Never Lose Another Bid!

I’m taking a little risk in writing this, giving away some trade secrets for free. My assumption though is that mostly only my own clients and friends are the ones reading this blog, and a limited amount of other realtors (the competition).  Honestly, I don’t know why all realtors don’t know and use this trick (as basic as it is), but I have observed that many don’t…request

So if you find yourself in a multiple offer situation (which is quite common in Austin), then how do you win?  I’m often asked, “how much do you think the other parties will be bidding?”  I don’t have a crystal ball, and I honestly have no idea how much other people want the house or how deep their pockets are.  At lower price points, I typically don’t see the bidding go more than 5% over listing price.  At higher price points it’s often confined to 2-3%… but still, these are generalizations.  Any realtor that tells you they know what will happen is not being honest with you.

So how do you ensure that you’ll almost certainly win the bid?  Well, you can just WAY overbid and blow everybody else out of the water!  “Really Jeremy? THAT’S your advice?!”  Well, if you’re using a lender to finance your offer, an appropriately written contract should specify that the deal is dependent upon your loan approval, which is also dependent upon your house appraising at full contract value.  Basically that means that the government has ensured that you NEVER have to pay a single penny over appraised value if you don’t want to!  That means that as long as you are willing to pay the full appraised value (which is typically synonymous with “market value” because appraisers are the best at what they do), then you can bid basically any high number and then just wait for the appraisal to come in.  If you’re not sure what others will bid, then just WAY over bid them, win the bid, and then wait for the appraisal to bring the price back down after everybody else has been defeated.

Q: But wait Jeremy, do the sellers HAVE TO agree to lower the price if the appraisal comes in low?

A: No, but they are not really left with any other good options at that point in the game. In the event of a low appraisal, you have the ability to drop out of the contract at that point, and if they let you walk away they’ll have to put their back on the market.  If they try to promote their house to other buyers, they will run into the exact same problem all over again.  That appraisal will still be on file for the next guys to see, and those people won’t want to pay over appraised value either.  Nobody wants to start out with negative equity from day one, and very few people want to bring extra cash beyond what their loan will finance.  So far, every single time I’ve had an appraisal come in low, we brought a price lowering ammendment to the seller and they’ve always agreed.  Most likely their own realtor will be telling them the exact same thing, that they have no good options at that point.

So is this a little confusing?  Here’s a fictional scenario to show you how it plays out in the real world.  The Jones want to by 103 Brown St which is listed at $250,000.  Unfortunately this house was marketed well and 4 other people have also submitted offers.  Even though there’s a bidding war, likely most of the other bids will not be more than $260,000.  I’d say it”s much more unlikely for the other bidders to bid more than $265,000.  To be safe, let’s say I help the Jones bid $267,000 because they really want the house.  Lets also say that I’ve run the comps for them to help them know the house’s real market value, and we’ve assessed it to be priced right in the ballpark of $250,000.  Let’s then say that our $267,000 bid is accepted and we go under contract for the house.  Most likely the other parties will not want to place backup offers because that ties them up and in some ways keeps them from shopping for houses elsewhere.  Since we’re under contract, the Jones’ lender orders an appraisal, which will probably occur 2 weeks or more after the offer is accepted.  At that time, let’s say that the appraisal value comes in at $252,000. What do we do next?  We then tell the sellers about the appraised value and write an ammendment to bring the price down to $252,000.  Unless they are just stubborn or unreasonable, the sellers will most likely come down to our requested price.  Do you see what has happened here though?  You will end up getting the house for $252,000 but if you had bid that originally you would almost certainly not have won.  It’s a bit of gamesmanship here, but it works!  When I’m trying to get the best deal for my clients I’m willing to play a few games, and I think they end up appreciating it too.

Now what are the holes in this strategy?  Cash buyers!  Cash buyers don’t have to even have an appraisal done.  Even if they did want to purchase one, there is no normal contract clause that gives them to right to drop out if the home doesn’t appraise.  In this respect, cash buyers are taking a higher risk, and are willing to overspend when necessary.  Often it’s just difficult to compete with them. Sellers will usually favor cash offers in multiple offer situations, and if the bidding gets really crazy the sellers will KNOW that their house will not appraise for such a high amount.  In that situation, even if the cash buyer is not the highest bid, the sellers will still chose them because they believe the cash buyer will ensure the highest amount of money in the end.  Cash buyers are more common for lower priced properties, and more prevalent in Austin proper.  The closer you get to down town and the lower the price, the greater the occurrence of these cash buyers.  This is just my observation.  The good news is that in the suburbs, and in higher priced areas, you will rarely see cash buyers in the bidding war.  Things have slowed down substantially since the summer time as well, so even in Austin proper the rate of cash buyers in offers seems to me to be decreasing.

Want one more way to float to the top of a bidding war?  Have you ever heard of love letters?  I’ll talk about this more in a future blog post, but it’s basically just a personal introduction of yourself, attempting to pluck as many heart strings as possible with the seller.  It’s amazing how a love letter can determine who wins a tie, or who the seller chooses to counter-offer (even if their original bid wasn’t the highest).  Cute family pictures help as well. Feel free to ask me more questions about any of these things and I’d be glad to help.