How to compete in a hot market

Competing in this market

Many things go into making an offer competitive. A ‘clean’ offer with no mistakes which includes all the proper forms is critical so that you don’t give the seller an obvious reason to make a counteroffer.

My number one advice for the buyer is: know your own needs (and what you don’t need). Do you need 3 bedrooms on the same floor as eachother? If the answer is “No” then don’t even bother looking at those homes. 3 bedrooms on the same floor is a configuration frequently required by people starting a family, and you will never win against someone who requires a feature that you don’t care about. Same goes for homes with 2 car garages, etc. The key to winning your bid is to go after houses that you will probably win. Especially houses that have a unique feature that you don’t mind but which might be a problem for others. Maybe you don’t mind having a single bedroom and no bathroom on the top floor; most people wouldn’t care for this floorplan, so you would probably be competitive. One of the most valuable skills I bring to the table is: knowing which houses you have the best chance of winning.  That is the main reason my offers are normally accepted the first time.

Houses are typically put on the market on Wednesday, Thursday, or Friday, with offers being due on the following Tues or Wed. This frequently results in bid war that increases the price 10% or more over the list price. In Sеаttlе, there аrе bid wаrѕ for many houses—but not all houses. Half of all houses sell in less than 8 days. Half of the remaining houses sell in more than 30! It is amazing how many times I have to remind a seller what the word “median” means.

If you are competing in a multiple offer environment then you will likely have an Escalation Clause. One of the most frustrating things about this market is the way Escalation Clauses work. An Escalation clause is a form that simply says that you will pay X amount more than the next buyer up to Y price. Sounds simple, right? Let’s say you are trying to buy a house priced at $500,000 and are willing to pay as much as $550,000 – then you might want the Escalation Clause to say that you will pay $5,000 more than the next highest offer up to

$550,000. The next question your broker will ask is, “Will you be sad if someone else paid $555,000?” Usually, the answer is yes. So you increase your limit to $560,000. Then the next question is, “Would you be sad if someone else paid only $5,000 more?” This goes on and on until the buyer finds a number that they are hoping they won’t have to pay -a pain threshold -which they usually wind up having to pay. But wait, it gets better (actually, it gets worse).

If you know that you will be going up against multiple offers, then you have to focus on all the aspects of the contract, not just the price. This means waiving as many contingencies as you feel comfortable with. (A contingency is a predetermined way that the buyer can back out of the deal and get their earnest money returned to them. Waiving a contingency means giving up that right.) The most common contingencies are the Inspection Contingency and the Finance Contingency. In a normal market environment, the buyer would be able to negotiate a period of time (usually a few days) in which they can inspect the property. During this period the buyer can back out of the transaction and have their earnest money returned -even without a reason! You can see why sellers may not like this one.  In a multiple offer situation, your offer will likely be thrown away if it has an Inspection Contingency. So how do you know the property isn’t a lemon? You inspect it BEFORE you write the offer. This is called a pre-inspection. It usually cost around $600 and takes about 3 hours. That is $600 for each house that you write an offer on. Can you see how painful this can get if you lose a few bids?

If you are obtaining financing, then you would most likely want a Finance Contingency. This allows you to back out of the transaction and have your earnest money returned if you are unable to obtain your financing during a certain period of time. Part of the Finance Contingency is the appraisal. The way the standard agreement is written, you don’t have to pay more than the appraised price. In this market it is common for prices to be higher than the appraisal. Many sellers are asking the buyer to waive all or part of the appraisal before they even accept your offer. For example, if the seller thinks the property will appraise for $600,000 but your offer is $650,000 then they might ask you to cover the difference. This means that you would have to pay an additional $50,000 on top of your downpayment. This is a very common occurrence and one of the biggest problems with our real estate market. In this case the buyer overpays for the property, which will raise the value of all the houses on the block because this sale will be a ‘comp’ for future appraisals.

Shortening the closing time is also critical. One way to do this is to get Pre-Underwritten for your loan. Some lenders don’t like the term Pre-Underwritten and may have a different name for the process. This is different than getting pre-qualified. Many lenders will give you a pre-qualification letter based on the income and expenses that you tell them. After you have a mutually agreed purchase and sale agreement, you would then be asked to provide pay stubs, tax returns, credit card bills etc. This process can take a couple of weeks. Getting pre-underwritten means that you provide those documents before you even find a house to make an offer on. This means that your lender can get you the money 2 weeks faster once you you have a property under contract. Your lender might normally say that they need 35 days to fund your purchase but if you have been pre-underwritten then they might say they can do it in less than 20 days. This is a big deal to sellers. The buyer also has 3 days to back out upon receiving the Form 17. This is a huge list of disclosures about the property that the seller is required to fill out. A smart listing broker will make sure that the prospective buyers have this before the offer review date. A competitive buyer will read it, acknowledge receipt and waive the 3 day period.

If the property is a condominium then there will be a list of disclosures made by the condominium association called a Resale Certificate. Larger condominium projects are also required to include a Reserve Study which is a written inspection of the property that includes the useful life of the different building components, the cost of replacement, and whether or not the association is collecting enough dues to pay for replacements. Sometimes this can take a few weeks for the association to put together. It can also be hundreds of pages long. Surprisingly many listing brokers do not have this available by the time that offers are due. If it is available then a competitive buyer will read it, acknowledge receipt and waive the review period.

If you are not in a hurry to buy a home you might consider only writing offers on properties that have been on the market for more than 10 days. Sometimes a house doesn’t sell on the offer review date.  This can happen if the price is too high, or if it is too close to the actual value.   Buyers usually assume that a property will sell for at least 5-10% more than the list price.  The house might be worth the list price—but not 10% more than the list price…so it gets no offers on the offer review date. Listing brokers know that it is very difficult to get the listing price after the offer review date has passed. You can use this to your advantage by writing an offer the day after the offers are due. You might even get an inspection contingency and a full financing contingency.

Here is an example of how this can happen: Let’s say a seller is trying to sell a house that should be worth $25,000 more than comparable houses that have recently sold for $900,000. Let’s say these other houses were listed around $850,000. If this house is listed for $925,000 реорlе will assume the seller wаnts over a million dollars for it. If it were listed for a price between $875,000 and $900,000 then it might very well go for more than $925,000 because of the way escalation clauses work. I frequently have to tell new sellers that if you want the same results as someone else then you have to do what they did.

Prices tend to increase in January when inventory is at its lowest. Inventory is lowest in January because it takes one or two months to get a house ready for market. Since no one wants to fix things around the house during the holidays, there tends to be few houses for sale in January.

Sellers usually wait until after the holidays to sart getting their house ready for market so they tend to come online around March. A buyer, on the other hand, only has to get their checkbook out to be ready. So, in January, there are lots of buyers and very little inventory.