Take care with bidding-war tactics in pursuit of a home
To craft a winning bid, some buyers are dropping contingencies that protect them against complications in a home sale.
Seattle Times business reporter
Click to explore an interactive graphic that shows how bidding wars vary in intensity by city and neighborhood.
To win a bidding war, buyers must pay attention not only to the price — the highest doesn’t always win — but also to terms of the offer.
To make their offers as competitive as possible, some buyers are waiving contract terms that protect their earnest-money deposit, using escalation clauses that ratchet up past list price, and even giving the seller two months of free rent after closing.
“You have to find out what the sellers want,” said Seattle real-estate broker Presha Sparling.
There are three protections commonly included in the purchase contract, known as “contingencies,” that allow buyers to back out and get their earnest money back:
• Inspection: This one lets buyers back out if they don’t like something found in an inspection. Agents are telling buyers to conduct pre-inspections so they can waive this contingency.
• Financing: Buyers can invoke this protection if they can’t qualify for a loan to close the deal. Some buyers who’ve gone through their lender’s underwriting process are waiving this one in hopes of competing with cash buyers.
• Appraisal: This contingency gives buyers an out if the lender’s appraisal of the property’s value is less than the sale price and the seller refuses to lower the price.
Real-estate experts caution that buyers should carefully consider the possible consequences of dropping those contingencies, and some discourage it altogether.
“I definitely think it would not be wise to waive all those protections you get when you’re trying to purchase property,” said Penny Crowe, a senior residential appraiser in Bellevue.
Still, in the bidding frenzy for homes in certain neighborhoods, some buyers are pulling out all the stops.
For example, in the spring a buyer beat out about 20 bids for a home in Seattle’s Ravenna neighborhood. The buyer didn’t have the highest offer, but prevailed because he waived all contingencies and offered the seller free rent for 60 days after closing, said Locality managing broker Trevor Smith, who represented the buyer.
Such deals sometimes get hammered out at night, Smith said, with “the listing agent calling and saying, ‘What does the buyer want to do to win the house?’ They’re trying to drive the price up even further.”
Marc Holmes, a lawyer with WaLaw Realty, a real-estate brokerage that charges sellers a flat fee instead of a commission, said “it’s a terrible, terrible idea” for buyers to waive their inspection contingency if they can’t get a pre-inspection done. “You have no idea what’s lurking in that house.”
In a pre-inspection, which can be half the cost of a regular inspection, the buyer walks through quickly with the inspector, who doesn’t provide a written report. If the buyer gets the home under contract, the inspector can provide a thorough report for the balance of the regular fee.
Pre-inspections have become a necessary evil, partly because there aren’t enough licensed inspectors to go around, agents say.
“Sometimes we’ll have to call seven, eight, nine, 10 inspectors before we find one,” Smith said.
Appraisers hired by lenders say that buyers who waive their appraisal contingency should be prepared to bring more cash to closing if they can’t get the seller to lower the price — or forfeit their earnest-money deposit.
“Real-estate agents don’t value properties. They price them,” said Crowe, the Bellevue appraiser. “Value is what someone is willing to pay.”
Appraisers establish the value of a property by finding comparable home sales nearby, but that’s harder these days because the supply of homes for sale is so tight.
“We’re not just using sales,” Crowe said. “We’re using pendings. Sometimes lenders want to see active listings too.”
Still, for some buyers, waiving the appraisal contingency could make sense, Holmes said, recalling a recent sale.
“They were putting at least 40 percent down, so appraisal is no longer a concern,” Holmes said. “Even if it doesn’t appraise, the amount by which it falls short is made up by such a huge down payment.”
To be sure, personal letters and photos of the kids are a nice touch but unlikely to outweigh other factors, says Kristin Frosaker, managing broker at Windermere’s Northlake office.
As a seller, she said, “You strip everything out and you don’t make it emotional.”