Multiple offers on a given property have been a part of our current strong seller’s market. One can easily see how this can create frustrations for buyers. It often creates headaches for sellers too.
What is a seller’s market?
Defining this is typically done by looking at the number of months of inventory on the market at any one time compared to how many homes are selling per month. This is also termed the absorption rate. Markets with inventories of 4 months or less favor sellers, while inventories of 8 months or more favor buyers. Balanced markets have 5 to 7 months of inventory.
For example, imagine that there are 10,000 homes on the market and that 2,000 homes close every month. The currently available homes represent 5 months of inventory – 10,000 homes available divided by 2,000 home sales per month = 5 months of inventory. In other words, all homes currently on the market would be absorbed (i.e., sold) within 5 months if no more homes came on the market and buying activity continued at a steady pace of 2,000 per month.
A strong seller’s market exists when there is 3 months or less of inventory on the market. This was the situation in much of metro Denver for the majority of 2013. It has continued in 2014.
Tactics for Buyers
For buyers, the challenge is obvious. Buyers are often competing with other buyers for a given property. The tendency is to just focus on price and to offer more and more money. This isn’t the only tactic.
There are other tactics that can help a buyer win the multiple offer war that has nothing to do with price. These tactics range from full and complete loan pre-approvals to modifying and waiving certain contractual buyer rights while still having the proper protections.
Tactics for Sellers
The challenges for sellers are less obvious. Sellers typically imagine the advantages of a bidding war: the property gets sold at a higher price than list and they get more money in their pocket. The problem with this is that a seller can win the bidding battle – but lose the appraisal battle.
There are multiple offers and all the offers are over the asking price. The seller takes the highest offer, thousands and perhaps tens of thousands over. But the appraisal comes in below that highest offer price. If this happens, the buyer can try to renegotiate the contract to a price at the appraised value, or terminate the contract without penalty if a seller will not renegotiate.
Seller can focus on half a dozen strategies in an offer beyond and besides the price. For example, offer an additional provision for the buyer to waive the appraisal contingency and agree to buy the house at the contract price regardless of the value given by an appraiser.
A quality real estate agent helps sellers make a wise choice from among the multiple offers, not only to get the highest price but to also achieve a higher certainty of getting to a successful closing.