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Underpricing to Create a Bidding War

Why you should Get Good Help!

Kim Rohrer was looking forward to leaving the leaky windows in the two-bedroom Berkeley rental duplex that she shared with her husband and two small children.

The couple recently found a three-bedroom, two-bathroom chalet-style house in Berkeley listed for $799,000, which seemed relatively affordable for the area.

The house needed significant work, including plumbing upgrades, but the couple wasn’t deterred. “It was like a dream house,” said Ms. Rohrer, who works in human resources for a tech company. (Her husband works at the University of California, Berkeley.)

The couple offered well above the asking price: $850,000. They knew there would likely be multiple offers but they also needed to save some money for the necessary repairs. They didn’t get the house.

They didn’t even come close. The home sold for $1.4 million — nearly double its asking price. “It’s terrible,” she says of her house hunting experience so far. “Completely terrible.”

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The Typical Bidding War

Here’s a great snapshot of how the vast majority of listing agents handle multiple offers. They just grab one, and kiss off the rest – which isn’t good for the sellers, it’s not good for the losing buyers who might have made a better offer if there was a highest-and-best round, and it’s not good for the buyer-agents who should have the right to compete fairly to sell the home.

But the listing agent gets to go back to sleep, so there’s that.

The most common response? “I just did what the seller wanted to do”. But isn’t it your job to advise them of a way to create a fair competition that could get them a better offer and more money? I think so.

Skip the Bidding Wars

Are you thinking of going somewhere that doesn’t have bidding wars? You need to go a ways!

Just in case you haven’t heard, snagging a well-priced home in today’s real estate market can feel a bit like winning Powerball. It’s all about beating sky-high odds. Scant inventory, worsened by a pandemic-crush to buy new homes, has led to prices reaching new records and competition bidding them up even higher. All-cash bids and multiple offers way above asking are pricing many would-be homeowners right out of the market, or leaving them feeling hopeless.

“Demand has actually been growing stronger than supply going all the way back to 2014,” says Doug Duncan, chief economist at Fannie Mae. “It’s just that in 2020, incredibly low interest rates augmented that demand.”

In other words, we’ve found ourselves in an extreme seller’s market.

But not everywhere. The Realtor.com® data team found the places where buyers could actually have the advantage. Buyers in these spots—which tend to be smaller cities and college towns—have more properties available to choose from, and prices haven’t risen too much (if at all) compared with where they were at the start of the COVID-19 pandemic. This doesn’t mean home prices haven’t risen and the competition isn’t fierce in these cities—they’re just better than the rest of the country.

Looking ahead, buyers may get some more relief in the coming months as sellers become more comfortable listing their homes. Rising mortgage rates and the increase in inventory could slow down price gains. And while prices likely won’t drop, or at least by much, it could lead to a bit less competition.

But where can buyers get at least a little relief right now? To come up with our list of places, we looked at cities where home prices had not risen more than 10% in the past year (compared with 16% nationally) and calculated the number of homes for sale per 1,000 households—the more the better. All of the cities had at least 50,000 residents, and we limited the list to one city per state to achieve geographic diversity.

https://www.realtor.com/news/trends/best-cities-for-home-buyers-right-now/

Listing Agents & Bidding Wars

Let’s review how some listing agents have been handling their bidding wars in 2021.

  1. Ignored a $60,000 non-refundable deposit and took an offer that was $40,000 lower.
  2. Once they get to the highest offer, they insert their own buyer at the same price.
  3. Let an escalation clause determine the winner, and ignore the others.
  4. Counter for highest-and-best, then pick a winner before everyone responds.
  5. Not respond at all.

There are no rules. No guidelines. No laws.

The best our association can do is to issue a spreadsheet form.

Thus, anything goes.

Here’s how I handle it.

The home on Galena Canyon had originally listed for $1,599,000 and had 25 showings and six offers over the first weekend in March.  We had three buyers (one was contingent) who were willing to pay around $1,750,000, so I asked the two non-contingent buyers to make their second highest-and-best offer to determine the winner – which they did, and $1,770,000 won it. I changed the list price in the MLS to $1,770,000, and marked it pending.

Last Friday morning, the buyer had an unforeseen glitch, and we fell out of escrow.  We go back on the open market for Easter weekend, hoping for the best – knowing that the urgency is much higher when the listing is new and fresh.

I had added this to the confidential remarks:

Since we hit the market, these have happened: 16175 Deer Ridge 3,451sf closed for $1,775,000 on March 1st. 15288 Cayenne Creek 3,877sf closed for $1,800,000 on March 30th. 16342 Cayenne Creek 3,446sf pending, listed for $1,825,000. 9716 Wren Bluff 3,780sf pending, listed for $1,835,000. Plus Mark listed one for $2,795,000 around the corner. Built-in equity!

This time, we had six showings and three offers over list, which I thought was pretty good.

I had told the agents to make their highest-and-best offer, and while they were all competitive, I thought there might be more gas in the tank. So I politely asked all three to H&B again, and one emerged from the others by packing another $40,000 onto their first offer.

We are in escrow at $1,840,000, after starting at $1,599,000 a month ago.

Isn’t that the result you’d like to see for yourself, or someone you know?

It is not a given how listing agents handle a bidding war. Most agents just grab their favorite, and turn off their phone.  You deserve better.

If you, or someone you know, is thinking of selling, I’d sure appreciate a call!

Bidding Wars Everywhere!

Our Serra Mesa townhouse listing garnered five offers – one at list price, and four over! It will be the highest sale in the history of the complex. Hat tip to ‘just some guy’ for sending this in:

In the ultra-competitive Westchester market, the odds were stacked against Heather Harrison and her client. A stately suburban home that was listed on Tuesday already had 30 showings lined up for that upcoming Saturday.

“I put in a full price offer at $1.275 million, that was the asking price,” Harrison said. “The client went to highest and best on Monday at 5 p.m., and I counseled my client to bid accordingly, waive his mortgage contingency, then we bid $1.45 million and we got it.”

With the suburbs seeing record volume, agents and brokers like Harrison, who runs Compass’ operations in Westchester alongside her husband Zach, are counseling their clients on how to prevail in a fierce bidding war.

According to Redfin, offers on single-family homes in August were most likely to be involved in a bidding war, at 56.6% of offers, followed by townhomes at 54.7% and condos at 41.3% – 54.5% of offers overall engaged in bidding wars.

Time waits for no buyer in the suburbs

With record-low interest rates, paltry inventory and a surge in buyers, agents are advising clients to be extraordinarily aggressive to win.

“You’ve got to really advise your clients appropriately, quickly and make sure that they know there’s not even a week to come see the property – you’ve got to go,” Harrison said. “The property comes on within 24 hours, and if it meets your buyers criteria you want to get them out to see it.”

When it comes to counseling a client through a bidding war, education is paramount, Harrison said. Prospective buyers need to be armed with as much data as possible about the market they’re targeting. Another critical element, according to agents, is not to make the deals contingent upon things like inspections and not to “nickel and dime” the seller. That will set the prospective buyer apart, Harrison said.

“I’ve also been encouraging them to write kind of like a love letter so to speak to the sellers, so they’re not just like an offer on a piece of paper, they’re giving a little color about themselves, why they’re moving, why they like their house, and giving a picture of them so that the sellers can feel good about who they’re selling to and it’s not just about the numbers,” Harrison said.

To win, waive those contingencies goodbye

Susan Hamblen, broker and owner of Long Island-based EXIT Realty Achieve, said that her agents are slammed with business, and homes that are “priced right” are getting offers within the first 24 hours.

“Homes are going $40,000 to $60,000 over ask, easily,” Hamblen said, attributing the bidding wars partly to the influx of buyers from New York City. “We have about two months of inventory and the buyer demand is just crazy.”

Eugene Cordano, vice president and director of sales at Halstead in New Jersey, said that in his market, bidding wars have triggered offers between 15% and 20% over asking, across all home prices.

To that tune, Cordano agreed with Harrison that it’s important to stick out in a bidding war.

“The old axioms of real estate do not change,” Cordano said. “But the highest bid does not always prevail.”

The influx of buyers from New York City to New Jersey at the beginning of April through June meant that there was more money to spend on homes.

“For our seller-clients, we were counseling them on how the buyers waive appraisals or waive mortgage contingencies,” Cordano said. “With the influx of New York City buyers bidding these houses up, oftentimes waiving the financing/mortgage/appraisal contingencies was not a difficult thing to ask for and most of them did that.”

When it comes to buyers, it’s a different story.

“If the buyer really wanted that home, it was often, “How do we structure this offer to make sure that it stands out and wins the day?’” Cordano said. “That’s not a scientific process. Sometimes that is something that’s very emotionally driven, or driven to the point where the buyer really wants it and is just willing to pay and will offer, either in price or in terms, something that will win the day versus all the other buyers that were there.”

Spreading out in the hottest market will cost you

Vickie Mox, an agent with RE/MAX Dallas Suburbs, covers the Collin County area, north of Dallas. She said the surrounding towns are busiest right now.

The Dallas suburbs of Frisco and Plano are the hottest because they have low rates of inventory and are priced to sell, spurring bidding wars, Mox said.

“Houses that are more unique with large lots and that have been totally updated [sell quicker], and there’s nothing for the buyer to do but move in,” Mox said. “[That listing] could conceivably have 10 offers, and that’s usually between the price range $250,000 to $400,000.”

Once you get over $400,000 there are fewer buyers and there’s less demand for the property, according to Mox.

“But a $500,000 house could have multiple offers if it has everything the buyers are looking for which is being updated to a large yard or a three-car garage, in the right neighborhood and right school district,” she said.

In Colorado Springs, which Redfin said recently has the No. 1 hottest ZIP code right now, there could be at least three to five offers on a home in the first 48 to 72 hours of being listed, according to Keller Williams Associate Broker Scott Sanchez.

“The typical thing here in the Springs has been a $10,000-plus minimum to go over list price,” Sanchez told HousingWire.

“Maybe two years ago it was kind of common for five grand over, maybe $10,000 tops,” Sanchez said. “Last year, you start getting into the $10,000 to $15,000 range and this year it’s been $20,000 on the good homes that are well marketed and even if they’re priced up, they still will get 20 grand over.”

Bidding wars aren’t necessarily uncommon for Peck Barham, a real estate agent at TeamBarham, Keller Williams Homewood outside Birmingham, Alabama, but not at this rate.

“We haven’t seen [bidding] quite like this,” Barham said. “I think in August something like 600 homes went under contract in a three-week period, which for Birmingham is a lot. That’s a lot of homes going real fast.”

Link to Article

Escalation Clause To Win A Bidding War

I don’t accept these when I’m the listing agent because it’s not fair to the rest of the bidders.

Here’s what C.A.R. has to say:

Introduction

Q1. What is an escalation clause?

A1. An escalation clause (also called a relative bid or “sharp” bid) is a provision added to an offer or counter offer where the buyer offers “X dollars more” than the next highest offer.  For example, an offer that states, “The purchase price shall be $1,000 higher than any other offer,” contains an escalation clause.

Q2. Why make an offer with an escalation clause? 

A2. The escalation clause allows the buyer to make the highest offer but only by the minimal amount necessary to beat out other offers. At first blush, it seems to be a savvy strategy.

II. Enforceability

Q3. If accepted, do such offers create enforceable contracts? 

A3. Mostly likely, yes. Although no published case addresses escalation clauses in the context of a typical real estate offer/counter offer situation, the 1991 case of Carver v Teitsworth involved the enforcement of an escalation clause in the context of sealed bids for real property, one of which the seller was bound to accept when the bids were opened. The Court stated, “A relative bid may be valid, but only where a party expressly solicits relative bids or such bidding is objectively reasonable as being customary in a particular trade or industry.”

Based on this case, escalation clauses may create binding real estate contracts, depending upon custom in a particular trade or industry.  While sealed bidding is not common, in many areas of the state, particularly those experiencing a “hot” or competitive market, it is not unusual or unexpected to see an offer with an escalation clause.  Accordingly, there is a good chance if a seller accepts an offer with an escalation clause it would be considered objectively reasonable and will be enforceable.

Of course, unlike in the sealed bid situation present in the Carver case where the seller may have been surprised by the escalation clause, in a typical real estate offer/counter offer scenario, the seller is not bound to accept any particular offer and may accept, reject or counter any offer received.  Further, in the absence of a confidentiality agreement, the seller may disclose one buyer’s offer to another in an effort to generate a higher sales price.  These factors further favor the enforceability of an offer with an escalation clause voluntarily accepted by a seller in the typical context.

III. Contractual Considerations

Q4. Should there be a cap indicating the maximum price? For example, should the buyer offer “XXXX dollars more” than any other offer but “not to exceed” a certain maximum price?

A4. On the face of it, this seems like a good idea since it limits the buyer’s exposure to paying an exorbitant price in the event another buyer makes an outrageously high offer. But, on reflection, in the typical real estate scenario it has a fatal flaw. Once the buyer makes known the cap amount, the buyer has given away the maximum price at which they are willing to buy. If the seller has not received an offer as high as the maximum set by the escalation clause, the seller, armed with this information, can then simply counter at that maximum price or use it as leverage to get more from other prospective purchasers.

Either way there is a problem for buyers. Without the cap, they risk being bound to an outrageously high price. But with the cap, they’ve given away critical information to the seller about how much they are willing to pay.

Q5. Should there be a floor price establishing the minimum amount the buyer is offering to pay? For example, should the buyer offer “XXXX dollars or $1,000 higher than any other offer received, whichever is greater”?

A5. There are pros and cons to such a provision. On the plus side, in the event there is no competing offer, then the buyer’s offer, if accepted, would still create a binding contract. Thus, by including a floor price the buyer adds certainty to the offer that is the equivalent of an offer without an escalation clause. On the other hand, if no other offer matched the buyer’s floor price, the buyer will wind up paying more than if the buyer had only included an escalation clause.

There are different ways a buyer could make such an offer.  It is not recommended to say, “$XXXX or $1,000 higher than any other offer received” since it is unclear which is being offered, the fixed price or the escalation price? Such an offer could be interpreted as ambiguous and be unenforceable.  Instead, the offer might state, “$XXXX or $1,000 higher than any other offer received, whichever is greater.”  Or another way to say this is, “$1,000 higher than any other offer received, but no less than $XXXX.” With this type of wording the buyer is more clearly committing to a minimum price while at the same time more clearly indicating a willingness to pay more, but only if needed.

Q6. Should the buyer include a provision that allows for verification of the next highest competing offer?

A6. Yes. Since the buyer is making an offer dependent upon the offers of other buyers, it makes sense that the buyer should be able to verify that those other offers were in fact bona fide offers. The buyer may include language such as:  “Seller shall, upon acceptance, provide buyer with a copy of the highest offer received.  Buyer has a right to contact that prospective purchaser making that offer, or his or her agent, to verify the validity of that offer and that the other offer is in fact a bona fide offer.”

While the listing agent may be uncomfortable handing over another buyer’s offer to the accepted buyer with the escalation clause, the NAR Code of Ethics provides that, in  general, offers are not confidential, and both the price and terms may legally be disclosed to other buyers unless all parties and their agent have signed a written confidentiality agreement (such as C.A.R. form CND). Even a listing agent acting as a dual agent might be able to reveal details of an in-house buyer’s offer where the in-house buyer has consented to such by signing C.A.R. form PRBS (“Possible Representation of More Than One Buyer or Seller – Disclosure and Consent”) or form SBSA (“Statewide Buyer and Seller Advisory”).

Q7. What happens if all buyers, or even two or more buyers, make offers with escalation clauses at the same time?

A7. In this situation,  there is a chance that the seller’s acceptance will not result in the creation of a binding contract. A contract can only be created where there is an objective way of arriving at a discernable price.  If more than one buyer includes an escalation clause, it is unclear which offer is used as the basis for calculating the escalation clause. It could be the next highest fixed price offer, or it could be the other escalation offer.  If the latter, then there is a never ending escalation (where neither escalation offer has a cap or maximum price).  Should this situation arise, rather than accept one of the multiple escalation offers, the seller would be well-advised to issue multiple counter offers.

IV. Risk Management Approach

Q8. Should the buyer be cautioned against making an offer with an escalation clause?

A8. Yes. Given that the enforceability of such a contract is not 100% assured, and given the potential pitfalls as discussed in the previous questions, the buyer should be advised to speak with their own legal counsel prior to making such an offer.

Q9. Can a broker adopt a policy discouraging the use of escalation clauses since such offers may lead to disputes, especially in light of the complications in drafting such a provision?

A9. Yes. State law requires brokers to adopt policies and procedures for their office. Certainly, there would be nothing improper for a broker to adopt a policy discouraging the use of escalation clauses in offers. Another possibility is that a broker could adopt a policy prohibiting their agents from writing such a provision thereby placing the onus upon the buyer directly, or more appropriately, on the buyer’s attorney to draft this type of offer.

Q10. Where can I obtain additional information?

A10. This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.’s legal products and services, please visit car.org/legal.

Readers who require specific advice should consult an attorney.

PQ Bidding War!

Let’s review what it takes to create a solid bidding war.

  1. Maintain and improve your home constantly over the years.
  2. Install a master bathroom like this!

3. List with Jim the Realtor for an attractive price, do $3,200 of staging, and take off for the weekend!

I inputted the listing at 8:30am on Saturday morning with professional photos, and got immediate results – over 100 people came to open house the same day.

Sunday’s open house had nearly as many people, and those who didn’t attend could watch my walk-around tour on video: https://youtu.be/LCEDYc4rkaQ

We’ve received EIGHT WRITTEN OFFERS (seven over list price), and going for more.  Three showings set up for today, and Donna and I are fielding questions and encouraging higher bids all day long!

To ensure top dollar, we treat everyone fairly and give them every opportunity to bid up the price. The highest offer so far is $890,000, and others have said they are going higher so we raised the list price from $869,000 to $899,000 on the MLS for added exposure on the realtor hotsheet. I mentioned that we have eight offers too.

Want this kind of attention when selling your home? Hire Jim the Realtor!


Leucadia Bidding War

Word on the street is that there are 11 offers on this new listing in Leucadia, and it’s up to $1,200,000:

https://www.zillow.com/homedetails/460-Parkwood-Ln-Encinitas-CA-92024/16709568_zpid/

It goes to show you that you don’t have to worry about under-pricing a home…..as long as you put it on the open market so every buyer gets a crack at it!

Bidding War!

We ended up with three offers on our Gladstone listing, and a bidding war!

Bidding wars don’t just happen; somebody has to spur them on, coordinate them effectively, and keep the focus on winning and losing, and not the price.

The home had its foibles too.

It only has two bedrooms, the third ‘bedroom’ is unpermitted, the kitchen and bathrooms were gussied up but mostly original, and it backs to the full assortment of power lines.  The worst part was not having any recent comps that painted a solid picture on value, leaving it up to the buyers to get comfortable – I helped, and thankfully they had good agents too.

We are listed for $499,000, and I nudged two offers north of $530,000!

If you are thinking of selling, hire me!

Are Bidding Wars Legit?

Another reason we should sell homes by live auctions…..Hat tip SM:

A local developer and prominent real estate agency conspired to prey on Chinese nationals and inflate luxury home prices on the Eastside for their own profit, according to a lawsuit filed in Seattle on Thursday.

Two plaintiffs who bought adjacent newly built homes in Kirkland allege that their broker at Realogics Sotheby’s International Realty was actually working on behalf of the builder selling the homes.

Jie “Gabby” Jiao and the married couple Maoqi Zhang and Wei Fan hired Realogics Sotheby’s broker Connie Blumenthal to buy their first homes in the United States in spring 2015.

Realogics has aggressively targeted luxury homebuyers in China and is one of the top brokerages for foreign buyers in King County, and Blumenthal has a glitzy website where she boasts her connections in Hong Kong and million-dollar home sales locally. The company and Blumenthal call the claims “baseless.”

Both buyers relied heavily on the expertise of Realogics Sotheby’s and Blumenthal to understand the local market. They were told there were multiple offers on the table and that they needed to bid more than $2 million each to buy the homes, west of Big Finn Hill Park, the lawsuit says.

But when they arrived in the area after the deals closed, they discovered the homes weren’t as promised, and later found out there was no evidence that other buyers were interested in the homes — suggesting they had badly overpaid based on their agent’s advice, the suit says.

One of the buyers, Jiao, was so dissatisfied with the home’s condition — among other things, it did not have the promised backyard or bedroom lake views — that she put the house back on the market. Even with her new broker aggressively marketing the home and offering a free Mercedes to a potential buyer, she wound up selling it for $1.67 million last June — a $338,000 loss over a two-year period, despite the region’s red-hot real estate market.

The other buyer’s home is assessed at $1.46 million, or about $745,000 less than the couple paid.

The Chinese nationals’ attorney, Dave von Beck of Seattle, said he found “what looks like collusion” between Blumenthal and the seller of the home, Alex Dudko of homebuilder Unique Design & Construction Co.

After issuing subpoenas in discovery, according to the suit, the attorney found emails and check stubs showing Blumenthal — the buyers’ agent — was actually working directly with Dudko, the seller, at the time of the sale.

One check showed Dudko paid Blumenthal $20,000 after the sales for “services,” according to the suit. The suit calls the payment a “kickback” for Blumenthal bringing the buyers to the developer.

In an email to Dudko around the time one of the sales closed, Blumenthal referred to a “bonus just between you and I.”

“Let’s meet for dinner and margarita’s again when I get back!” Blumenthal wrote to Dudko. “I need a new handbag :)”

Read full article here:

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