The real estate market seems to be hot everywhere I look. Shortages in inventory, paired with very favorable interest rates continue to drive real estate values nationwide. There were a lot of unknowns as COVID began shutting down almost every activity last spring, but once real estate opened back up, there has been no looking back! To say it is a sellers’ market might be an understatement – houses in the Denver market are regularly selling for way over asking price, often more than $100,000 over. This is a wild phenomenon because the market values are increasing faster than most can keep up with, but it is important to know exactly where properties are selling to be successful. When I see someone bragging that a property sold for $70,000 over ask price, my immediate thought is, “that the property wasn’t priced right!” I have noticed a few trends, have had a lot of conversations around this topic, and wanted to summarize the information in a way to get you more money for the properties you are selling.
Appraisal Gap
These might be the worst two words for a first-time home buyer to hear, especially in lower priced homes (lower is all relative in a market with a median price over $500k!) For those not familiar with the appraisal gap, this is where a buyer will agree to pay the contract price, even if the appraisal comes in lower than that price, thereby covering the gap between the appraised value and the purchase price. I was making an offer on a property recently that I intended to use as a rental. I called my mortgage lender because I wanted to understand how the appraisal gaps are working, I do not want to use all my down payment funds covering the gap in “overpaying” on the property. But luckily, he taught me quickly! With the right information presented to the appraiser, it was his experience that more than 96% of the houses he financed appraised at, close to, or over the offer amount, even when the offer was significantly over the asking price! This makes sense though, right? When two ready, willing, and able parties agree to a price in an arm’s length transaction to buy/sell a property, that property is worth the agreed price. It is the appraiser’s role to verify that value can be supported by like properties to make sure the lender is safe.
I recently saw this example take place – a property was listed for $400,000, but in a neighborhood where there were comps easily showing up to $470,000. I am unclear on why the property was listed so far undervalue, likely because the agent wasn’t aware of the market conditions in the neighborhood. The house had almost 100 showings and 20 offers, multiple offers at $470,000 and one up to $500,000. The seller chose an offer at $470,000 because it had the strongest appraisal gap coverage, the offer at $500,000 only had a $20,000 appraisal gap. The house ultimately appraised and sold for $470,000, so the seller may have left $20,000 on the table. Of course, there was a risk in the smaller appraisal gap, but if the house appraised for only $450,000, the seller would have still got the $470,000! So how do you use the appraisal gap to get more money for your property? In this case, the seller could have accepted the $500,000 offer but required a rush appraisal be completed immediately after going under contract, before inspection or other diligence. A rush appraisal is expensive (maybe seller agrees to pay for or split appraisal if it doesn’t value), but you could get a value in 2-3 days. If the property values at $470,000, they move forward at the $20,000 over. If it doesn’t hit where the buyers can cover, they terminate and move on to the stronger offer at $470,000 that was accepted in back up position. In this example, there is low risk, but a large upside.
Strong Presentation
There are a few items here that will help sellers get the best price and maybe less showings.
Price: Price it right, really focus on getting a good list price by digging into the comps and listing it as close to what you think the property will get on the market. This lessens the need for huge appraisal gaps and gives more buyers the opportunity to make an offer that might work for their position. This also could cut down on showings – in the previous example, how many people looked at the property because it was listed at $400,000, they could go to $440,000, but never stood a chance? A waste of everyone’s time and may have took a showing appointment that a more qualified buyer couldn’t book. Less overall showings, but higher quality showings of those who can perform and may understand the submarket very well, may produce stronger offers.
Listing: Get the 3D tour! When buyers can see the property in detail before visiting, it may give them the information they need to get very excited or eliminate the property. So often it is hard to tell from pictures how many beds are on the upper level, understanding room sizes, will that office work, where is the backdoor, etc. Everyone is looking from their phones and computers, give the best experience possible so they are bought in when they arrive.
Cheat Sheet: In one house I looked at, the listing agent provided a list of items that would help an offer be competitive. The list included timing of closing date, rent back, post occupancy, inspection and appraisal conditions, appraisal gap, proof of funds, etc. This provided a road map not only to make a competitive offer, but would also help to rule out a property, if for example, the sellers needed 60 post occupancy but that didn’t work for the buyers need. This helps the listing agent have considerably less back and forth with buyers’ agents, and ultimately delivers higher quality offers to present.
Top Three Offers
My good friend Joe Massey at Castle and Cooke Mortgage shared this tip with me, and I find it to be very helpful. I have mentioned the scarce inventory for sale, this is sometimes leading to so many showings over a weekend that buyers are only getting as little as 10 minutes to walk the property and make an offer. Even 30 minutes really may not be enough time to see the property when buyers could be touring 5-10 properties over the course of a few days. After receiving all the offers and selecting the top three contracts, give those buyers the opportunity to see the house again over the next 24-48 hours. Allow them to see the property for as long as they need to make sure this is the house they want to win the bid on. Inevitably one of the three will drop out, leaving you with two bona fide offers. With these offers you can do one of a few things; you can see if either buyer wants to come up on price or see if they can strengthen their offer by waiving inspection resolution, appraisal, or work with your preferred lender. Or just pick the offer and work towards closing. Allowing another look may also lower the chances of the contract falling out. The last time we saw inventory levels get very low, a lot of contracts were falling out because buyers were bidding in the moment to win the deal, later realizing that they may not have the funds to cover a gap, or if the price took them outside of their comfort level, and the homes were going back on the market.
I hope all our readers are finding a way to benefit from the market conditions we are seeing. The increasing prices are fun for those of us who have real estate investments but make it very difficult for buyers with more limited resources. I hope we see the market slow, even if it is just a smidge, as it will make transitions easier for buyers and sellers alike. In any market, there are opportunities, we just have to position ourselves on the right side of the transaction. If you find value in the information or have other tips for getting top dollar, please share.