What are real estate bidding wars, and why have they been happening in Silicon Valley?
First, let’s explain what it is. Bidding wars happen when multiple home buyers overbid a property that’s on the market and make increasingly stronger offers (improving price and terms) until one of them is accepted by the home owner and the bidding is over. Sometimes home buyers get a counter offer, but return their response with even more than the seller requested. At other times, they may not even wait for a counter offer – but up their contract’s purchase price or adjust the terms to make it more desirable to the seller.
Why does this happen? It is a supply and demand issue. When there’s not enough supply for the demand, buyers feel desperate – especially if they have offered on many homes and been rejected each time. With multiple offers, prices get pushed up – and sometimes up and up while the sellers are still reviewing the contracts in front of them. The process is accelerated (or exacerbated) when multiple offers also become bidding wars.
Digging deeper with 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, though not for many years). But when the realty market is an overheated seller’s market, inventory is too low for the demand, prices rise with those multiple bids. Additionally, the terms get so aggressive that buyers often have few, if any, rights. Remember, it’s always price AND terms – so things like cash versus a loan, larger downpayments, shorter or no contingencies, and things like free rent backs will also impact the outcome. It is not only price! When the offer process escalates, we have bidding wars.
How do bidding wars come about?
This can happen intentionally, as when home sellers knowingly under price the property to attract multiple buyers with the hope of bidding wars and the listing agent reveals to each one what has been offered so far to elicit higher & better offers.
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 has 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, and they keep trying until the home is under contract.
In case the concept of multiple offers with Silicon Valley or San Jose real estate is new to you, let’s discuss the basics for a moment. Here’s what can happen with multiple offers:
- purchase agreements or contract come in over list price (if you want to offer less, that’s usually a waste of everyone’s time – at least in today’s market)
- 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 (I heard of a year long rent back in Palo Alto awhile ago – that can only happen with a cash offer)
- 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) – right now about 25% of all offers are all cash
- 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, meaning bank statements, not a letter from your lender
- most 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
So you can see that with multiple offers, the price goes high, the escrow usually is shorter, and there are few if any contingencies. On top of all of that, some buyers may submit an offer, and then change it (raising price, removing contingencies) before the sellers decide – creating a bidding war. Or if the buyer gets a counter offer, may come back higher still – also creating a bidding war. Once in awhile, the home buyer may begin with or counter with a “relative bid” or “sharp offer” – though I am not hearing of that right now. (The relative or sharp offer is discussed here: https://sanjoserealestatelosgatoshomes.com/what-is-a-sharp-offer-or-relative-bid/ )
Once in awhile, the bidding war results when more offers unexpectedly come in and the sellers don’t respond terribly quickly to the contracts in hand. (The CAR contract allows 3 days for the seller to respond, which provides a very big window for surprises to happen, but it can be shortened to a day or two or even a few hours.) Let’s say that 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 due to increased competition, 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. 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. (See “Why didn’t I get a counter offer?“)
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.
Please also check out the Silicon Valley real estate market on the Move2SiliconValley site.
