While the pace of home-buying activities picks up around the nation, certain areas are seeing more excitement than others.
As is usually the case during economic recoveries, no two cities recover in exactly the same way. Some have a glut of inventory that will take many years to turn over, and other markets such as New York City, Denver and San Francisco have barely any inventory left at all, and each new listing seems to spark a vicious bidding war that drives the price far beyond a property’s appraised value.
Seattle falls in the latter category.
“In Seattle right now, it’s usually more than two buyers,” says Sam DeBord, managing broker of a Seattle real estate firm. “We hear about a 20-plus offer bidding war weekly. In most cases, it’s closer to five offers.”
DeBord, who is also the state director of Seattle King County REALTORS®, says that institutional investors often bid the most aggressively and get the higher-priced deals; however, it’s the so-called “regular” buyer—the one who will actually move into and live in the property for at least a few years—who comprises each side of a typical Seattle bidding war.
Down in the Southwest, brokers in cities such as Las Vegas and Phoenix saw their share of bidding wars a few years ago once the market bottomed. That activity was largely fueled by an influx of institutional buyers either backed by Wall Street money or foreign funds, according to Mark Stark, CEO and owner of one of the largest real estate firms in Nevada and Arizona.
Stark says those professional buyers came in with all cash and bought up all of the available properties until it wasn’t really much of a discount anymore. Then they all moved on to the next speculative market.
“When we were in that shortage, there was a bidding war on every property. It was ridiculous,” says Stark. “The investors, they were insatiable. They had a specific return they were trying to achieve, and now that (the market has) come back to where it was…they just can’t get their returns, so they moved into other markets.”
But that hasn’t stopped the bidding wars, and the main reason is simple: low inventory. The regular buyers will clamor for quality product if there aren’t that many available just as aggressively as the pros.
“All markets see bidding wars. They’re absolutely happening,” Stark says. “You just keep countering and letting them know that if the offer is not accepted you’ll go to someone else.”
Sometimes regular buyers are pitted against deep-pocketed investors, making for an awfully daunting showdown—not that the seller should mind. DeBord says these types of bidding wars can be tricky to manage, but a broker doesn’t have to give up just because they’re up against a large institution.
“Occupant-buyers need to show somehow that they’re more likely to close the transaction than an investor. Cash and speed are to the advantage of the investor, but they’re not as heavily invested in actually getting any single property they’re writing offers for,” DeBord explains. “Regular buyers should show commitment, whether by financial, logistical, or personal means to sway the seller—within legal guidelines, of course. Personal letters, earnest money increases, and waivers of contingencies can all show serious intent to close.”
He adds that making a deal with a hedge fund or some type of Chinese conglomerate isn’t always as easy as it seems.
“For sellers, it’s worth considering that the investor may be making offers on multiple properties at the same time,” says DeBord. “Keep in mind that the well-financed traditional homebuyer might, in some cases, be more likely to get your transaction to closing.”
“Well-financed” is the key phrase in a bidding war, and usually the winner will get the property for an amount that is above the appraised value. That’s where the cash comes into play.
While investors tend to make all-cash offers, non-investors are making an offer that’s supported by a mortgage—which is limited by an appraisal—or they’re taking the appraisal amount and adding their own cash on top of it to beat out the other bidder. These hybrid offers are common in middle-market bidding wars (under $1 million), Stark says, adding that the luxury markets in the Southwest have been relatively calm due to the fact that there’s a smaller pool of buyers who can afford those products.
“Buyers with mortgage financing will sometimes waive their appraisal contingency. In this way, they tell the sellers that they’re willing to pony up the extra cash in case the appraisal comes in low and the lender reduces the total amount of their loan approval,” DeBord says. “This is one strong move that a traditional buyer can employ in a bidding war, as long as he or she is well-informed of the realistic market value of the property and has ample funds on hand for a potentially larger down payment.”
But the price is not the only factor that will get the home for a client. Stark says that other issues, such as the timing of the closing or just sentimentality, can influence a seller, and brokers need to know how to navigate that rare scenario where a buyer loses the bidding war but still wins the property.
“We’ve had sellers choose a buyer because they just like that buyer,” Stark explains. “They want the money but they might also choose the buyer if it’s a family they like because there is sentimental value.”
Taking a smaller commission could be a tough pill for an agent to swallow, though, so Stark encourages his team to fully understand their clients and thoroughly vet the finances—and personal needs—of potential buyers.
“The sales executive has to be comfortable if they’re going to take less money because of sentimentality,” he says. “You have to really understand your client and you have to understand what is important to them.”