If you’re new to mid-Peninsula real estate, you almost certainly aren’t prepared for the way well-priced homes are bought and sold here, especially during booms but even during busts. The same is true if you’re a first-time buyer, although if you’ve lived here a while you may have heard hair-raising war stories from friends and co-workers. The process is much like an auction, faster, more competitive and more demanding than any real estate market you’ve ever seen. It’s much like interviewing for a great job with a highly-regarded company.
Here’s what you’ll need to know to hit the ground running.
- In this area, “entry level” generally means homes priced under $1,500,000 (although that number can vary by 10 or 15 percent, depending on local market conditions).
- Entry-level properties sell quickly—within two weeks—if they’re priced properly. We’re usually a very fast-moving market. Even in depressed markets, homes typically sell in forty days or so.
- If an entry-level home has been priced properly, the selling process is literally an auction. A large amount of information about the house is packaged and given to potential buyers, who have to review and sign off on this information prior to making an offer. Often multiple buyers bid against each other. This is especially true of the top 10 percent of homes, the “move-in condition” homes everyone wants, even during a downturn. It’s also been true of well-priced bank-owned homes at the low end of the price range.
- Buyers who are not pre-approved by a lender stand no chance in a multiple-offer situation. And even if theirs is the only offer, the lack of a pre-approval letter is a red flag to the seller. The pre-approval letter is essential to establish a buyer’s credibility.
The following is a simplified version of a complex process. Not every house or transaction will go like this, but enough will.
Before sellers put their property on the market, they usually enhance its sales appeal. New carpet or refinished floors, new paint and landscaping are pretty much the minimum. Depending on the condition of the house and its price range, there may be other cosmetic enhancements such as granite countertops in the kitchen or even extensive remodeling. Sellers correctly believe that these enhancements will return more money than they cost, because today’s buyers willingly pay a premium for a house they can move into without much (or any) work.
The seller usually does at least two property inspections. A “whole house” or “general” inspection covers the structure and operating systems from roof to foundation. No walls are opened, but a good inspector will go over the house with a fine-toothed comb. And since most mid-Peninsula homes are forty to fifty years old or older, the inspector will find problems, even if the home has been well-maintained or recently remodeled. The only questions are how many problems and how serious they are. The seller may repair the more serious ones, or simply adjust the list price downward before going on the market. The seller may also request that offers be as-is. An as-is offer relieves the seller of the obligation to sell the house free of defective operating systems, but does not relieve the seller of disclosing any known defects.
The seller’s agent will make these home inspection reports, as well as the multitude of seller disclosures mandated by government, brokerage or local custom, available to potential buyers in an imposing volume called a “disclosure package”. You’ll be expected to review and approve this package before presenting your offer. Reviewing takes at least an hour, and can easily take longer if you’re an engineer.
The seller will be reluctant to hear an offer until the house has been properly exposed to the market, often because it’s been slightly under-priced to attract multiple offers. This exposure usually includes at least one week-end open house plus another open house for agents called “brokers tour”.
Why won’t the seller take offers right away? Believe it or not, it’s at least partially a matter of fairness. A fixed marketing period gives every potential buyer time to see the house and look over the disclosure package. It’s also partially, mostly, and perhaps entirely a matter seller self-interest. Seller hopes that a wave of interest in the house will cause multiple buyers to compete for it. Competing buyers are far more likely to make their best offer initially, without negotiation. As buyers discover that others are considering the house, the terms of their offer usually become more favorable to the seller. The price buyers are willing to offer goes up, and buyers are tempted to offer a quick close, waive contingencies and accept the house without repairs. Of course, this waiting strategy only works when buyers outnumber sellers, but that’s often been true in this area since the late ’90s and, as I mentioned above, buyers often compete for the best homes even in downturns. There’s no room here to build new housing developments on a large scale, especially the single-family housing most buyers prefer, so supply is relatively fixed.
The day the house is put on the market, the seller may have already set an “offer date”: the date and time that offers “if any” will be heard. Again, the seller will hear no offers before that date. (Well, then again, maybe he will, but anything presented to him will have to be mighty good to be accepted.) Or the seller may simply wing it during the first few days on the market, the listing agent using input from buyers’ agents to gauge the amount of interest in the house, and then set an offer date and time.
You need to understand this: if the house is well-priced, it sells very quickly, whatever “very quickly” means in that particular market. A buyer who has left important steps like pre-approval or do-we-really-want-to-do-this? soul searching to the last minute may either be too late or feel too rushed to make a competitive offer.
If there are multiple offers on the offer date, each buyer’s agent will get about fifteen minutes to present their client’s offer. There won’t be any of the leisurely give-and-take common to most other real estate markets. The offer you write is probably the only chance you’ll have to get your foot in the door. This is not the time to keep something up your sleeve to negotiate with—you may not get the chance. Agents and buyers with uncompetitive offers will be curtly thanked and unceremoniously sent home.
Perhaps one buyer will make an offer that stands out from the pack, and the sellers will probably accept it. I say probably because some sellers will counter even the standout offer.
It’s also possible that two or more buyers will make equally compelling offers. The seller may accept one offer because of a small detail that tips the balance in its favor; that’s why it’s so important to sweat every detail in your offer. Or the seller may “counter” these stand-out buyers (request that they improve their offer). Usually a counter is written but it can also be verbal, sometimes as a vaguely-worded request to “do better”, limited in this case only by the buyer’s imagination and financial constraints.
If countered, the buyer(s) can:
- refuse to raise their offer, or
- raise it to an amount below the seller’s counter-offer price (a “counter counter”), or
- accept the seller’s counter-offer price, or
- raise their offer to exceed the seller’s counter-offer price; this strategy assumes that a) there’s competition, and b) said competition will merely meet the seller’s counter-offer price.
Since this is real estate, one of the last bastions of the negotiated deal, any variation of the above can occur.
The final outcome of all this back-and-forth may be known almost immediately, perhaps that night, or it may not be known for several hours or perhaps even a day or more. This is a time-consuming (and extremely emotional) process. The sellers may have to listen to and review multiple offers. Since this is probably the first time they’ve seen a current purchase contract, the sellers will carefully review each of its eight pages with their agent to understand all its nuances. They may even have to do a little soul-searching themselves, just as you did before making your offer. Then the sellers and their agent may write and present a counter-offer to one or more potential buyers. The sellers will give the buyer(s) a deadline to respond to their counter(s).
Simple and straightforward it’s not. You usually won’t be given much time to think, so you’ll need to be able to respond almost instinctually. That takes motivation and commitment well beyond the norm. Many buyers never get to that point, and the ones that do usually need one or two offers under their belt before they get there.
During the offer process, buyers must be easily and reliably available to their agent so that they can respond to seller questions and counter-offers in a timely manner. Sometimes it’s best to wait in the lobby—just be discrete, since other buyers and their agents may be listening. At other times it’s better for the buyers to be immediately available but not on site. Just have your cell phone on, and leave the line open.
How long has the selling process been like this? Off and on—mostly on—in the more desirable areas since late 1999, when ten offers were routine and thirty not uncommon. [Multiple offers are still common in many local markets, despite what you may have read. Palo Alto isn’t Modesto or Detroit.] Buyers have less stock market money to throw around these days, and the price ranges that were red hot back during the dot-com era, from $3M up, have cooled considerably. But bargain interest rates and a shortage of inventory have created plenty of buyers in the under-$3M range who are willing to compete for the right house.
What’s the “right house”? Usually it’s one that’s “done” or in “move-in condition”, which I define as “buyers can have their friends over the day they move in without undue embarrassment”.
Or it may be a house in average (or less-than-average) condition but which offers outstanding potential: a desirable neighborhood, or the right schools, or ample space, or a large lot, or some combination of the above. And, most important of all, it has to be priced so that buyers see it as a good value.
Is the auction process fair to buyers? I haven’t heard that question much lately, perhaps because the novelty has worn off. In fact, these days I often hear offers referred to as “bids”. When bidding wars became standard operating procedure in the late ’90s, most first-time buyers were new arrivals, but today’s first-timer has often been here a while, heard the folklore and perhaps even had a brief and discouraging taste of the market back in 2000. Say what you will, the auction process levels the playing field. In fact, it’s usually the only manageable way to sell a home in a high-demand neighborhood. Everyone gets a shot; the house isn’t sold the first day it hits the market or, more likely, even before it hits the market. It is true that you can’t, as one client complained, “just fall in love with a house and buy it.” Homebuying here isn’t a lengthy and elaborate courtship ritual; it’s a fast-paced business deal. And fair or not, the auction is how local real estate has necessarily adapted to incredibly high demand and incredibly high prices. With ten buyers for every house, and entry-level homes starting at $900k to $1 in the more sought-after neighborhoods, the rules have to change.
Besides, as any economist will tell you, every one of us competes, every day, for everything we need, from toothpaste to housing. Modern retailing has managed to disguise this fact, but the gloves come off when it comes to buying a home here.
Are multiple offers just real estate’s version of buyer/lemmings running off a cliff? Not if you believe that people are extremely rational when it comes to spending this much money. Let’s take an extensively remodeled house that attracts five offers. Those five buyers are willing to pay a premium for a house that offers them a better lifestyle right off the bat, without additional cost or delay. To them the additional cost is well worth the convenience, especially when the premium is spread out over the 360 payments of a thirty-year loan. If you don’t think that way, that’s okay, but it puts you behind the eight ball, because most of your competition does.
Can you avoid the auction?
Yes, but it takes patience and a willingness to negotiate. Not every house gets snapped up with multiple offers. Some have been overpriced for their size, condition or location.
But often they’re just as much house as the one down the street that was priced realistically and sold with multiple offers. So why doesn’t every seller price their house realistically? That’s real estate’s $64,000 question. Usually they’re sellers who think homes are still sold the way they used to, with some cushion in the price so that they have room to negotiate down. Or they may really think they’re home is worth far more than anyone else’s. But buyers aren’t fooled. Active buyers know value, and they’ll shun a house that’s overpriced. Days turn into weeks, and still no offer.
Watch that house for, say, a month. Don’t wait for a price reduction—other buyers are waiting too. Make your own price reduction. You’ll have to negotiate but remember, you’re the only game in town, at least for the moment, so you have that all-important leverage. If it works, you’ve paid less than you would have. If it doesn’t work, well, it didn’t cost you any money. Just look for the next overpriced house. They’re out there, in all but the most overheated of markets.
Interested in buying a home? Please contact me at email@example.com.
copyright © John Fyten 2004-2014