The Return of the Contingent Buyer

2018 was one of the most unusual years for Real Estate that I have seen in my almost 30 years of selling homes. The first 5 months were a complete and total Sellers’ market. Buyers would offer over asking price, remove contingencies (especially for the home to appraise) and basically ask nothing of Sellers in the way of repairs. I wrote a blog at that time “When will this Sellers’ market ever change?” describing how a lack of available homes and pure Buyer confidence was fueling something that seemed like it would last forever. Until it didn’t. In June, things started to slow. “Maybe it’s vacations or the interest rate increases” we wondered. Then July and August clearly slowed even more. Homes simply didn’t sell right away. When an offer came in it was one or two, not five. We started to see price reductions again as smart Sellers realized the market for their home simply wasn’t there the way it was in April or May. Now I’ve written about how the Spring season is especially obvious in Santa Clarita because of demographics and so many people wanting to move around the school year. But this was something noticeably different. By September (a pretty strong month in 2017), the amount of homes for sale was up 30% from April. Buyers not only offered under asking price, they would not even respond to counter offers from Sellers. Once in escrow, Buyers would ask for extensive requests and credits…something we never saw in the Spring. In short, the market had in many areas completely flipped in the space of about 4 months. It was clear that what we could get for our Sellers had changed and it required new thinking and a willingness to work with any motivated Buyer, we didn’t have a handful to choose from anymore. The Buyer exuberance that we saw in March/April/May, when over 450 homes each month opened escrow, changed to caution. In the October/November/December months not once did more than 250 homes open escrow. The 6-year run up in prices seemed over.

Which brings us to 2019 and the return of what most people historically would describe as a “normal” market. This market is defined by homes taking longer to sell (normal), Sellers sometimes having to negotiate price and repairs (normal) and Buyers taking their time to evaluate and purchase instead of just jumping on a home for fear of missing out (normal). Buyers are no longer fearful that prices will pass them by because…they aren’t. We still don’t have too many homes for sale, about 700 compared to the 400 we had a year ago, so no big price adjustments across the board are likely coming. Sellers have equity and if they don’t like the market values, they simply won’t sell. That is already happening. Also, clearly homes with desirable locations and upgrades are still commanding top dollar and multiple offers still occur. Just not like they did in Spring of 2018. Many top agents believe Spring of 2018 likely represented the top of the market for the next few years. Time will tell. Regardless, these market shifts are actually healthy to overall market stability in the long term. Prices being essentially flat for a year or two shouldn’t surprise anyone. As I wrote in the Spring “nothing goes up forever,” and it didn’t about 2 months later. All this means moving forward is that Sellers will have to conform to current market conditions and so will the Realtors. Any agent less than 7 years in the business likely hasn’t seen this kind of market and may not know what it requires. In short, it means we really have to work at a much higher and smarter level to get our Sellers into escrow. Again, historically normal. Those of us that have seen this before, in some cases many times, know exactly what is required and that is working with the Contingent Buyer.

The Contingent Buyer is someone that needs to sell in order to buy. This Buyer has historically driven the market in Santa Clarita. When the market was dead slow in the early 90’s a group of top agents decided to start the first Network Group to try to put transactions together. We noticed that it seemed to be the same 20-30 agents that had the majority of the clients that were ready to actually do something and most of these clients needed to sell to buy. We would literally meet and describe our clients that wanted to sell and move up or move down. In this group we could put a condo Seller into a 3-bedroom Seller into a 5-bedroom Seller into an estate home. All we needed was a first-time condo Buyer to get the chain started and inevitably one of us had that. That group exists to this day doing over 25% of the sales in Santa Clarita and my guess is the next two years will require us to dust off some of our real networking skills and get to work. Homes simply won’t sell on their own, they will need to be “marketed” at a much higher level. This Contingent Buyer, that needs to sell to buy, isn’t a Buyer that Sellers have looked favorably on in the past few years. Why choose a Buyer that needs an escrow to close when there are plenty of Buyers that don’t need to sell anything to buy their home? Understandable of course. This is a Buyer that potential Sellers should love, though they certainly didn’t have to work with them 9 months ago. They had plenty of non-Contingent offers. Many Sellers will tell me “I don’t want any Contingent offers” and in a hot market that can be fine. Today, though, that would often be a mistake and it’s important to understand what this Buyer can do for you as a Seller and why they are often even BETTER Buyers in a shifting market than a non-Contingent Buyer!

The reason a Contingent Buyer might be a better Buyer for you if you are selling is that they are usually highly motivated. They have just sold their home. They are in escrow. They HAVE to buy. Often as the market shifted in the fall, we noticed non-Contingent Buyers exhibiting a real lack of motivation. Some simply wanted to see what the Seller might do for them in escrow and walked away when they didn’t like the results. Some offered lower than a motivated Contingent Buyer would. I had Sellers choose Contingent offers over non-Contingent offers simply because they believed the Contingent Buyer would give them a smoother escrow and most importantly, close the deal. That is a big reason why working with a Contingent Buyer in a normal market can be so important. Now, I am not describing a Buyer that hasn’t yet put their home on the market or is on the market but hasn’t opened escrow. Those Seller/Buyers have importance too, but they aren’t ready to go. I’m referring to the Buyer that already is in escrow with their home and wants to buy yours after theirs closes. This is where the knowledge and expertise of your agent becomes critical in vetting out their escrow to make sure it is solid. Once we know that they have solid escrow we can usually expect a concurrent closing that works for all parties. It’s funny how quickly things can sometimes change. A year ago, discussing Contingent Buyers would have been something home Sellers didn’t want or need to consider. Today, it could be the difference between selling and not selling.

How to know when a market is REALLY changing…

It’s almost August and if you read my last post about the super strong, multiple offer driven Spring market, you may be surprised to hear that just a few months later the market is shifting a bit. The problem with describing these changes is that there will be exceptions in every neighborhood and price point, but for most sellers we are seeing a return to stable price points and longer marketing times. Many of my current sellers are experiencing less traffic than they likely expected or hoped for and are noticing more signs up, often without a “sold” attached. The media knows this too and we have seen the return of less than encouraging headlines. In fact, in the last week I have seen Forbes, Bloomberg and USA Today proclaim the following:

  • “Chinese reversing their big Real Estate buying spree.” This actually started a while ago and pertains primarily to Commercial Real Estate, but the San Gabriel Valley isn’t seeing the same residential impact of foreign money that it did in 2013-2017.
  • “Sales of new homes sink to an 8-month low even as prices fall.” This is for new construction and a National Stat, but it still raises eyebrows.
  • “Southern California home sales crash in warning sign to nation.” My personal favorite! Crash? Closed sales were down 10% in June.

So, what is really happening in Santa Clarita and how might that affect your Real Estate plans? No hype or flashy headlines, just the facts. The following started at the end of May and is happening as I write:

  • Inventory is up 30% in the last 60 days. Our spring average was about 450 homes for sale. Today we are at just under 700. For perspective a “normal” amount of inventory would be about 1100 homes. Still we clearly are seeing homes come up for sale and not go into escrow right away. In May, we had more homes in escrow than for sale. Today the reverse is true.
  • When newer listings get interest, it is often one offer and not 2 or 3. More and more offers are coming in under the asking price which rarely happened several months ago. This makes negotiating the price up more difficult when there aren’t multiple offers. There are simply less buyers for the new listings coming on. Many have already bought (hence my advice to sell in February-May, not June-August), and many others are seeing prices they just can’t afford. In Santa Clarita, the median Income is $90,000 and the median price is $595,000.00. It takes 133% of the median income for a 20% down payment on that $595,000 home.  It is also 43% of the monthly income. For many we have reached a point where they simply can’t or won’t pay today’s prices. Therefore, it is important to consider that unless something changes, a small correction to the market, wages increase, or interest rates come down; we will have a little slower market for now and stability in prices if not some modest reductions.
  • Buyers don’t have the same urgency as in the Spring and (surprise!) in addition to making offers under asking are perfectly willing to walk away from seller counter offers they consider too high. Buyers are keenly aware of market shifts. They know when homes come on the market and don’t sell right away. They see the price reductions that are becoming more common as sellers realize they may have been ambitious in their initial pricing. We put a home under contract last week in which our buyer made an offer in May and 75 days later the seller came back and accepted his initial offer.

To sum up let’s remember a few things. Inventory is still low and low sales numbers are often a reflection of that. It doesn’t mean there isn’t still strong demand for quality homes and certain price points. There is. I sold a pool home for $550,000 over the weekend with 5 offers. That can still happen and will continue to happen when homes are marketed properly. However, a great majority of sellers need to understand that if their home doesn’t sell in a few weeks or with multiple offers that nothing is “wrong.” This is the new normal and simply reflects a more balanced market. Further, sellers will not be able to make demands the way they did in a hotter sellers’ market and need to understand that condition & price are key to getting sold. Many agents are uncomfortable telling their sellers about market changes that affect them if it isn’t obviously happy, good news. They won’t emphasize the importance of preparing the home to show its best, pricing it properly (not optimistically) or being honest about how buyers will compare it to the competition under current market conditions. Worse, they won’t explain why repairs might be required to get the home closed. That is a crucial mistake. Months ago, I would say “a hot sellers’ market can forgive a lot of sins.” Not today. Markets ebb and flow. Nothing goes up forever. Sellers should be prepared for it to take a few months (maybe more in higher price points) to sell and be thrilled if it is just a few weeks. Understanding where the market may be softer and less forgiving and being honest with a potential seller about what that means is absolutely critical today. Yes, the market is shifting. Remember though this is still a market that doesn’t have enough homes for sale in many parts of town. Knowing where that is true, and not true, is what good agents have to share with their sellers in navigating these shifts.

When will this “Seller’s Market” Turn?

This spring marks the 6th straight year of appreciation in the cost of housing in California. In many areas the cost to buy or rent has become unaffordable. As I begin my 28th year of selling Real Estate, I know this won’t continue indefinitely. We all should know this if we follow history. Still, this market remains a sellers’ market for anyone with a nice home under $800,000 in Santa Clarita and if you have participated in any “multiple offer” situation recently you feel at the mercy of a seller with a choice of buyers, hoping they will pick you. It’s a frustrating feeling to be sure.

To know when this crazy appreciation may slow down and even change to a more balanced market, it’s important to know why this sellers’ market won’t change for at least 2 years. First, we have a strong economy and people have jobs. Confidence more than anything else fuels housing. When you talk to thousands of people a year and they all tell you “I’m not buying in a declining market” like they did from 2007-2012, you know the importance of this. The opposite of that is happening now. When you are a little tentative as a buyer to offer a higher price for a new listing and you lose it to 4 other offers that all offered as much or more than you were considering, the next time you don’t want to lose out. And you offer whatever is necessary to get the property complete with a heart tugging letter of how you will be the perfect buyer for that seller. Sound crazy? Perhaps, but this is at the core of what you read about as median prices get back to all-time highs. Psychology is a very important driver of the current market. More on that later.

Besides buyer confidence that prices will continue to rise, there are some fundamentals causing a supply/demand equation that favors sellers. First, the amount of new construction built in Santa Clarita from 2007-2017 isn’t anywhere close to meeting demand. Building in California is both expensive and very time consuming. The Newhall Ranch project (now called “Net Zero Newhall”) which I believe will change our market significantly, has been trying to be approved for almost 20 years. Just NOW is the grading beginning around Magic Mountain. New construction has always driven our market and we haven’t had anywhere close to what is needed to satisfy demand. Further, what we have had hasn’t moved the needle with the MANY people in our valley who would move moved if there was something to get them excited. Small, 2 story properties with Melo Roos taxes, high HOA’s and no yards isn’t what this group wants. They have a low tax base on the home they have lived in for 10-25 years, low or no extra fees, a low house payment with a great interest rate they likely locked in a few years ago, and basically, they are comfortable. They might be ready for a change (the house is too big, or they want newer etc.) but there isn’t anything to get them excited. So, they stay put and don’t move. In Santa Clarita we have averaged under 600 total homes for sale for 4 years in a valley in which 1500 would be considered “normal”. We have less homes for sale this year than we did last year, and last year was an all-time low. That is why prices go up!

Another driver of this sellers’ market is the complete change in the quality of buyers in the marketplace and the loosening of lending guidelines in the last 2 years to reflect that. Today’s buyers – some of which lost their homes 10 years ago – are well educated about their options and have taken the time to be a solid buyer again. They buy less than they can afford, they have jobs and their credit is good. Because of this, lenders have made it easier to get loans and again you have a fair supply of good buyers for an unusually small number of sellers. A good supply of motivated buyers plus not enough homes for them to buy equals further appreciation.

So, when will this change? It’s telling that I am getting more sellers calling me to sell and they plan to buy “in a year or two when the market goes down.” If this sentiment grows, a lot more homes will come on the market. Again, confidence and perception really drive cycles in the market. The problem is, it’s hard to see any mass movement to sell and wait when most fundamentals suggest otherwise. Yes, people are retiring out of California but the millennial population coming into the market is the largest home buying group in the history of American Real Estate. They are behind the crazy markets in Salt Lake, Seattle, Portland, Nashville and Dallas. Plenty of them are buying in California too. What I think will cause the market to slow and eventually balance out here is the combination of 3 things that we will start to see in about 18 months here in Santa Clarita.

First, rising interest rates are happening and will continue to happen for the next 18 months. No one disputes this, the Fed has clearly stated it and though historically money is still cheap, higher rates mean a seller’s home costs more to buy even if the price stays the same. We are getting back to the point where people are spending over 40% of their income for housing-both ownership and renting. That CANNOT continue to go up for long. Further, all buyers watch carefully what home ownership costs and one clear trend that came out of the mortgage meltdown is buyers being conservative and buying less than they can afford. They rarely stretch it. Rates going up combined with prices going up (though slower than few years ago, prices are still going up) means at some point buyers simply can’t afford it and don’t buy.
Second, is the new construction mentioned above as creating more supply to take buyers away from the resale market. New construction has a double effect. It takes away the buyers that might consider resale homes if new weren’t available AND it causes people that have homes to put them on the market, so they can go buy a new home. I remember clearly trying to sell Warmington or Lexington resale homes in 1995-96 and having buyers choose new Castlerocks in Northbridge. Or losing buyers to new homes in Sand Canyon, Stevenson Ranch or Castaic instead of my resale down the street. This always happens when new comes on the market and it causes the resale market to cool and sometimes even decline a bit in value. This won’t happen in Encino or Manhattan Beach where there is no room to build, but it will certainly happen here in Santa Clarita in 2020.

The last reason the market will cool has less to do with economics and more to do with psychology. Can you believe that the median price in San Francisco County is over 1.5 million? That we have had 6 straight years of appreciation when a normal cycle is half that? That your neighbor just sold for $20,000 over their asking price with 5 offers? Well we can believe it because it is happening, but it isn’t “normal.” We all know that Real Estate is cyclical and though it’s hard to see any kind of big drop in prices, the cycle will eventually change. In a few years this exuberance for housing will seem just as foreign as me doing a market analysis in Tesoro Valencia in 2010 and having every single home on that piece of paper be a short sale or a foreclosure. That really happened though it seems hard to believe today. So, no reason to think this seller’s market changes soon, all the fundamentals suggest otherwise. But with rising rates, new construction coming and in time, buyers backing off a bit, it will change again. Just like it always does.

2018 Real Estate Tax Plan – Updated

When we reported to you in November what was proposed for “Tax Reform,” there were some proposals which would definitely hurt the Real Estate Market. The final version which is now law has many Realtors & Real Estate Groups concerned that it will negatively impact values and long term growth. I DON’T see that happening in Santa Clarita.

Watch to learn why…

Lawyers Title - Tax Reform

Economic Outlook Preview – Demand for Industrial Space Hottest in Years

Demand for Industrial Space Hottest in Years

SCVEDC-Technology Graphic-2

The Santa Clarita Valley industrial market is heating up, with a growing number of companies acquiring new warehousing, manufacturing, and logistics space. At the same time, builders are beginning to complete some large-scale projects, creating an environment that is dynamic and rapidly changing.

Net Absorption
Last year, the business community absorbed almost 350,000 square feet of the region’s spare industrial capacity, one of the largest figures of the past decade. In the Valencia Gateway alone, more than 250,000 square feet were absorbed.

Prominently, much of this activity was from companies already located in the Santa Clarita area. Two examples are Accurate Freight Systems and Pharmavite, each of which moved into facilities of more than 50,000 square feet. Firms like these typically cite several reasons for expanding within the local community, including its growing pool of available workers and its competitive lease rates.

Across California, job markets are getting tight, and companies are struggling to attract qualified employees. In most of the state, almost everyone who wants a job already has a job, forcing companies to recruit workers from their competitors or hire people from other cities.

But the population of the Santa Clarita Valley is growing rapidly, creating a steady influx of talent and making it easier for companies to hire.

Compared to the rest of L.A. County, the SCV also has some of the most affordable industrial lease rates, with average rates that are more than 30 percent cheaper than Central L.A. and 15 percent cheaper than the San Fernando and San Gabriel Valleys.

In response to growing demand, builders are ramping up their construction activity, delivering a substantial amount of new capacity to the market. In 2017, several industrial structures were completed, totaling almost 400,000 square feet of space. More is underway, and with an average of 700,000 square feet under construction throughout 2017, additional completions are expected in 2018.

Deliveries                                           Under Construction

As companies begin to fill this new space, jobs will be created in several industry sectors, including logistics and transportation. Over the past year, jobs in the logistics industry have expanded at an accelerated rate, as consumers increasingly shop online and have goods delivered to their homes. Logistics services tend to be concentrated in the Central Valley and Inland Empire, but some of this activity is moving to the SCV to take advantage of its proximity to the ports, and to be close to the L.A. County consumer base. During 2018, the SCV logistics industry will expand faster than the overall labor market, and is expected to offer above average wages and salaries.

For more valuable insight into the local, state, national, and even global – YES, global! – economies and how they’ll be impacted by the growth and development on the horizon, register for the 2018 Economic Outlook Conference. Scheduled for Thursday, March 8, 2018, from 2 – 5 p.m. in the beautiful Valencia View Room at the Tournament Players Club in Valencia. Regular registration is $125 and walk-in registration the day of the event is $150. Space is limited!

 

About the Author: One of the featured 2018 Economic Outlook Conference speakers, Dr. Mark Schneipp from the California Economic Forecast, provides economic analysis and forecasting for a wide range of clients including businesses, non-profits, cities, regional organizations, colleges and universities. The California Economic Forecast’s special areas of expertise include regional economic analysis, economic evaluation of regions using local indicators, and longer-term forecasting of California counties. Dr. Schneipp will provide an in-depth forecast for the Santa Clarita Valley at the upcoming Outlook event.

 

About the SCVEDC: The Santa Clarita Valley Economic Development Corporation (SCVEDC) is a unique private / public partnership representing the united effort of regional industry and government leaders. The SCVEDC utilizes an integrated approach to attracting, retaining and expanding a diversity of businesses in the Santa Clarita Valley, especially those in key industry clusters, by offering competitive business services and other resources.

The New Real Estate Tax Plan – how much will it cost you?

By now you have probably heard that the current tax plans being voted on by Congress have chosen to target homeowners that use interest and property taxes to reduce their tax bite as deductions that need to be reduced or go away entirely. Yesterday the House passed their plan and the Senate is soon to follow. It’s been a long time since we have had changes to tax law that so squarely affect Real Estate, but for many of this, make no mistake it will cost us thousands of dollars each year. And if you listen to the Real Estate Lobby, whatever version of the two laws is formally adopted (something that will almost certainly happen in the next few weeks), may cost some of us in the value of our home. I’ll touch on both here but to be sure, my views are neither Red nor Blue but Green. In other words, who is this going to hit financially, and I think it’s pretty clear California is at the top of that list. In fact, it’s been a long time since I’ve had so many of my great past clients call about one topic like they have about this. So, for this year end blog post I will attempt to answer the 3 questions that have been raised the most and in 2 weeks you will get a video interview from me on this topic. Of course, nothing is yet finalized but it’s clear that despite a lot of uproar from California and a few other states change is going to happen and it’s going to cost some of us some money.

Let’s start with what is being likely to be enacted and the answer to the first question which is when will this start?

First, if the House bill is approved, you will only be allowed to deduct interest on up to $500,000 of loan. Meaning if you have a loan of more than that (and for a lot of people in our valley, it can be a lot more than that), you will no longer be able to deduct that interest. Next is even bigger -the property tax deduction. The House bill caps the amount of property taxes you can deduct to $10,000 and the Senate bill eliminates the property tax deduction completely. That is the far bigger issue for many people that have either no loan or a very small loan in which interest deduction may not cost them much. EVERYONE pays property taxes and for some, it’s a BIG number. Further, and a lot of people aren’t really talking about this, the new laws would require you to own a home for FIVE years, not the current two years, to avoid paying capital gains should the home go up in value. Want to further reduce the amount of homes coming up for sale and reduce the amount of Real Estate transactions? This part of the tax reform does this for sure. Also, for those fortunate enough to own second homes, no more interest deduction for you and if you have a home equity line, bye bye deduction. This will all start next year under the current plan. There are some other issues that will affect builders and low-income housing but these are the ones that affect you and I.

Second, how much will this cost me? To be sure for many Americans, the answer is effectively zero. Over one third of our country doesn’t own a home. Another third owns but with no mortgage. The elimination of a Mortgage Interest Deduction means nothing to them. But the reduction or worse ELIMINATION of the property tax deduction is a different story. Everyone that owns a home pays property taxes and though they don’t all itemize, for people in expensive states like California, New York and Illinois it’s a major incentive to home ownership and losing it can cost a bunch. Before writing this, I went back over the last 2 years and counted how many homes I sold over $700,000. It was 180. Over 1 million was 39. Losing the property tax deduction alone will cost each of these families over $10,000 each year. Of the 39 homes I sold over 1 million, all but 4 had loans over $500,000 and many had loans over $900,000. Losing the mortgage interest deduction for many of them will cost thousands each year. The median price point in LA County is almost $560,000. In Orange County it is over $750,000. It’s safe to say that the higher in price point we go the bigger the financial hit and for some it could very easily mean over $7,000 year in real dollars lost to them. One client buying a home for $1,120,000 who is closing this year and has loan of $850,000 (closing this year means he keeps the current 1.1 million interest deduction limit) figures closing next year would cost him over $50,000 in real dollars in the 7 years he plans to own that home in mortgage interest alone. Make no mistake, this will mean a lot of financial benefit to homeowners in expensive areas like Santa Clarita will be lost.

Third, what will happen to the value of my home? This is really one that in the short term it’s hard to see it affecting the value of homes in Santa Clarita under $650,000. We still live in market in which it’s expected we will have another year of appreciation in 2018 solely due to short supply and at least steady demand. Between $650,000 and 1 million will likely be affected somewhat, especially with move up buyers that will now lose at least some of the financial benefit of moving up and buying bigger. Instead of buying a home for $850,000 they may see if they can get a larger home in the $750,000 range. One thing I have noticed since the mortgage meltdown is buyers are more conservative than ever. They often buy less, sometimes a lot less home than they can afford. Further, they are well aware of exactly how much that new home will cost them and exactly what their write offs will mean to them based on their tax bracket. I make sure all buyers know these numbers as do all good lenders. Last, the over 1 million dollar market will be affected and potentially quite a bit. It’s already the part of the market that has the lowest number of buyers in SCV, obviously. Now you either limit or take away entirely tens of thousands in financial incentive to buy those homes? How could it not? I deal with a fair amount of well off people and to be sure, for many they will invest in Real Estate and their own home will continue to be an important part of that. But this group is also very smart with money and now changes are being made that reduce the incentive to buy bigger. And the second home market? Look out in areas that rely on that. Long term it could be argued that the under $650,000 price point could also be affected. One of my favorite exercises with first time buyers is educating them how by writing off interest and property taxes they can often buy for less than what it costs to rent, or get a home for the same effective cost per month as an apartment. Based on what the final version of this reform looks like, that can change now too.

I realize that this is a difficult topic to analyze and predict what may happen. Many politicians are claiming that a lot of good will come from it. I always question what any politician says, but hopefully there will be positives that affect all income sectors. To be sure though it’s hard to see how it will help homeownership, stimulate home building, reduce costs to purchase or any other obvious economic drivers. If it negatively impacts property values, that won’t be seen as a positive by homeowners either. There is a lot more to this reform that will affect a number of other entities, specifically schools and nonprofits. I won’t comment on any of that. What I will say is that whatever the final signed legislation is will cost many Santa Clarita homeowners some real money.

How to get Multiple Offers, and what to do when you do!

For the last 3 years, we have experienced a shortage of quality homes for sale in Santa Clarita. That’s no big surprise, “tight inventory” is all over many real estate related reports. It is for that reason that 2016 was the fourth year in a row of price appreciation, especially in the lower price ranges. Too many buyers for too few homes caused about 10% appreciation for the year. At some point, of course, this will stop, but it’s hard to imagine it happening anytime soon. Today, we have under 400 resale homes and townhomes for sale in a valley of over 200,000 people. Even adding in the 11 new construction projects and their available homes leaves us with about 40% of what would be needed for a “normal” 4-month supply of homes. Meaning, that a marketplace in which multiple offers are common will likely be around for a while.

It is in this kind of supply/demand environment that we often see a new listing come up and there be multiple buyers making offers for that property. That is what today’s post is about, as I regularly see sellers and their agents mishandle this opportunity. Worst case, they take the first offer that comes in, something happens in escrow and 30 days later they have to come back on the market. So many times I’ve seen that cost sellers tens of thousands of dollars and untold aggravation. That can be avoided, though, by following some important tips that give the best possible outcome for buyer and seller alike. Let’s assume then, that the seller wants not just the best possible price, but also TERMS that lead to the time-frames they need and a smooth escrow without surprises or disappointments. I’ll offer a few tips to buyers at the end, but this is mostly for those that plan to sell in a tight inventory market like we have today.

It is my experience that if a seller wants top dollar, that almost always comes in a multiple offer situation during the first month that the property has been for sale. I’ve heard many homeowners say they think a home was sold under market value because it sold right away, and that certainly has happened. Rarely does that happen, though, when the agent involved makes sure that ALL buyers in the marketplace see the new listing, and it stays on the market for a designated period of time – not just a day or two. In fact, almost always when a home sells right away for less than it could have, it is because the listing agent sold it to the first offer in the first few days on the market and, SURPRISE, often to their own buyer so they can get all of the commission. This happened so many times in the short sale market of 2009-2012 that banks today INSIST a home be on an auction website to ensure that the home can be bid on. For today, the tip is simply this – have your agent put in the remarks that the new listing will be open for viewing for a specific period of time (i.e. 7 days, 10 days or 2 weeks). Give those buyers and their agents a chance to get in and not feel rushed to jam an offer in right away. Encourage everyone to come and offer if qualified and interested. This creates a comfort zone to view and buy and still keeps the urgency up to get offers in. This all but guarantees that every buyer that is in the marketplace sees it, which is the key to getting top dollar.

Next, any prospective buyer should be encouraged to write and put their best foot forward to start with. This way you learn their true motivation. Once all offers are received, tip #2 is to write a “multiple counter offer” with respect to the buyers’ highest/best price and terms. It floors me how often agents don’t do this, and while there can be reasons to just accept a solid offer, why not find out what each offer’s best price and terms are? It simply takes an extra day or two, and a one page form. I prefer asking for “highest and best” as opposed to asking for a specific price, because this encourages buyers to truly give their best price, rather than meeting a specific number. You never know what that will be! Giving a “multiple counter offer” is also important to determine what the second-best offer is to be a potential “back up offer” in case something happens with buyer #1. Again, just because you are the hot new listing doesn’t mean things can’t happen in escrow, and you want to be prepared if they do. For buyers, this is where a “cover letter” detailing your sincere interest in the home can help a seller feel comfortable being in escrow with you. Sometimes these letters can be a bit corny, but I’ve often seen them be the reason a seller chooses one buyer over another, even if their price is lower. Remember, a seller may be emotional about saying goodbye to their home. Knowing a buyer values it like they do can be powerful.

Last, terms are so, so, important (sometimes more so than price) but are rarely evaluated equally in a multiple offer situation. Removing all contingencies quickly means the seller has a solid deal. Until that is done, it isn’t even close to a “done deal”. By far the biggest issue in a rising price environment is the appraisal contingency. Just because a buyer offers $10,000 over asking…what happens if the lender’s appraiser doesn’t have recent sales to support it? I’ve spent hours and hours rebutting appraisals in the last 3 years, even after meeting the appraisers in person. Appraisers often don’t value things the way a buyer does. That’s just reality. For this reason, you should remove the appraisal contingency from the deal when possible. It may require the buyer to put more money down if it comes up short, but they don’t pay any more than the price they offered. Buyers, understand why removing the appraisal contingency will often be the reason you get the home – or don’t. Honestly, no one knows value better than a buyer that has been actively looking at every property for sale. They know better than appraisers! For sellers, if the appraisal contingency can’t be removed from the offers, at least shorten the amount of time to get it removed so you know if you have an issue. Sadly, many buyers will tie up a property, then try to renegotiate price when the appraiser suggests they paid more than market value. My feeling is if they are willing to pay over asking because of market conditions then they are going to pay that regardless of what the appraiser says. Get that in writing when you have the leverage to do so – in a multiple offer situation – before you open escrow. Happy selling!