Cover story: Buyer competition returning

Homebuyers in the Washington area may think they are in a buyer’s market and have all the power in their hands. Think again.

There’s real competition for homes in some pockets of the region, in every price range, area Realtors say. Buyers should be prepared for the possibility of competing with multiple offers for their preferred property.

Chris Ann Cleland, an associate broker with Long & Foster Real Estate in Gainesville, Va., says her buyers have been facing competition for more than a year for all types of sales, including foreclosures, regular sales and even short sales, which are notorious for being slow and frustrating to negotiate.

“I’ve seen multiple offers across the spectrum of home prices, from a town home around $200,000 to a single-family home at $700,000 here in western Prince William County,” Ms. Cleland says. “I do think the market has shifted a little over the past year.

“Last spring, the competition for town homes under $300,000 was so crazy that you could hardly get in the door with an offer. I told my buyers that they could not wait and think about it if they were interested in a property; they had to make an immediate offer. Now, the demand has turned more in the direction of single-family homes priced from $400,000 to $600,000.”

Buyers might assume intuitively that competition is highest for properties with low price tags or those that are new to the market, but that is not always the case.

“In the past month, I’ve worked with buyers in three multiple-offer situations and also worked with a seller who received multiple offers,” says John Edelmann, a Realtor with Coldwell Banker Residential Brokerage in Georgetown. “An unexpected example was one home that had been on the market for six months and was in excellent condition but had not received any offers. Then two contracts were written on the same day for that property.”

Mr. Edelmann says competition is being driven by a lower inventory more than increased demand.

“It’s extremely important for Realtors and buyers to watch the number of listings on the market, because if a property has 10 showings in one week, that sets the stage for competing offers,” he says.

Competition can be especially high if just one or two homes are available within a popular subdivision or condominium.

Mynor Herrera, a Realtor with Weichert Realtors in Bethesda/Chevy Chase, says cash-strapped purchasers often are competing against cash-heavy real estate investors, particularly for bank-owned foreclosures.

Mr. Edelmann says all buyers should anticipate the possibility of competing offers by preparing themselves financially and emotionally.

“Every buyer should be fully preapproved for a mortgage and review their finances frequently with a lender,” he says. “Buyers should determine for themselves where they want to be in terms of their comfort level with their housing payment and find out from a lender the maximum amount they can qualify for. Then they can say to themselves, ’I can afford to pay X, and with a stretch I can afford to pay Y.’ Buyers should also think ahead a year or two to estimate whether their housing payment will be more affordable at that time.”

Ms. Cleland recommends that buyers carefully consider their price range, particularly in areas with competition.

“Buyers should not shop at the top of their price range because of the possibility that competition will increase the price of the property they want,” she says. “Buyers cannot always rely on the list price to be an accurate reflection of market value. An experienced real estate agent knows whether a home will receive multiple offers and knows whether it is likely to sell for more than the list price.”

Today’s multiple-offer situations, while less common than in the frenzied market of 2004 and 2005, also are less likely to result in an inflated price.

“Sometimes, even with price escalations by competing buyers, the final sale comes in under the list price,” Mr. Herrera says. “Buyers still need to avoid getting caught up in the emotion of the moment, though. Buyers need to establish a price that they feel comfortable offering and make sure they do not go above that cap.”

Ms. Cleland suggests that buyers ask their lender to estimate their monthly housing payments for a particular property, including taxes, homeowners insurance and homeowner association fees, to be sure they would be comfortable with the monthly payment.

Offering too much money for a property can create financial problems for overextended buyers, but sometimes higher prices also trigger appraisal problems.

“If buyers write an offer too high above the listing price, there’s a chance that [the home] will not appraise for that amount,” Ms. Cleland says. “If the buyers have left out an appraisal contingency, they will be required to come up with the additional funds for their full offer in cash, since lenders can only lend up to the appraised value.

“Some buyers rely on the fact that the appraisal will come in too low and assume they will be able to renegotiate the contract, but there is a chance that it will appraise and then the buyers are stuck with that high price.”

Mr. Herrera suggests that buyers offer a higher earnest-money deposit to improve the chances of their offer being accepted.

“A larger earnest-money deposit is only risky if you act risky,” Mr. Herrera says. “It is very rare to lose it. There are multiple opportunities to walk away from the contract without losing your deposit.”

Ms. Cleland says offering 1 percent of the sales price as an earnest-money deposit is customary in this market.

“Sometimes buyers want to deposit as little as $500 to $1,000 on a $400,000 home, but by putting down 1 percent, you show the sellers that you are a serious buyer,” Ms. Cleland says.

Mr. Edelmann says buyers should be prepared with a readily available, appropriate earnest-money deposit so they can write a contract as soon as they identify the home they want to buy.

In addition to offering more money for a home, buyers have a few more options that may mean the difference between a signed contract and searching for another home.

“If you think there will be multiple offers on a home that you really want to buy, I would suggest that you don’t ask for concessions from the seller, such as closing cost assistance,” Ms. Cleland says. “Buyers should avoid being greedy because it can turn sellers off. If the buyers really want the house, they should not ask for a home warranty or for the furniture or for the sellers to pay for the termite inspection.”

Multiple-offer scenarios vary as much as any other real estate transaction, so Mr. Edelmann recommends that the buyer’s agent talk to the listing agent to find out what is important to the sellers before the buyers make an offer.

“In some cases, an offer can be stronger simply because the buyers are willing to accommodate an early settlement or a late settlement,” Mr. Edelmann says.

Mr. Herrera suggests that if the buyers or their Realtor have a strong relationship with their lender, the buyers may be able to have their financing in place for a fast settlement.

Most Realtors recommend that buyers have a home inspection, but it is an option to have a home inspection simply for information rather than as a starting point for negotiations over repairs.

“The standard home-buying contract says that all systems in the home must be in normal working order, so even without a home-inspection contingency, the contract has a protection for the buyers,” Mr. Edelmann says.

He warns that buyers must weigh the risks of removing contingencies.

“Sellers always prefer a contract without any contingencies, but buyers need to be careful to understand the consequences of removing contingencies that protect their interests,” Mr. Edelmann says. “I would never recommend that buyers waive the financing contingency, for instance, unless they are all-cash buyers.”

Sometimes buyers can overcome their competition with the personal touch.

“Not all sellers and listing agents allow this, but it can be helpful for the buyers agent to present their offer in person,” Mr. Herrera says. “Not only does this personalize the process, but the agent can also answer any questions or concerns and even make immediate changes to the offer with the permission of the buyer.”

While buyers must be careful not to overreach their own budgetary constraints, Mr. Edelmann says paying a little above the list price for a property may not be as dangerous as it was several years ago.

“The real estate market has been depressed, so chances are that property values will rise rather than fall,” Mr. Edelmann says. “A good Realtor with local knowledge should provide buyers with comparable sales statistics, and that can help the buyers decide what the property is worth.”