Over the years I have been in quite a few multiple offer situations with my Silicon Valley home buyers and it seems that we are again in that kind of market in many parts of Santa Clara and San Mateo Counties. Understandably, home buyers do not want to pay more than a home “is worth”. With several buyers all vying for the same property, though, the price is driven up. That’s a seller’s dream and a buyer’s nightmare. Is it possible to pay fair market value, and not more, with multiple offers?
What is fair market value?
With a little research, you may find a few slightly different definitions of fair market value. Most, though, include these elements:
- Both buyer and seller are reasonably motivated (but not under any undue pressure)
- Both buyer and seller are well informed and acting in their own best interests
- The home or property has been given enough exposure such that the market has been tested
- There are no special concessions that would impact the sale price (such as a year long free rent back, including all the furniture or personal property, the seller carrying the mortgage at a very high or very low rate of interest). Likewise, no other special terms that would increase or decrease the sale price.
In other words, fair market value is usually achieved when the buyer and seller have a normal sale, with normal time frames, normal contingencies, normal relationships to one another. Most of the time, this is the result of one offer on the house after two or three weeks on the open market. (Sooner than that, there may be pressure and other bids.)
If a seller or buyer is desperate to sell or buy, you probably won’t see fair market value. Similarly, if a parent sells the family home to a son or daughter, there’s a good chance it will never be a matter of exposing it to the pool of buyers, and the price is likely to be soft. Off market sales may be on the low side, though recently we’re seeing buyers in those circumstances paying more just to secure the property. A buyer who writes an offer subject to the sale of her or his home will be at a negotiating disadvantage, but a seller may accept that bid if the home has been on the market awhile, there is no other competition, and if the sale price is higher than it otherwise would be. (They’ll accept more risk for a higher sale price.)
With multiple offers, usually there undue pressure on the buyer to compete with better terms (few or no contingencies, faster than normal sale, buyer picking up more of the seller’s costs) and better pricing. Nearly always, bidding wars will result in a sale price that is more than fair market value. Frequently there’s a “band of pricing” which is above the list price. Most home buyers will fall into that range, and when a home has been listed a little on the low side, this band may represent fair market value. This can be far exceeded if one super motivated person, an outlier, spikes the price.
In summary, residential real estate sales that take place with multiple offers will usually be with terms that strongly favor the seller and with a price that is above fair market value. It is not usually possible to pay fair market value with multiple offers – most of the time, the property will sell for more than fair market value.
Silicon Valley buyer and seller advice
Fiscally conservative home buyers in Silicon Valley will find this a very frustrating and discouraging situation as they write offers for “fair” prices and find them too low each time – and to see prices rising! When that happens, the more offers they write and the longer they take to buy, the more expensive it becomes to purchase anything at all.
My best advice for the cautious home buyer who’s afraid of over paying is to find a property in a good location with fixable defects (such as an ugly kitchen, not a location problem, which you cannot change) which has been on the market more than 3 weeks. In that case you will probably have no other competition and can pay what is fair market value rather than an inflated price to due multiple bids.
Conservative home sellers are sometimes afraid to slightly under price their property to attract multiple offers. That is understandable, so I would suggest never putting a price on the home that you wouldn’t actually accept. There are many things you can do to get your home to sell fast (within 2 weeks) and which will attract a few buyers. Those aren’t so risky but they do involve some work. If your property looks like “the best deal”, you can be sure that the home buying public will notice. Just don’t undermine yourself by being present at showings, making it too hard for buyers to see your property, or not making the home attractive and risk free to home buyers. I have written many articles on how to attract buyers who will pay top dollar – you can google “pope-handy home seller tips” or start with this piece: How to make people line up and beg to buy your home.
For more reading:
On this site: All comps are not equal
On popehandy.com: How much is your home really worth? (Discussion on fair market value vs appraisal value in addition to other factors)