Your buyer has just won a bidding war where there were five other offers.
Although they didn’t intend to pay $30,000 over asking price, they are happy to finally have a house under contract after six other attempts to purchase.
That’s today — what about tomorrow?
There are a host of forces creating the current buying frenzy. The most recent high tech boom has created plenty of “Google millionaires” who can afford to pay $1 million or more — cash — for a property.
Multiply this by all the other successful brands in this area and it’s easy to understand what is driving the demand — plenty of money and minimal supply.
I was recently chatting with Cathy Harrington of Better Homes and Gardens Mason-McDuffie Real Estate. They’re based in Pleasanton, Calif. just across the bay from San Francisco.
The entire Bay Area and Silicon Valley is a major hotbed of extraordinarily fierce competition among buyers. The best properties are seeing as many as 40-50 offers with asking prices often being bid up 20 to 30 percent.
Harrington made two interesting observations about how buyers are responding to the current inventory crunch. Her first observation is that many buyers are experiencing “buyer fatigue.”
They have made numerous offers, none of which were accepted. They desperately want a house and finally decide they will do whatever is necessary to win on the next offer.
Once they win the bidding war, however, they begin to question whether this was the right choice. It probably comes as no surprise that the DFT (deal fell through) rate on typical offers hovers around 10 percent, whereas the DFT rate in multiple-offer situations can be as high as 50 percent.
Harrington also observed that rather than letting the transactions “DFT,” buyers are engaging in what she called “deal doctoring.”
Buyers are tying up one property, then continuing to make offers on other properties in the hopes of obtaining a better deal or a better property. If they find a deal that’s good enough, they will forfeit their deposit and walk away from other offers.
Playing a risky game
The overheated markets have forced both buyers and their agents to play risky games. In order to win the bidding war, they waive the physical and geological inspections as well as the loan contingencies.
In a less heated market, buyers could inspect the property before writing an offer. This is usually not an option, however, since many new listings are placed under contract within 24 to 48 hours from the time they are listed.
This type of desperation serves no one in the transaction well. In the case of the physical and geological inspections, what happens if there is a major issue? In California, earthquakes are a fact of life. Without the appropriate inspections, buyers could literally be putting their lives at risk.
Most California purchase contracts contain a liquidated damages provision that allows the buyer to walk away from the deal for 3 percent of the purchase price. On a $1,000,000 deal, $30,000 is a hefty price to pay for changing your mind. The buyer would have to weigh this loss against the cost of the repairs to the property as well as the potential risk.
There’s also another risk. Recently, a New York judge ruled that if a buyer walks away from a transaction and the seller sells the property for less money, the buyer is responsible for the additional costs of the cancellation, and the difference in the purchase price.
Although this decision only applies in New York, it is still a very disturbing development, especially if the market is flat or declining.
Buyers have some leverage
Even if buyers waive inspections and contingencies, they do have two additional leverage points. If the seller did not provide a disclosure statement during the offer process, the buyer can sometimes use a disclosure item to either be released from the deal, or to have the seller handle the issue.
The second point where the buyer has leverage is time. Let’s say a deal is seven to 10 days from closing. The sellers have purchased another house and are set to move. At this point, if the buyer threatens to walk out, the seller now has their own deposit on their next purchase at risk. Furthermore, they have also emotionally committed to the next property. Consequently, this may cause them to be more willing to negotiate, even though they are not obligated to do so.
The simplest way to resolve this problem is to have the listing agents insist that no matter who wins the bidding war, that the buyers show proof of funds for an all cash deal and that they conduct a complete physical inspection of the property.
For five years, many areas have struggled with the worst buyer’s market in our lifetimes. It looks as if the next seller’s market is going to be equally difficult in an entirely different way.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of the National Association of Realtors’ No. 1 best-seller, “Real Estate Dough: Your Recipe for Real Estate Success.” Hear Bernice’s five-minute daily real estate show, just named “new and notable” by iTunes, at www.RealEstateCoachRadio.com.