5 Reasons You May Be Getting Outbid on Homes in a Seller's Market

Here you are. You’ve been pre-approved for a home loan, toured dozens of properties and finally worked up the courage to commit and make an offer on a home that you love. And yet. The rejection call comes. “There were 15 offers…” “The price escalated well above your budget…” “The winning bid waived all of the contingencies…” Sound familiar? Sound too familiar? Even if you’ve received this news once it stings but more than once can lead to buyer burnout. Here are five reasons why you may not be snagging the house of your dreams in a seller’s market.

You won’t or can’t waive the appraisal contingency

I know. It’s scary to waive contingencies that protect you financially, especially the appraisal contingency. For those unfamiliar with this term, an appraisal contingency protects a financed buyer from being contractually obligated to purchase a home if it does not appraise for the agreed upon purchase price. Why is this so important? Well, when a lender loans a buyer the money to purchase a home, they want to know that the home could be resold for the purchase price should the buyer default on the loan. As a result, lenders typically require that a third party appraiser determine the market value of the home. Should the appraiser determine that the value is lower than the agreed upon purchase price, the lender will only lend what the appraiser determined as the value. In the Oregon sale agreement, the buyer can then walk away from the purchase without penalty or negotiate the price down to that appraised value. In a seller’s market, like the one we are experiencing now, it is not uncommon for the purchase price to escalate quite a bit over the listing price—sometimes $100,000 or more. When a seller receives an offer that is $100,000 over list price their first reaction is usually “YIPPPPPEEEEEEE!” followed swiftly by “But what if it doesn’t appraise?” If you want a competitive advantage, waiving the appraisal contingency or contributing an agreed upon amount of funds to bridge the gap in the event of a low appraisal will ease the seller’s mind and make your over-asking-price-offer much more substantial. Buyer beware: this means as the buyer you should have the liquid funds to cover that gap should it arise. Those additional funds, if necessary, will be due at close with the rest of your closing costs and down payment.

Your inspection stipulations scare off the seller

Every market has varying inspections that are considered standard. In California it’s not uncommon for a termite inspection to be completed; in Florida, a pool inspection might be necessary. Here in Oregon, we generally recommend a radon test, sewer scope, and scan for any underground oil tanks in addition to the general inspection. However, a seller sees more inspections as more opportunities for the buyer to find something that may allow them to back out of the transaction or negotiate for more money. Occasionally, buyers will waive the inspections all together (HUGE BUYER BEWARE) but more commonly than that is buyers will scale back the number of invasive inspections that they request up front and/or specify the types of repairs and or credits they might ask for if discovered. For example, some buyers will evaluate the age of the home and determine that they feel pretty confident that certain conditions may be less likely to occur in this age of construction. Some folks will state that they will only ask for repairs if the total adds up to a certain amount—saving the buyer from financial catastrophe but letting the seller know that the buyer does not intend to nickel and dime them. There are a number of tips and tricks that an experienced agent can guide you through that will still allow for some inspections but which may also make your offer appealing to a wary seller.

You are looking at homes that are actually out of your budget

It’s important for a buyer to calibrate their expectations of what a certain budget will buy versus reality. When I meet with buyers for the first time they have typically been house stalking on Zillow for months if not years and believe they know the market well. However, one common mistake that folks who are simply perusing real estate online make is only looking at the listing when it is active and for sale. The list price gets stuck in their heads and pretty soon that is what they believe a $500,000 home looks like. However, as noted before, in a seller’s market the list price is rarely the sale price. I heard someone recently say to think of it as a “suggested starting price.” I advise new-to-the-current-market buyers to set their settings to the sold price on whatever app they like to do their real estate research on and then look back at what that home listed for originally. Similarly, when buyers are not quite ready to make offers, I recommend “favorite”ing the homes that they would consider offering on today based on the listing and then check back in 30-45 days to see what it actually sells for. This is often the fastest way to realize that you may need to look at homes listed 25k, 50k, maybe even 100k below your actual budget so that you have the wiggle room to get aggressive when multiple offers are in play. That doesn’t mean stop looking at homes at your top budget or even slightly beyond. But when you do, look with a critical eye. Are they new to the market? Likely to go for over asking? Or have they been listed for three weeks with no offers? If the latter is true, you may still be able to afford it but if it’s a new, hot listing, try to be realistic. Don’t spend time and effort touring and bidding on homes that are out of your budget. Ask your agent to speak frankly and offer an opinion on whether or not the house is within budget. Then, focus all of your energy on those homes that are get-able.

Your agent is not communicating what it will take to “win the bid”

When I am working with a serious buyer and they find a home that they are willing to bid on, I spend about 24-72 hours leading up to the offer deadline checking in with the listing agent. What do I mean by “checking in”? Digging for information that I can use to strengthen my client’s offer! First, I feel out the agent and find out what their seller has authorized them to disclose. Not all sellers will allow their agent to tell me about the competition but many do and if I don’t ask those vital questions, someone else is going to. What kinds of questions do I ask? Let’ start with “How many offers do you have?” “How many are you expecting?” “What does your client need in terms of occupancy after close (aka a rent back)?” “Are the appliances included in the sale?” “Have the other offers waived appraisal yet?” “Have they waived inspections?” “Are there any cash buyers?” And on and on. All of these questions and their corresponding answers help me to inform my client on what it is going to take to get the house. Sometimes that information allows my clients to write a super competitive offer and get the house. Other times, it saves them from entering a bidding war that has already superseded their budget thus saving them the heartbreak and energy. Either way, it is providing the information necessary to make an informed decision. No buyer should be writing an offer without receiving as much feedback as their agent can provide prior to writing the offer. And it doesn’t end when you submit. If your offer is not the winning offer, I am a big practitioner of finding out what the winning bid was so that the buyers can learn and apply that knowledge to future offers. That can lead to buyers changing terms or price in ways that are in their control or changing priorities so that the homes they are looking at are within reach.

You are not listening to your agent’s advice on what it will take to “win the bid”

So, your agent is telling you this info you say? And you are still on losing bid #8? OK there are some exceptions to the rule, however, this is where you have to take some personal responsibility. Has your agent been suggesting you look at other types of properties? Have they been coaching you on ways to make your offer stronger and you have been rebuffing those ideas? It may be time to start taking their advice. After all, you didn’t hire them to open doors—or at least I hope you didn’t! They are an advisor to you and, if you don’t respect or trust their advice, you should hire someone whose advice you do respect and will, after serious consideration, take. Remember, that your agent probably goes through this process on a weekly basis whereas most folks go through the process 1-3 times in their lifetime. They have the numbers on their side in terms of seeing what works and what doesn’t at any given moment in the market. Hire someone you trust and who has a proven track record of getting buyers in contract even when there are many, many offers.

Hang in there. Persistence plus a dose of realistic priorities will land you a home within your budget.