Bidding Wars Are Back, According to Redfin

You’ve got maybe 5 seconds to read the small print…

Nothing has surprised us real estate professionals quite as much as how hot the market has been during the Covid-19 pandemic. Redfin, the brokerage with what I consider misleading TV ads, did an analysis of offers written by their own agents on MLS listings and found that over half of those offers faced competing offers from other agents.

Nationwide, the percentage of Redfin offers facing competition was 53.7% in June, up from 51.8% in May and 44% in April. Boston led the pack with 72.4% of offers facing competition during June, up from 67.2% in May.

The Denver market came in 12th nationally in terms of bidding wars, with 53% of offers facing competition, down from 55.6% in May.  Of the top 12 metro areas, only Denver and Portland had lower percentages in June than in May.

What Does ‘Open and Transparent’ Look Like in Real Estate?

For some reason I’ve never understood, most listing agents believe that they should not be open and transparent with buyers’ agents regarding the disclosure of offers in hand when there’s a bidding war for their listing.

At Golden Real Estate, we believe in being open and transparent. Here’s what that looks like.

Rule number one is to always tell the truth. We never mislead a colleague about offers in hand. If we don’t have competing offers, we’ll never represent that we do. This is a matter of ethics. The Realtor Code of Ethics, to which every Realtor swears allegiance, requires no misrepresentation about anything, whether it’s how successful we are or whether we have competing offers.

Agents from other brokerages, however, typically won’t disclose the price or nature of the offers they have for their listings. At Golden Real Estate, we not only disclose the price and terms of offers received, but we will let each agent know if their offer is surpassed by a better offer. We don’t want any buyer or their agent to have the experience of being blindsided.

This is good for both buyer and seller, and buyers’ agents invariably thank me when I explain this policy. After all, how would you as a buyer like to learn later that if you had only offered $2,000 more (which you were willing to do), you would have won that bidding war?

Similarly, how would you as a seller, like to learn that you could have gotten $2,000 more for your house?

Although this process essentially operates like an auction, where everyone in the room knows what they’re bidding against and chooses on their own when to drop out of the bidding, it doesn’t mean that we let the bidding go on forever.

After the buyers have raised their bids twice, it’s time to ask for a final bid, without offering to return if it’s not the winning bid. While this is our policy, the seller, of course, is the final authority on how long to continue the back and forth. By that time, however, they tend to be quite happy with the highest bid and agree to cut it off. To do otherwise risks antagonizing the buyers and their agents.

It’s important to us as professionals that we leave each party in a bidding war happy that we were transparent enough that they felt they had a fair chance to win a coveted listing.

This approach takes more work on our part than doing what other agents typically do when multiple offer situations arise, which is to inform agents that they have multiple offers and ask buyers’ agents to submit their “highest and best.” Then the seller accepts the best offer and other buyers are upset and angry that they weren’t allowed to raise their offer.

We feel, however, that our approach is not only fairer to buyers’ agents but also produces the best price for our sellers.  We wish that other listing agents would adopt this practice.

Transparency, however, does not extend to disclosing the price at which a home is under contract prior to closing. The reason for that is that if the contract falls, we don’t want the next buyer to know what the seller was willing to accept. That’s because we have an ethical and legal obligation to work in our seller’s best interest.

The only time I would disclose the price at which one of my listings is under contract is when an appraiser needing comps calls me. If we are cleared to close — past inspection, appraisal and other contingencies — I’m willing to help that appraiser know the price so he can do his or her job in appraising a comparable listing for a different seller.

Thanks to this practice, Golden Real Estate has a better-than-average track record when it comes to closing price vs. listing price. In some cases this has resulted in our sellers netting their full listing price even after subtracting commissions and the other costs of selling.

Call me or one of our broker associates at 303-302-3636 if you like how we operate and would like a no-obligation market analysis of your home.

What Are the Implications When a Buyer Waives Appraisal in a Bidding War?

Real_Estate_Today_bylineWhen a home is priced at or below its likely selling price based on recent sales of comparable homes, there’s a good chance in this seller’s market that multiple offers could bid it up, possibly above the value an appraiser might give it. So what happens then?

Fortunately, I can report that the homes I have sold above the value suggested by comparable sales have not, as a rule, had trouble appraising for the contract price. Showing the appraiser the multiple offers that were received can demonstrate real-world market value. Without seeing those competing offers, the appraiser might determine that the buyer paid more than they should have. The presence of multiple, nearly equal offers gives appraisers an important tool for justifying value in our rising market.

Whenever a purchase is financed by a lender, there will be an appraisal. Lenders require them to make sure they’re not lending based on an overstated valuation. That doesn’t mean that the buyer can’t waive appraisal objection and bring additional funds to cover the discrepancy between appraised value and contract price. The contract may or may not specify a limit to the size of discrepancy the buyer will cover. Regardless, it is important for the seller’s agent to ascertain that the buyer is able to bring that additional cash to the closing table.

If the buyer is borrowing 95% or more of the purchase price, one might ask whether bringing several thousand extra dollars to the closing table is possible. This is where it is advisable for the listing agent to interview the buyer’s lender — something we do regardless of the size of the down payment. Typically, a buyer who is putting down 20% or more of the purchase price is more likely to have available cash to cover an appraisal discrepancy.

With Golden Real Estate’s auction approach, which maximizes the purchase price for our sellers, it is not unusual for the final price to be well above what comparable sales might support.  And because one can never be certain that the appraiser will be impressed enough by the existence of those other competing offers to justify the contract price, it’s a good idea to ask that buyers cover some or all of any appraisal discrepancy and that they provide evidence of their ability to bring extra funds to closing for that purpose.

Few buyers start out offering to waive appraisal, but once the bidding enters a range that is considerably above an appraisal based solely on recent sales of comparable homes, the listing agent can and should encourage waiving of the appraisal objection by the highest bidders.

One should remember, however, that an offer to waive appraisal objection is not iron clad when a lender is involved, because the buyer can still terminate based on loan objection if the appraisal ordered by the lender comes in too low for the buyer’s comfort. I’ve witnessed the scenario where a buyer who has agreed to waive appraisal objection still threatens to terminate because of the low appraisal, at which point the seller offers to lower the price to keep the contract from falling (assuming he doesn’t have a backup contract).

This is not unlike when a buyer agrees to purchase a home “as is” and use the inspection deadline only to terminate, not to demand any repairs. That can be a hollow promise.  If, for example, the buyer decides to terminate because the furnace needs to be replaced, the seller is likely to say, “Wait! I’ll replace the furnace!” Why?  Because the seller now knows the furnace needs to be replaced and would have to disclose that fact to the next buyer. Indeed, when I’m representing a buyer in what appears to be a bidding war, I will suggest making our offer “as is” while advising the buyer that it doesn’t mean we can’t get serious items repaired. The only time this doesn’t work is when the seller has received a backup contract that’s more attractive than ours. I point out to my buyer that the seller might be happy to have him or her terminate so that back-up offer can become the primary contract.

These two areas — appraisal and inspection — require deft skill in order to navigate the negotiation process effectively — a good reason to employ an experienced listing agent like one of us at Golden Real Estate instead of trying the for-sale-by-owner (FSBO) approach. A good listing broker can definitely justify his or her commission both in getting a higher selling price and saving money through effective negotiation.