Welcome back to the next video in my series, Demystifying Real Estate Offers. We started by talking about what goes in to writing an offer. Then we talked about comps.
Now we are talking about “What Happens Next?”.
So you have reviewed the comps, and you have an estimate for the likely selling price of the home. Now you want to write an offer. How do you evaluate the selling situation and what does that mean for your offer strategy?
Is the house new to the market? Has the house been on the market for a while? Are there multiple offers already on the house?
Let’s start with houses that are new to the market.
Our real estate market is a seller’s market so a lot of sellers expect their houses to sell quickly at or above asking price. Let’s take a look at my zip code as an example. Silver Spring’s 20901 had 1.47 months of supply in October 2019. Anything less than 5-6 months is a seller’s market. The median days on market in October was 8 days and the sales to original list price ratio was 100%. In 20901, sellers are receiving their asking price and selling in the first week on the market. This means they are not going to be interested in low ball offers. Starting low to see what you can get is not a strategy that will work with new houses in this zip code.
Let’s make it a bit more competitive.
Let’s say there is a new house on the market and they are expecting multiple offers, have multiple offers in hand already or have buyers conducting pre-inspections, and have set an offer deadline for Tuesday at 12 noon. This situation could come about for a number of reasons – the sellers set the list price under the market value to encourage multiple offers; the house is one of the best houses in the neighborhood because of the way it was renovated, its features, etc; or the supply of houses in that neighborhood is less than demand and there are multiple buyers for each sale competing for the home. I think most people understand that in this situation, you are not likely to get it for less than the asking price. In fact, you are likely going to see buyers doing pre-inspections, waiving as many contingencies as they can, and offer above asking price or providing escalation clauses. Escalation clauses are often used because, like eBay bidding, it allows you to increase your price to something you would be willing to pay without going over a maximum amount, as long as someone else is willing to offer just under your bid (that you are willing to bid a certain amount over their bid, which is called the escalation factor). This can be very frustrating for buyers, but is very common in our area.
Now let’s look at the opposite situation – a house has been sitting on the market for a while and the listing is “stale.”
Let’s assume for this situation that the house has been on the market for a few weeks more than the median days on market. In October 2019, the median days on market for 20901, we said was 8 days. In Shaw 20001 it was 11, Georgetown 20007 22 days, and Gaithersburg 20879 19 days. The first thing to try to determine is why has this house not sold. What is happening in the neighborhood or the greater real estate market that could be affecting this sale? We are assuming that you have already run comps and looked at the situation (go back and watch the comps video if you want more information on comps).
There are a lot of reasons the house could be sitting – The price is too high, meaning the list price is higher than what we determined in the comps was its probable selling price. The condition of the house is not good – there is a major issue, there are more issues that the average buyer wants to take on, the seller is not taking the condition into account with the price, etc. The photography and the way the house is being present is not good – no professional photos, no photos at all, super cluttered, etc. If you want to see more information about these reasons (from a seller’s perspective), then take a look at my series 7 Reasons Why Homes Don’t Sell.
The “right” offer strategy for a house that has been sitting is going to depend on the specific house and the reasons you think it hasn’t sold.
Let’s talk though about some of the options. You may be able to purchase the house for less than the actual value of the house. Often times, sellers who overprice their homes get less than they would have if they had priced it right from the beginning. You often do not need to waive the contingencies that you normally see, like home inspections, appraisals, and financing contingencies. You may have more flexibility to add other contingencies, like longer time to close, rent back or pre-settlement occupancy agreement, home sale contingency, etc. All of this depends on your total offer package and how willing the seller is to negotiate with you. Sometimes the seller has not come to terms with the reality of the situation – that they aren’t going to get what they want price wise for the current condition. If they aren’t there yet, you may not be able to get them there. Sometimes the timing of when you come to them, and how many times they have already had buyers offer the same type of offer will impact your success. There are going to be other factors you may not know – the reason they are selling, the personality of the listing agent and/or seller, their negotiating style, and how they are going to respond to your offer strategy. Some buyers may be very aggressive with a seller who needs to move and they will get what they want. Other aggressive buyers may run into a seller who doesn’t need to sell and would rather not sell to you than accept your offer, and sometimes even negotiate with you.
When you are thinking through your offer strategy, if you truly want to be successful, you need to present an offer to the seller that they can accept. You obviously don’t know what this is, but presenting a fair offer given the situation, is the best way to move forward. Remember, getting your offer accepted is just the first step. After that, you have a month of things to get through with them – home inspection, repairs, termite inspection, appraisal, the move out process, etc.
And that is where we are going to turn in our next video. What happens with things go wrong? The first explosion will be on the home inspection. Those are always super fun for the buyer, seller, and agents!