Multiple offers have returned to many segments of the Silicon Valley real estate market, so it is more important than ever for motivated home buyers to pinpoint the pricing.
Most of the time, when there are multiple offers, the sales price goes higher than the list price. Does that mean you would be over paying for the property? Possibly. Or it could simply mean that the listing agent and home seller listed it strategically low – under its true market value. In that case, the list price was never the expected sales price. Unless you and your Realtor carefully analyze the comps (comparable listings, pendings and sales), you won’t have a sense of the probable buyer’s value for that house, townhouse or condo.
Common home buyer mistake
A very common mistake for new home buyers is to get as far as to analyze the comps and find what they think is market value…and then start subtracting for everything wrong with the house. This is because they assume that the house is supposed to be perfect, or that they should not have to pay for any improvements or repairs after close of escrow.
The difficulty here is that most of the time, the house or townhome or condominium is not brand new. The comparable sales were not new, either. A 40 or 50 year old property is not going to be in perfect condition. Had you or any buyer seen all of the comps’ presale inspections and disclosures, you’d have learned that they also had a myriad of things wrong with them – mostly small but items to be repaired, replaced or improved nonetheless.
If possible, find out what you can about the the condition both of the real estate you want to buy and that of the recently pending or sold properties. Were they sold As Is? (If they got multiple offers, that’s probably the case.) Sometimes the MLS will reveal, in the private agent comments section, whether the property got multiple offers, if work was needed or done etc.
In short, if you are buying a used home, especially if it’s decades old, expect that it will not be in like-new condition. If buying it in a multiple offer situation, use comps of a similar age and realize that all of these homes have at least some little items (not health and safety) wrong and also had repairs required in 99% of the cases. So if you find the market value and then start subtracting, you will fall short and not be able to compete in purchasing the home – and in fact will probably end up low-balling, unintentionally.
To really pinpoint the pricing, it’s imperative to understand the true condition of the comps and not mistakenly assume that they were all absolutely perfect. Then you are really comparing “like to like”.
Fear of over paying & fear of not getting the home
Multiple offer situations tend to make buyers nervous, especially if they really want the home and aren’t just throwing a lowball offer out to see if it works (not a strategy I advise). If you make a great, strong offer and win, you may find that you have buyer’s remorse immediately! The odds are that you were willing to pay more than everyone else. Sometimes several offers come in at the same price, and that’s more consoling. But just as often, yours was the clear best offer. How will you feel knowing that no one else was willing to go as high, or write terms as strong, as your offer? It’s a little nerve wracking.
The other extreme is when you “just miss it”. Sometimes with multiples, there are a couple which are neck and neck, and you lose the house by a slim margin. Sometimes there are two nearly identical offers but one is just a tad better: either the terms or price are better, the offer is better written or presented, or some small (even emotional) item like a letter from one buyer and not the other could be the tie-breaker.
It’s easy enough to do the little things which can be tie breakers. Harder is the $5000 or whatever price difference.
With these two fears in mind (over paying or not winning the home), I suggest to my buyers, once all the analysis is done, to write an offer that they can live with whether they get the house or not. And I talk about winning in multiples (and immediately knowing that no one else would go as high, most likely) or missing it by a hair. “Will you be OK if you miss this home by $5000?” is a question I often ask. “Will you be OK if they do accept your offer?” Write such that you can sleep either way – that you put your best foot forward and are ok if someone else pays more for it and are happy if you get it.
Your agent can’t tell you what you “should” offer. At the end of the day, it’s your money and it’s your home or real estate investment. You have to live with getting – or not getting – the property. Your Realtor can and should provide you with good comps, and if well experienced, can probably estimate what the most motivated buyers would likely pay to get the property. Then it’s up to you, whether it’s worth it to you to compete and if so, at what level.
Please also read:
What are typical buyer costs when purchasing a home in San Jose?
