Buyers eager to strike a deal
WASHINGTON — Escalation clauses in real estate contracts, "naked" contingency-free offers and lowball-priced listings designed to pull in multiple bidders and turn routine transactions into auctions.
These are all techniques last seen with frequency during the frothiest months of the housing bubble in 2004-05, when prices were rising at double-digit rates. Now they are reappearing in some of the hottest sellers' markets from coast to coast — the by-product of severe shortages in houses listed for sale combined with strong demand by qualified purchasers. Nationwide, according to surveys of 800-plus local markets by realtor.com, inventories are down by 16 percent from year-ago levels. But in the hottest areas, listings are down by double or even triple that and prices are moving up fast.
Buyers, meanwhile, are out in droves, scanning for the latest listings, and signing up for alert services provided by realty firms.
Bidding wars are also increasingly frequent on well-priced listings in Washington, D.C., and its Maryland and Virginia suburbs; much of California; Seattle; Phoenix; Las Vegas; Richmond, Va.; Boston; parts of Florida; and others. In a handful of fiercely competitive areas, some listing agents reportedly are even restricting buyers' access to properties to narrow time windows in order to fan the flames.
To get a leg up in such situations, some buyers and their agents are using techniques that can be effective, but that also come with drawbacks and snares. Among them:
Contingency-free and contingency-light offers:Carl Medford, an agent with Prudential California Realty in San Francisco, says these are almost routine for buyers determined to win a bidding contest. He calls them "unprotected" contract offers. The idea is to strip away some or all of the customary contingencies in an offer that might irritate a seller or render the buyer's bid less attractive. The financing contingency, which makes the transaction dependent on the buyer obtaining a satisfactory loan and appraisal, often is the first to go if the bidder is confident of qualifying for a mortgage, has been preapproved or is willing to pay what could be a lot more than market value.
Many buyers are also willing to delete the inspection contingency, which Medford considers much more risky, since the bidder agrees to fly blind with no way out of the deal if costly defects later arise.
Escalation clauses: These are add-ons to contract language that keep bidders in the competition, even when the price soars well beyond the original asking amount. Typically the bidder agrees to match and exceed any verifiable, bona fide competing offers by set increments — say, $500 to $1,000 — up to some maximum amount. The upside: When properly used, they work. Bidders with the highest maximums often get the house. Downside: If you need a mortgage, the appraisal could be a problem because it's likely to come in lower than the purchase price. Be prepared to throw extra cash up front.
Lowball listings: Rather than list a house at the price that comparable recent sales in the area indicate it's worth — say $495,000 — the sellers, advised by their agent, cut that to $479,000, hoping to stimulate a bidding war. Astute shoppers spot the house as a "bargain," and multiple competing offers push up the final price.
Good for the sellers? Probably. They get top dollar. But the buyers end up committed to a contract requiring them to pay over the likely appraisal value — and that could have negative consequences for both the buyer and the seller.