Get ready for a bidding war in real estate

Low inventory, high rent prices blamed

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Brandt Elliot found his dream home the day it went on the market, and he knew he had to move fast.

"I was the first one to see it at 10 o'clock. By 4 o'clock, when I had sent my, my wife over there in the afternoon, they had already had another offer," he explained.

Not sure he'd find another house he liked as much, Elliot placed a competing offer.

"I was a little surprised to get in a bidding war because it was literally less than a day," he said.

But bidding wars are becoming more and more the norm, according to Jennifer McKinney with the National Association of Realtors, who blames high rent prices and low inventory. 

"Inventory has everything to do with bidding wars right now," said McKinney.  "It's basic economics. It's supply and demand."

Some argue sellers are intentionally underpricing homes, a tactic to get multiple offers and sell quickly, but McKinney disagrees.

"I think sellers are really pricing their property to sell and it's causing a flurry of activity and buyers are having to overbid in order to secure a property," explained McKinney.

Real estate attorney Elizabeth Vinings sees it, too.

"Just today I have a seller who had 17 offers on their home," she said.

Some of the contracts clearing her desk involve all-cash purchases, a strategy McKinney says typically gets the win when it comes to bidding wars. Many times it's an investor making the cash offer, and that means the average homebuyer loses out.

"Obviously if you put a cash offer up versus a 5, 10% offer and investors are willing to waive more contingencies, the investor's chances are they're going to win," said McKinney.

Contract contingencies are a big part of the bidding process too, and Vining sees buyers putting themselves at real risk in order to beat out the competition.

The three she sees most often:

  1. The seller negotiating to remain in the property, even after closing.  
  2. The buyer waiving the right to a home inspection.
  3. Waiving the mortgage contingency, which may mean the buyer has to bring a lot more money to the closing table.

"If a year ago you were buying a house and you're putting 20% down you would have a mortgage contingency for a mortgage of 80% of your purchase price," explained Vinings. "To get a mortgage of 80%, the property has to appraise for the purchase price. And therein lies the rub right now. Because people are bidding with multiple offers, they're often not supported by the appraisals."

Which means a buyer has to come up with the difference.

"They are doing it because I feel like a lot of buyers are desperate," added McKinney.

Elliot feels he was lucky with his bidding war.

"The only compromise we made was price and frankly, I think the seller was under-valuing the price," he said.

Sellers face risks too, and have to be careful to choose the right bid.  There are several factors to consider when you sell, in addition to the offer price. 

For instance, if the buyer's financing falls through, you're back to square one and it doesn't matter how high the offer was.

Read the July 2013 edition of the REALTORS Confidence Index from the National Association of Realtors.

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