Bloomberg News

Strategies for the Spring Housing Scrum

February 28, 2013

Succeeding in the Spring Housing Scrum

People attend an open house in Palo Alto, California, in this file photo. Pohtographer: Annie Tritt/The New York Times via Redux

It all seems so quaint now: the casual walk-throughs, the drives to check out the neighborhood, the luxury of sleeping on the largest financial decision you'll likely ever make. Trying to buy a home now feels more like being thrust into the trading pit at the Chicago Mercantile Exchange -- the frenzied bidding, the need for lightning-fast decisions, the packs of sharp-elbowed competitors.

In one fraught situation, a home near Union Station in Washington, D.C., drew 168 offers in December and sold for almost twice the asking price. In the tonier neighborhoods of Los Angeles, 20 bids per house is not uncommon, according to real estate agent David Kean. And the speed of deals can be intense. "In the middle of a snowstorm we have seen houses sell in one day," says Sam Schneiderman, owner/broker at the Greater Boston Home Team agency. "At open houses on million-dollar homes you are literally bumping into people, it's that crowded."

Finding an Edge

A dearth of homes for sale has run smack into a suddenly energized buying crowd egged on by rising values. The National Association of Realtors says the number of existing homes on the market in January -- 1.74 million -- was 25 percent lower than a year ago, and the lowest level since 1999. Over the past 12 months the inventory of existing homes for sale has dropped from a 6.2-month supply to a 4.5-month supply, the lowest level since 2005. 

Price is obviously the main lever in all deals. What’s particularly important now is to understand how the seller will handle bids. Some collect all bids and immediately choose a winner, typically the highest offer, which is often more than the asking price. Other sellers give the top three or five bidders the chance to make one counteroffer. In those instances, you want to get into the bake-off but leave yourself room to counter.

In today's tight market, some sellers are asking every bidder to counter. That's what happened to a client of Schneiderman's in the recent sale of a house in Newtown Center, Massachusetts, listed for $975,000. The seller got nine offers -- four to nine offers is the norm now, Schneiderman says -- and asked for counter bids on all nine. Schneiderman's client bid $1,016,000 and lost. The seller's agent said the winning bid was "significantly higher."

To gain an edge in counteroffers from the start, you can put an escalation clause in your original offer. With one of these, you agree to beat the top offer by $5,000, up to a limit. So if you bid $380,000 and have a $5,000 escalation clause up to $400,000, that means if another bid comes in at $385,000, you automatically agree to $390,000. 

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  • Beyond price, buyers need to craft an offer that screams “I’m easy” to the seller. That starts with the buyer’s agent getting vital intel from the seller’s agent on what buttons to push. Some sellers are in a hurry to close. Others would love an extra month before escrow to coordinate their move. Sometimes letting the seller stay in the home for a month or more, rent-free, after a fast close can provide the seller valuable breathing room that seals the deal. (After all, now they may need to find a house.)

    Potential buyers can also gain an edge by paying for an inspection before they even make an offer, says Los Angeles real estate agent Kean. That means spending $350 to $500 or more out of pocket before entering the bidding process, but it enables buyers to waive the inspection contingency in their offer. 

    Deb Tomaro, an agent in Bloomington, Indiana, takes a different tack. She recommends buyers write offers that state the inspection contingency will kick in only if major defects are found. “That signals you’re not going to nickel and dime them over minor issues like replacing a screen,” she says.

    Financial Bona Fides

    While cash is king, if you’re in a situation where everyone is going to use financing, your offer should include your financial bona fides. “You need to assure the seller you're going to be able to close the deal,” says Joe Parsons, owner of PFS Funding, a mortgage brokerage in Dublin, California. 

    PFS routinely provides a financial documentation package to accompany the offer that includes everything from confirming the mortgage has been pre-approved -- a no-brainer in a competitive market -- to a copy of financial statements showing the down-payment money exists. Parsons sweetens the pot by including the case file number generated by Fannie Mae's automated desktop underwriter. “That’s just another way to show the buyer has already been run through the system and is good to go,” he says.

    And, yes, write a short letter to the seller spelling out why you love the house. Tomaro scours Facebook, Pinterest and public resources to find out what she can about sellers. “I'm an online detective, bordering on being a stalker, so we can write a personalized note,” she says. “A letter won’t make up for an uncompetitive bid, but it can help differentiate you among competitive offers."

    Some even more basic advice comes from Greater Boston Home Team’s Schneiderman. "My mantra is: There is always another house," he says. "I want my clients to only make an offer that they can make peace with. The last thing you want is to overbid and then regret the decision."

    (Carla Fried is a freelance writer based in California.) 

    To contact the editor responsible for this story: Suzanne Woolley at swoolley2@bloomberg.net 


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