Buying Tips for Multiple Offers
One of the best ways to get a pulse on the Cambrian Park real estate market is to see what’s selling fast. Sometimes a few low sales will make the market look more sluggish than it is. For the Cambrian housing market, though, most single family homes are selling quickly, with multiple offers, and overbids right now. But not all. So let’s separate them out by time and see how it looks.
Fast sales are stronger sales: under 14 days is best for Cambrian Park realty sales
Just now (as of March 10th) I pulled the single family home sales for Cambrian (mls area 14) for the last 30 days (mostly Feb but some Mar) and saw a huge difference between the homes that sell fast and those that do not. The turning point seems to be 14 days on the market between overbids and underbids.
Out of 42 properties sold in the last 30 days, 36 of them or about 86% sold in 14 days or less, with the average days on market (DOM) a lighting speed 5.25 days. For these fast selling homes the average list price $1,370,951 and average sale price $1,464,152 (averaging an overbid of $93,200 or approximately 106.8% of list price). Only 5 in that group sold below list with 3 selling at list price and most selling over asking.
Of the 6 remaining, which were on the market between 15 and 236 days, only 2 sold above list price, none at asking, and 4 sold below.
Buyers who are getting slammed out of the Silicon Valley real estate market due to low inventory and multiple offers are extremely frustrated. In many cases, they write offer after offer, and each time not only are their bids rejected, but they never even get a counter offer. Part of the problem may be the amount of cash in their offer. It can be hard to compete with bids with smaller loan amounts.
The question arises all the time: why isn’t my 20% down offer just as good as the 50% down or the all cash offer? Isn’t 20% down good enough? Or for that matter, why wouldn’t a 3.5% FHA backed loan be suitable?
Cash is better because there’s less risk
Twenty percent down is “good enough” if there are no other offers. If it’s multiple offers, though, it’s probably not sufficient for most sellers provided that the all cash offers are written with realistic pricing. Right now, about 15% of home sales in Santa Clara County are all cash, and sellers would far rather deal with an offer that includes no finance or appraisal contingencies. For sellers, the fewer contingencies the better and no contingencies is ideal. Particularly now, when we are seeing a very sudden and dramatic upswing in pricing, appraisal contingencies can kill an offer’s chances of success due to the fear of a low appraisal. With all cash, there is no appraisal at all – it’s a slam dunk on that front. Continue reading
When the real estate market is overheated, prices tend to rise steeply, and homes are more likely to have a problem with a low appraisal. That is where we find ourselves today in Silicon Valley as properties are selling fast, with multiple offers, few contingencies, and frequently steep overbids with resulting appraisal challenges.
In the course of the last week, I’ve heard of massive overbids in much of Santa Clara County, from Alviso to Los Altos, from the lowest price points to those more than $3 million, which is generally the beginning of the luxury tier in Santa Clara County.
In Cambrian, Campbell, and other desirable but non-luxury locations, entry level and move up housing in good shape, with a good location, and not overpriced is getting a lot of attention. Some open houses are mobbed. Realtor colleagues and friends of mine are reporting that among these “normal” homes, some of the overbids are 15-25%, or $150,000 to $300,000 over list price. I heard of one, in another area of San Jose, that was 50% over list price (and it was not inappropriately priced or too low).
Together with those massive overbids are disappointingly low appraisals.
What happens with an appraisal shortfall?
Frequently, buyers with enough cash are purchasing without contingencies (we don’t recommend that, but it’s a reality that if there are a number of offers, some or all will have no contingencies). In those cases, the buyers make up any appraisal shortfall. To do so, they have far more than 20% to put down.
Hypothetical case of a low appraisal: Continue reading
The real estate market has heated up again, and in most of Silicon Valley it is once again a hot seller’s market, and that means that often there are multiple offers, overbids, and sales with no contingencies. Some buyers may get it on the first attempt, but many are bidding over and over – why do they keep losing out on multiple offers?
Over the course of my career, I have noticed that often there is a consistent “spread” of offers. Most of the time, there’s a pack or band of offers at about the same level, sometimes 10% or more over list price, then a couple higher that that, and maybe one or two (once in awhile 3) at the top of the heap in terms of both price and terms which are attractive to the seller.
Not everyone is losing out on multiple offers: what are the winners doing?
- The top offer frequently has the highest price and best terms. It is 10-20% over list price or more, 25-30% down at least, and has no contingencies for inspection, loan, and most of all, appraisal (the percentage over has to do with whether the home was priced spot on the value or strategically under). These offers come with all disclosures signed, and the buyer’s agent has even done her or his Agent Visual Inspection Disclosure. They include the proof of funds and usually also write a nice letter to the sellers about why they want to purchase that home. the buyer can absorb any appraisal shortfall and is prepared to do so. Right now, many homes are not appraising to sale price, so this is awfully important for sellers.
- The best offer is also someone who’s been SURE that he or she or they wanted the home from the very beginning and looks ROCK SOLID. NO WAVERING, not a “last minute” offer. Any hesitation on your side will cause the seller to not feel good about your odds of closing the sale. Be consistently interested if you want the sale. A shaky looking buyer may not include their proof of funds. Perhaps they would not sign the disclosures yet or otherwise submit an incomplete package. They don’t come across as certain about buying this property and need a few days to see the property again, or show it to their parents, or otherwise confirm the decision to buy. Their agent is not so thorough. If the TDS is not fully signed off, is the buyers’ agent trying to sneak a 3 day right of cancellation into the contract? The best buyer’s offer doesn’t look shaky – it looks dead set on buying the home and has done everything possible to convince the seller of their conviction.
- The second best or next runner up is usually strong on terms (at least 25% down, few or no contingencies) but perhaps made an offer price a little under the top value. Sometimes the next runner up has a good price and mostly good terms, but something is not quite as solid. If the offers are tied but one buyer has no contingencies and the other has any, that will be the tie-breaker.
- Middle of the pack is usually a combination of a price where the home should appraise, a solid down payment, and few or no contingencies. It may be a price that seems “reasonable”. Buyers may feel that it is “a fair offer” or a win-win. Often the fair offers aren’t good enough to take the prize in multiple offers. If you can project what most buyers think a home will be worth, maybe you might want to consider getting ahead of that pack and seeing where the pricing trajectory will take you. The folks in the middle of the pack are usually the ones, together at the bottom, who keep losing out on multiple offers. (They will say things like “we are cautious…)
- Bottom offers are under, at, or barely over list price, and include an appraisal contingency as well as others (one for loan or one for property condition). If there’s a rent back, they want their PITI covered.
If you repeatedly find yourself losing out on multiple offers, try to see your own pattern in this spread. Is there one thing, or perhaps are there two or more things, you’re just not ready to do?
Why it is so hard
An appraisal value is an opinion of real estate value by a licensed appraiser, employed when a house or condo is under contract or sale pending with a mortgage, so that the lender does not over-invest. In other words, when an appraisal is used in escrow, it is to protect the bank which is lending money on the property. Appraisals may be used at other times, too.
Market value is what home buyers and sellers will agree on as the sale price of a property. When Realtors work up a comparative market analysis or competitive market analysis, they try to figure out where the home will sell in the future, or what the market value will be. They will also strive to bring that sale price to the top of the possible range of likely values – or go beyond it.
Put another way, appraisals attempt to determine the most precise value for what a home should be worth, if buyers and sellers are both unpressured. Home buyers may or may not agree with an appraisal’s results, though. The appraisal value does not equal market value. The market may find the property to be worth more or less than what an official appraisal states as the worth of the real estate.
With an appraisal, there is a subjective element to the opinion of value. For instance, if a brand new kitchen sink is tangerine in color but in great condition, will the appraiser ding it for being unpopular, or value it higher for being new? I can tell you that most Realtors would take off projected value for that poor color choice – but I doubt that an appraiser would. How about a flag lot? Is that worth more or less than a standard lot on the street? Most buyers would prefer a home on the street, and that may impact the sale price, but will an appraiser devalue a flag lot? Maybe. Continue reading
When listed properties get multiple offers, sometimes all or most of the bids are in a similar range or band. Sometimes, there may be one buyer who’s lost out on several multiple offers and spikes the price high to make sure that he or she “wins”. That ultra high price, far more than the other willing and able home buyers were offering to pay, is called an outlier. (We are seeing a lot of this in Silicon Valley.)
When that house closes escrow, neighbors and real estate professionals themselves see the closed price, and may be amazed at the amount the new neighbors paid, as it often sets a new high for the immediate area.
Below is a sample scenario of bids in a “band” of pricing with one outlier.
Sample list price $999,000
Offer 1 $999,999
Offer 2 $1,100,000
Offer 3 $1,250,000
Offer 4 $1,200,000
Offer 5 $1,000,000
Offer 6 $1,260,000
Offer 7 $1,275,000
Offer 8 $1,400,000
Offer 9 $1,325,000
Offer 10 $1,265,000
Offer 11 $1,215,000
Offer 12 $1,335,000
There will always be a couple of offers that come in close to list price, despite all clues that a property is under priced and the activity leel is high. Offers 1 and 5 are essentially at list price and they haven’t got a chance. Half of the offers, 6 of 12, are between 1.2 and 1.275 million. We’d call that a band of pricing. There are 2 in the 1.3s and 1 at 1.4.
The offer at 1.4 million is $65,000 higher than the next best offer, but the buyers don’t know the prices being offered. If no one had spiked the price, anything over 1.3 would have trounced the rest of the offers. But we just never know how high a very highly motivated buyer will go.
Will that one spiked sales price or outlier establish the value for the neighborhood?
Not by itself, it won’t.
Appraisers look for three comparable home sales in establishing valuation for residential real estate. Real estate agents do too. One sale in a tract could be a fluke. Several of them and you have a trend – something more dependable, indicative of rising values for the region as a whole.
Home buyers do not want to be outliers, but if they have lost a number of homes and see prices continuing to rise, they can project a likely value a few months into the future and decide it’s better to pay the “two months down the road” price today and get the house rather than continue to lose as prices go up and up and they risk getting priced out of the market. So they may pad what they think is reasonable just to make sure they get their home this time around. Of course, this is a seller’s dream. Recently I sold a home where there was this sort of buying activity with most bids in a band and one super high. My seller’s response? “Scrape me off the floor” followed by a simple “let’s take it”.
The probable buyer’s value for a home is very similar to market value, as a home is only worth what a buyer will pay. If the seller wants more, it won’t sell.
Sometimes it can be tricky to estimate what a home might sell for. I usually talk with my seller clients about trying to find the probable buyer’s value. The seller may have a range of prices that he or she anticipates and would accept. So too with the buyer, whose range will likely be lower than the seller’s. The key is finding where the buyer and seller price ranges overlap. If it’s unlikely that their ranges overlap at all, we’ll have a listing that is difficult or impossible to sell.
Let’s take a hypothetical case of a home worth about a million dollars (see image above). The seller would love for the property to sell close to $1,040,000. The buyer would like to purchase it for $960,000. The agent’s competitive market analysis indicates that similar homes have sold or are selling at around a million dollars, give or take a percent or two. If the buyer and seller can come to a meeting of the minds, and there’s no undue pressure on either one of them, we have (hopefully) a sale and we have market value.
But as we know, sometimes homes sell for much more than they would seem to be worth, and other times much less.
What causes property values to go above or below what would seem to be the probable value? Undue pressure can certainly cause values to rise (desperate buyer who just has to get into a house, even if overpaying or desperate seller who has got to unload a property, even if selling too low).