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Should Your Buyers Increase Their Offer?

Limited inventory and a very strong demand for housing has created an environment where bidding wars are commonplace in today’s real estate market. Homes priced properly are getting multiple offers within a short time of coming to market. This brings about a dilemma for the agent: How should they advise their client who is about to make an offer when other offers will also be presented?

Over the last several years, there wasn’t any pressure on the buyer to adjust their offer for three reasons:

  1. There were plenty of homes for sale
  2. Prices were falling
  3. Mortgage interest rates were falling

They buyer could find another home easily for probably less money and a lower mortgage rate. There was no downside to not ‘upping the ante’. However, in today’s market, things have dramatically changed.

HOUSING INVENTORY

A normal real estate market has between 5-6 months worth of inventory. Over the last several years, the inventory of homes for sale had skyrocketed to 10 months. Most buyers in almost any price range had a multitude of houses to choose from. Today, the national month’s supply of inventory has fallen below five months. In many markets, there is not enough housing inventory to satisfy the current demand.

Conclusion: If the buyer loses the house they are bidding on, there is no guarantee they will find a similar home anytime soon.

HOME PRICES

Becausemof the limited inventory, home prices are again appreciating. The Case Shiller Pricing Index revealed that house prices rose by 6.8% in 2012. Experts are projecting home prices to increase by 5% to 8% in 2013.

Conclusion: If the buyer doesn’t get this house, there is a good likelihood that a similar home will cost more in the future.

MORTGAGE RATES

The ‘cost’ of a home to a buyer is determined by the price of the house and the expense associated with the financing. Mortgage rates are projected to inch up in 2013. In a recent forecast, the Mortgage Bankers Association predicted that rates could climb as high as 4.3% by the end of the year.

Conclusion: If interest rates do inch up, the ‘cost’ of the next home could be impacted significantly.

Bottom Line

If a buyer truly loves the house they are bidding on, it probably makes sense to raise their bid now instead of waiting for another dream house to appear.


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9 replies
  1. Estelle Hastings
    Estelle Hastings says:

    I always tell my buyers to bid high, even when the home is overpriced. That way the deal closes more quickly and I spend less time earning my commission!

    Reply
    • Loren Selig
      Loren Selig says:

      But then are you really doing your fiduciary duty to your client? Isn’t our job to provide our clients with the best analysis of the home’s sale value and then help them to make the best decision on how to move forward?If you are advising clients to bid high on an overpriced home, are you really representing their interests or your own?

      Reply
  2. Deb Dewees
    Deb Dewees says:

    This is true, however, it becomes quite difficult for those buyers who only have so much cash to put “down.” And when that dreaded appraisal comes in lower than accepted contract price, more disappointment is in store, especially if the buyer does not have any extra “wiggle room” to bring additional monies to the table at close of escrow, and, the seller refuses to work with the buyer in reducing their price to match or (better match) the appraised value. I don’t “tell” my buyers to bid high, instead I run fairly indepth comps for sales withiin a 3-6mos period (I really prefer to use the last 3mos comps, as that gives a fairly clear picture of the “current” market (I make it very clear to my clients that this is based on current market activity, and I am not a licensed appraiser) to establish as close to a “market value” as possible, and I explain the current market conditions prior to going out to look at homes. This way my clients are aware of what’s going on iin the current real estate market and what it could potentially take to get a home under contract yes, even having to offer over list price). Ultimately, they need to be the ones to decide how they will proceed based on their financial situation, and then we take it from there. Unfortunately (or fortuntely depending on which side of the fence you’re sitting on), here in AZ homes are selling anywhere between 98% – 105% (or more) of a property’s listed value. Sellers are sitting pretty these days – buyers are becoming more and more frustrated. There’s still alot of cash being thrown around – which we all know, and can agree – almost always pushes those “financed” buyers out of the running. For those of my clients who will be owner/occupied buyers, I have my clients hand-write a note introducing themselves to the seller, and also let them know they are not investors who are looking to flip the home to make profit, they will actually live in the home. It’s a nice touch when submitted with the offer. In some cases, our offer may not have been the highest and best, but it’s the note that ultimately “wins” the seller(s) over.

    Reply
  3. Annmarie Cristiani
    Annmarie Cristiani says:

    This is a tough market with many qualified buyers, and there’s cash out there. Bidding over asking price is certainly necessary in many cases, but the appraisal has to come in and the comps have not caught up to the surge. Not every buyer can make up the difference. Even going in high, I am losing to cash buyers who will pay more and won’t have an appraisal issue. The cash buyer wins this race.

    Reply
  4. Northwest real estate
    Northwest real estate says:

    Definitely the cash buyers are winning with a doubt because of the appraisal issues. If you are not a cash buyer but you are willing to bring a little cash to the table should the appraisal lower than purchase price then this is the only way your buyers are going to win the bid and as an agent you just hope this time that the other buyers have given up for a while and your buyer is only bidding against three offer instead of 20! So, YES, while prices are still reasonable your buyer should bid more, as long as you can inform them what they are up against and the buyer isn’t paying more than they need to!

    Reply

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