on Monday. She has researched current prices in Spring Glen, and they have decreased by only 1%. The Edgehill team just sold a Hamden house in two days.

Remember that the tax credit can be used for one's 2008 taxes, so time is of the essence. So, if you're thinking of selling in any of these neighborhoods, please consider doing it now!