The perfect storm of market conditions in San Carlos is leading to some questionable tactics and dilemmas in certain transactions. Buyers that fully understand some of these pitfalls will be in a much better position to protect themselves against these unfortunate positions. My feeling is that this storm has been brewing for some time, but here are the ingredients for our current market:
(1) Extremely low inventory
(2) Interest rates at record lows and loans guidelines which have been loosened since last year
(3) A flood of buyers into the San Carlos market, believing they have waited long enough for the bottom to hit and now want in
(4) Multiple offers are back….not quite the same way they used to be, but they are back nonetheless
(5) On the realtor side, the number of transactions for San Carlos is down 34% over the high in previous years. The result: fewer realtors completing transactions, and those who are completing transactions are doing fewer of them.
(6) Frustration on all sides. Buyers are frustrated with a lack of inventory, sellers are frustrated with lower values and realtors are frustrated with the lack of transactions.
All of the above factors, when mixed together, create the perfect storm for some situations that buyers should be aware of:
The Forced Offer
When a listing agent realizes that there will be interest from more than one prospective buyer, they will usually set a date to hear the offers on a property. 99% of the time your agent will show up with the offer in hand, at the time and date specified and be able to present the offer. Now, let’s take the perfect storm above and say that there is one prospective buyer who has lost patience with the process and an overly aggressive agent that tells his clients the old line “all offers must be presented to the seller within a reasonable amount of time, as dictated on the offer.” Translation: put in an offer ahead of the date and time specified to hear the multiple offers and the listing agent has a duty to present that offer ahead of time. Some agents will refuse to show the offer to the client because their reputation in the real estate community will be on the line…..and they are correct, however, they still have a duty to show the offer to their clients. The best way to handle this is to inform the sellers that in the event someone forces an offer on them prior to the multiple offer date, they can view the offer, but have an understanding that they should not respond until after all of the offers have been heard. The problem is that sometimes the forced offer is so attractive that the seller is afraid that particular buyer will not wait around and ends up wanting to accept the offer. The listing agent will ultimately need to abide by his client’s wishes and allow them to sign the offer. Meanwhile, the other buyers waiting to present their offer on the specified date will be out of luck, as the property will have been sold.
>>> How to solve this issue: If you have identified a property you would like to offer on, and it will be a multiple offer situation, have your agent stick like glue to the listing agent. Have your agent call or email them twice a day asking for updates. Be prepared for the example above. That way if your agent gets word that there is a forced offer, you will be able to respond quickly.
The Sharp Offer
You don’t see these as often as you did a few years ago, but with the perfect storm of market conditions, don’t be surprised to see it once again. First, just what exactly is a sharp offer? A sharp offer is when you have a buyer who offers on a property in a multiple offer situation, but includes a clause through a self-made addendum that says something similar to “We believe the attached offer is a compelling offer for the property, however, if our offer is not the highest offer, we will agree to increase our purchase price to an amount equal $5,000 above the next highest offer, not to exceed X.”
The benefits to the sharp offer are obvious. They allow the buyer to bid competitively on a property without the worry of overbidding to the point where they far surpassed the next closest offer.
The disadvantages to a sharp offer is that they are frowned upon by some sellers because they believe the buyer is somehow trying to cheat the process. Additionally, some agents do not like to deal with them because they believe the clauses are often poorly written and can expose possible loopholes for the buyer to back out or form other liabilities for the seller.
>>>How to deal with the sharp offer? First, ask your agent if they are comfortable using a sharp offer. Second, your agent should call the listing agent and see if they are agreeable to hearing a sharp offer. Finally, if the answer to both of those questions is “yes,” you should have a family attorney or at a minimum, the supervising broker of your agent, look over the clause drafted by your realtor. Sharp offers can be extremely effective and can end up saving you a significant amount of money.
The Non-Contingent Offer
I thought we had done away with these a while ago, but they seem to be popping back up again. A non-contingent offer is where the buyer waives all contingencies in the contract. The buyer does so in order to make his or her offer more attractive to the seller. Normally, there are at least two contingencies, those two being the Property Inspection Contingency and the Financing Contingency. Both are critical. Giving up your right to have a professional inspection of the property and having 100% confidence that your bank will close the deal on your prospective home is a real risk. Many buyers make the mistake of relying on the home inspection reports given to them by the seller’s professional inspector. The problem is that if the particular inspector missed something in his report, the buyer is the one who will be left holding the bag. The seller’s professional inspector does not owe any duty to the prospective buyers. There is no line of privity between the two and the buyer has not paid the professional inspector any type of consideration. Additionally, the sellers are not expected to give a professional accounting of their property in their disclosures because they are not experts in the area of home inspections. Finally, with the appraisal issue being what it is in San Carlos right now, pre-approval or not, your prospective mortgage is anything but a guarantee.
>>>Considering a non-contingent offer? Rarely is this a good idea. Of course, there are individual circumstances involved and each situation should be evaluated on a case-be-case basis, but in general, they are a serious risk. My advice would be to take a hard look at your offer and see if there are other ways you can incentivize the seller.
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2 Comments
Great article highlighting current market conditions. I will re-blog this on my site. Thanks!
If I were to write a ‘must read’ for current market conditions, it would be:
1) Don’t get scared into buying on impulse and joining multiple bid situation by the threat of the big 3 carrots disappearing: higher interest rates, government loan buybacks winding down, or ending tax credits (which are less relevant for many buyers in this area anyway). Interest rates may rise but are not going to 7% tomorrow and they will be quite low (comparatively) for a while. If all these 3 things happen in 2010, smart buyers can get that money back in a lower house price after the dust has settled (since every buyer’s buying power will be diminished). All the money in 2010 will be made in small rushes leading up to each of these 3 events.
2) Find a house you really like, and plan to be there for a while, because the above mentioned macro economic factors combined with the flow of short-sale and foreclosure inventory will continue to put price pressure on the market recovery for some time.
3) There is multiple bidding, but I feel its more on the ‘perfect’ houses, whereas properties that need a little work are still selling at deep discounts – look past surface level issues and you will find the gems, especially as more inventory comes on into the spring. Contractors are easy to negotiate with and book these days so its a great time to get work done!