Silicon Valley real estate bidding wars
It is a supply and demand issue. When there’s not enough supply for the demand, prices get pushed up. The way that this happens is often through bidding wars.
When a lot of home buyers want the same property and write purchase offers for it, we have multiple offers. In some markets, multiple offers come in at or under list price (I have seen this in cooler markets). But when the realty market is an overheated sellers market, inventory is too low for the demand, prices rise with those multiple bids. Then you have bidding wars.
This can happen intentionally, as when home sellers knowingly under price the property to attract multiple buyers, or it can happen unintentionally, when the owner and agent priced the home in line with the comps and the market, but there’s an unexpected avalanche of interest. (The latter just happened to me when I priced a listing to be exactly in line with the market, but got 20 offers and a lot of overbidding.) Either way, the result is similar. Buyers up their price and sweeten their terms to win the deal. Here’s what can happen:
- offers come in over list price
- usually the escrow period is short, to assure the seller it’s a “done deal”
- if owner occupied, often there’s a free rent back of a month or two
- some buyers may offer to pay costs that customarily are paid by the seller, such as an owner’s policy of title insurance, the escrow fee, transfer taxes, and in some cases, even the commission
- most of the time, “cash is king”, and the all cash offers will win the deal (or large down payments) – very hard for 20% down or less to compete against cash offers because they usually include an appraisal contingency (with prices escalating, many homes won’t appraise)
- many offers with no contingencies for inspections, loan, and appraisal – non-contingent offers can be dangerous, most of all if there are no presale disclosures or inspections
- most offers will come with proof of funds
- some will have the disclosures already signed too
- some will include a letter from the Realtor, the buyer or both – buyers may also include a photo
But let’s focus on the bidding part in particular for a moment. How is all of this a bidding war? Is it just that offers come in over the asking price? Yes, but sometimes even more is going on too. Let’s look at that now.
Sometimes an offer is submitted when it appears that there are only 2 or 3 others, but within a day there are 10 offers. That is a very different landscape! The buyer who submitted the offer earlier may submit a new offer, without even knowing what the prices are – often it’s just a new page 1 of the contract since that’s where the pricing information is.
As more offers pour in, the listing agent may tell the buyers’ agents what the status is. More buyers may “improve” their offer, essentially bidding up the price before there’s ever a presentation to the seller or a counter offer to be seen (or hoped for). The bidding can be self-inflicted, in other words.
Once the seller sees the offers, there may be a counter offer to one or more of the bids – though perhaps not. Buyers should NOT count on the opportunity of getting a counter offer (a mistake I see all of the time). The old saying that “you only get one chance to make a first impression” counts here. Some sellers will simply pick the best offer and be done. Seeing a stack of contracts and all the ancillary documents can be overwhelming and exhausting for sellers – so many do not want to deal with countering a lot of them.
During the counter offer period, if it happens, some buyers may accept the seller’s price and terms. But some buyers will go a step further and up their offer and terms further – either in a new counter or yet again with a new page 1 of the contract. Here you really see “bidding wars” in action!
You may be wondering why we don’t just auction houses instead. That’s a valid question. It does happen in many countries around the world (Australia comes to mind first). There are some auctions of houses here, too, but it’s not popular just yet. Who knows, it may come to that at some point. But right now, most of Silicon Valley real estate is sold the normal way, but often with extraordinary circumstances when there are many buyers seeking the same house, townhouse or condo.