Publication Date: Wednesday, April 7, 2004

Multiple offers, again
Low interest rates, low inventory bring out the competition

by J. Robert Taylor, J.D.

Receiving multiple offers on new listings is the rule rather than the exception this spring, in the local real-estate market. Spurred by very low interest rates and a lack of inventory, the old saw of "supply and demand" is ruling the market.

Hearken back to those zesty dot-com bubble days of 1999-2000 when buyers lined up to bid against each other for a rundown house in the Silicon Triangle of Palo Alto-Menlo Park-Los Altos, with the winning bidder often paying 10 percent or more over the asking price.

What are the differences between today's real-estate market and the market of the dot-com era? First, interest rates are considerably less. Remember Federal Reserve Board Chairman Alan Greenspan kept increasing rates during the bubble and real estate continued to surge until 2001. Given the present long-term rates in the 5.5-6 percent range, the cost of ownership is less than in 2000.

Second, buyers are borrowing more and are making smaller down payments. As opposed to 2000 when buyers were often purchasing property with their stock portfolio and putting 50 percent down or more, today buyers are usually making down payments of 20 percent or less and the money is coming from selling their home or hard-earned savings.

Third, developers were a major force in buying property in 1999-2000. That trend seems to have come to a halt, with owner-users being the most likely buyers for tear-down homes or those in need of a major remodel.

Unfortunately multiple offers has its downside for both buyers and sellers. For buyers it means that they could easily be paying more than they should. You don't want to follow the lead of a buyer in my neighborhood who paid more than $5 million in 2000 and recently resold the same house for $3 million. Buyers more than ever need to focus on the comparable sales that have occurred in the last six months in the same area as the property they are purchasing.

Buying a home is a very emotional process; nothing can change that. However, analyzing objective data will help you control your emotions. Do not rely solely on the agent's suggestion of what you should pay. Ideally you want to see the purchase much like an investor would: Be willing to pay a fair price, but no more.

Many buyers are submitting offers with no contingencies for inspections or financing. This presents obvious risks since you must rely on information provided by the seller with respect to the condition of the property instead of getting your own independent inspections.

If you have no financing contingency and your lender fails to give you the loan for any reason, including the property failing to appraise at purchase price, then if you fail to close you will be in default and at risk for losing your deposit.

If you default you may be sued by the real-estate brokers for the commission they would have made had the transaction closed. In the average transaction this could add up to a sum of almost 9 percent of the purchase price.

Know your limits and carefully consider the risks. You could pay a heavy price for an emotionally based decision. If you feel any pressure from your real-estate agent to sign, it is a signal that you should walk away. There is always another house to buy.

More than once I have seen the person who actually bid less for the house end up to be the person who eventually bought the house, and those buyers are grateful that they were not the "high bidder." High bidders can wake up the next day and have tremendous remorse because they realize that their decision to purchase was based on pure emotion.

The downside for sellers is a little more difficult to grasp. What could be bad about having 20 people bidding on your property? It has as much to do about properly managing a confusing and emotional situation as about how to get the highest price. The majority of sellers are interested in one thing, getting the most money for their property.

I would propose that sellers should have two primary objectives. First, to sell for the most money and, second, to sell the property to a buyer who has full knowledge of what they are purchasing and a strong desire to own the property. Balancing both of these objectives will most likely get the seller the most money in the end, and just as important, a happy buyer who will not come back and haunt the seller with lawsuits because they overpaid for the property.

Here are some tips for the seller:
1) Price your property at the fair market value using comparable sales and adjusting for the market trend. Setting a low value to try to get 20 offers is a dubious practice and has obvious risks.
2) Obtain professional inspections on all aspects of the property, including: home inspection by a contractor, pest control report, hazard zones reports, and extended reports on any aspect of the property that may raise questions, such as foundation, soils, roof, chimney, lot-line survey, and the like.
3) Prepare a complete package of materials for the prospective buyer, which includes all of your disclosures, reports and other forms. Make sure the buyer signs all of these documents prior to the presentation of the offer.
4) Allow the property to be marketed at least one week and preferably two weeks. This allows time for buyers to investigate the property, the reports, and prepare to make their best offer.
5) Set a date for the offers and make sure it is published in the multiple listing service.
6) Be present for the presentation of offers. Do not let your agent filter the information. Often you get cues as to who would be the best buyer from the presentation itself.
7) Give yourself time to think about the offers after they have been presented; do not react emotionally.
8) Very few offers are written perfectly; make a counter offer to the buyer you would most like to work with. If that buyer is unwilling to accept your terms then move on to the next buyer to see if you can get them to agree to your terms.
9) Establish a good rapport with the buyers. You want them to be as happy as you are!

J. Robert Taylor, J. D., a real estate attorney and broker for more than 20 years, has served as an expert witness and mediator and is on the judicial arbitration panel for Santa Clara County Superior Court. He is 2004 chairman of the Palo Alto district for the Silicon Valley Board of Realtors. Send questions to Taylor c/o Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA, or via e-mail at btaylor@taylorproperties.com.