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By: Renee Cohen
The stories winding their way through the real estate community are almost too crazy to be true. Real “you can’t make this stuff up” stuff:
A home listed on the market for over $2M, which was $100,000 higher than it sold for one month prior, and showings were slated to begin the next day. The same day that the house went on the market, and before showings even began, the seller received a sight-unseen, over-asking cash offer that the seller could not turn down. The house went pending even before buyers with scheduled showings had the chance to go see it.
A $1M townhome in a typically desirable, walkable Denver neighborhood that sat on the market for several months with very little activity and no offers in late 2020 and early 2021 all of a sudden saw a huge increase in showing activity to the tune of 20 showings in a weekend with several over-asking price offers submitted by the following Monday.
A newly listed property received upwards of 150 showing requests over a 3-day period, 20+ offers all over asking price, all waiving as many contract contingencies as possible including the right to terminate at the inspection, with the winning buyer paying cash and close to $50K over asking price on a $390K home.
These are only a few of the examples that illustrate the idiocy in our market. Why is this madness happening? When will it end? And what do we do in the meantime?
Why is the madness happening?
The madness is happening truly because we have more buyers demanding homes than we have a supply of inventory. Between people wanting to move due to COVID and buyers wanting to capitalize on historically low-interest rates, there are so many buyers in the market right now. Conversely, sellers are holding off listing their homes; many do not want to list during COVID, understandably so, and others want to list but know that once their house goes pending in a matter of days, they’ll join the masses of frustrated buyers looking for a new home and they do not want to be in that undesirable position. Because there is virtually no inventory out there, and what comes on the market goes pending almost as quickly as it becomes active, buyers are rushing to see these homes – and often get shut out due to constricted showing windows and an abundance of showing requests – and offering crazy things to try and edge out their competitors.
When will it end?
Well, since we have no crystal ball, it’s challenging to predict the end. That being said, two things are likely to gradually happen to help ease the market strain. First, buyers will become frustrated from this competitive rat race they’re in; it’s emotionally and physically draining to constantly compete at this level and continue to lose out in those situations. It’s not a sustainable cycle for the long-term and many frustrated buyers will eventually put their search on ice and exit the market for a little while. This will help some of the buyer demand dissipate.
At the same time, as the vaccine ramps up and warmer weather begins, many sellers who have been on hold will list their homes. That is really the remedy we need to have happen and it will be a time to celebrate once it does; more inventory for buyers will help ease some of the supply constraints, and while it won’t mean that buyers will no longer be competing for the scarce inventory, they won’t have to compete as hard as they have been.
What do we do in the meantime?
This is where the patience part comes in. Buyers really just have to be patient and know that it may take several months and/or several offers before they have one accepted. And they must be willing to compete as hard as they can without compromising their comfort level. If a higher down payment is possible, that’s one way to compete. Target price points may need to be adjusted; if homes are selling for $50K-$100K more than asking, spending $500K may mean looking at a target price point of $400K-$450K and bringing more money to the table if it doesn’t appraise. And, to that point, it’s important to understand what happens in the event of an appraisal gap because with discrepancies that large between asking price and purchase price, it’s not a given that there won’t be a problem with an appraisal. Lastly, if paying cash is an option, do it and refinance to get a mortgage after closing. When there are upwards of 20 offers on a home, undoubtedly several or more are cash, and buyers who are financing truly cannot compete.
Sellers who are ready to sell but have been holding off for fear of not being able to find their next home should consider taking the plunge and listing their homes. Because inventory is so scarce and buyers are competing so fiercely, sellers have all the leverage in the negotiations. Rent-backs – often rent-free – are abundant in this market; buyers are happily offering rent-free rent-backs to the sellers if that’s what it takes to win the home. This is the best time to be a seller – when you hold all the cards and the buyers are assuming most of the risk when it comes to inspections and appraisals – even if it means listing your house without yet knowing where you’ll go. The extra equity on your sale price and the amazing leverage in the negotiation may outweigh the fear of the unknown plans.
Regardless of whether you’re buying or selling, or both, this market is unbelievably challenging. And, although it may not feel like it right now in the midst of all the chaos of this market, the market will turn eventually. We’re hoping for a gradual dissipation of buyer demand and a steady influx of seller inventory to help stabilize the market. In the meantime, just be patient!
