One year ago, we were all sitting in classes discussing short sales and foreclosures. Today, the hot new class is what to do when you have four offers on your brand new listing.
Legally, multiple offers can present some challenges to real estate brokers.
Does the seller need to be made aware of every offer that comes in, even after an offer has been accepted? (Yes)
Are agents prohibited from telling other agents the price of competing offers? (No, as long as the seller approves and everyone is notified)
Will some agents make “moonshot” offers to get a property under contract, knowing that the appraiser will likely rein the price back down to current market value? (Yes, but there’s a poison pill good listing agents can drop into a counter offer to eliminate this practice)
In short, even though a hot market is obviously better than a cold market, every market has its challenges and good agents must adapt to whatever conditions are prevailing.
If you are working with buyers, there are things that can be done to improve the quality of your offer without necessarily raising the purchase price:
- Eliminate or limit the appraisal contingency, with language such as “appraisal contingency only applies if property appraises $10,000 or more below contract price."
- Take the entire down payment a buyer plans to make and convert it all into the earnest money deposit (a $12,000 deposit looks a lot more serious than a $2,000 deposit, and it’s all refundable if the buyer terminates based on a contract contingency).
- Consider taking your home inspector to the initial showing so you can remove the inspection contingency from the contract at the time the offer is submitted (an “as-is" offer)
For sellers, the strategies are different. For example:
- Round-robin countering. With multiple offers, choose the buyer you want to work with first and give them four hours to respond to your counter. If they don’t respond, move on to #2.
- Ask for as many contingencies as possible to be removed from the contract.
- Make all or part of the earnest money non-refundable upon acceptance.
- If buyers insist on leaving contingencies in, ask for a higher earnest money deposit or “tiered earnest money”, with additional amounts due at different checkpoints so that the buyer’s motivation can clearly by tracked.
In short, the rules of this market are very different from any we have seen in the past several years. And while not every home draws multiple offers within hours, the ones that are priced right with a great location are almost always subject to competition very quickly.
If your agent is not actively adapting to the realities of our new market, one where inventory is down 40% and contracts are up 20%, one where the percentage of distressed homes (short sales and foreclosures) has fallen from 45% of the market in January of 2011 to just 14% of the market today, you might want to reconsider your relationship.
With rates in the 3’s and bank-owned inventory (mostly) a thing of the past, it’s time to gear up for a new phase of the housing cycle. The phase called “recovery”.