Risk Buyers Take When In A Hyper Competitive Residential Bidding War
In today’s hyper-competitive real estate market, bidding wars are common on valuable properties. There are a few ways to resolve the problems created for buyers when competing against other buyers, as well as when multiple listings are placed on a property. Let’s take a look at what a bidding war is and what risks some buyers and investors are typically willing to take in a bidding war.
What is a bidding war?
A bidding war is created when multiple buyers compete to purchase a residential property by putting multiple offers on the property thereby increasing the property’s asking price.
How is a bidding war created?
Investors and Realtors of real property create bidding wars by effectively deferring listings of the sale of a home. By example, they list the home for sale at the beginning of the week, on Monday or Tuesday, and then don’t show the house until Friday. Multiple cash buyers then put offers on the property driving up the property’s price. The seller then puts up an offer deadline on the home.
Where are the most recent bidding wars occurring in New York?
In NYC, a bidding war is now escalating in the luxury apartment industry with two to four bedroom apartments becoming a hot commodity as of early this year. The availability of inventory and young people returning after the end of the COVID-19 pandemic causing people to look in Williamsburg, downtown Manhattan, West Village and Chelsea. A case in point is a luxury apartment located in Greenpoint, two blocks from McCarren Park. A realtor put it on the market only to show 18 people and secure six applications for rentals within the course of ninety minutes one day.
How can buyers most easily avoid bidding wars?
The most obvious way to avoid a bidding war is to have an adequate amount of cash on hand. This allows that buyer to avoid waiting for mortgage approval to secure the purchase of their home. A serious cash bidder is most likely to prevail over non-cash bidders in most bidding wars.
How can buyers obtain leverage in buying property in a bidding war?
The main way for buyers to avoid bidding wars is for the buyer to agree to waive contingency clauses in the real estate sales contract. The most common contingency waived is the home repair inspection.
What is a home repair inspection?
Ordinarily, it just means that the buyer is required to spend between $400 to $1,000 in more affluent areas to have a licensed inspector search for structural defects in a home. Such inspections often check for leaky roofs or defective heating or air condition systems, or for unsafe radon levels or for latent rodent or insect infestation. The inspection may reveal undisclosed high levels of mold or asbestos or lead paint levels in the home.
What does a waiver of the home inspection contingency mean to a typical buyer?
The waiver of this contingency usually means that this buyer is more attractive to a seller in a bidding war as the seller does not have to wait weeks for the inspection to be completed before closing on the property. This may be good for an anxious buyer who is eager to buy his first beach home in the Hampton’s but this buyer may be walking into some obvious pitfalls after closing that will raise his or her budgetary expenses moving forward.
What is a mortgage contingency clause and how does that impact bidding wars?
A mortgage contingency clause is a condition in a real estate contract that requires a buyer to obtain adequate financing before purchasing a home. This requires a statement of mortgage pre-approval that is often further contingent upon the buyer’s current income and credit standing. Loan pre-approval may also require the buyer to submit a down payment to the lender.
What is the difference between loan pre-qualification and loan pre-approval?
Loan Pre-qualification is not sufficient to secure lender approval for mortgage financing in the purchase of a home. Conversely, loan-pre-approval is sufficient to obtain lender financing or mortgage approval to purchase a home.
How does waiver of the mortgage contingency affect bidding wars?
A buyer’s waiver of a mortgage contingency in their real estate contract may expedite their chance of closing on a home. However, buyers should be aware that this waiver could place them in jeopardy of defaulting on their contract. By example, a buyer who waives getting an income report and credit history may not in fact have the ability to secure an appropriate mortgage or get loan pre-approval and may lose their earnest money allowance or deposit placed towards their home. This is often computes to about ten percent of the value of the home.
What is an Appraisal Contingency?
An appraisal contingency is a condition in the buyer’s real estate contract that requires the buyer to obtain a home appraisal evaluation before he or she can purchase a home. This often requires a fee of between $400 to $,1000 but may take several weeks to complete. In the process, other buyers may jump ahead who waive this contingency.
This contingency protects the buyer in that he or she can get an appropriate valuation of the property's true appraised value and secure a mortgage that appropriately finances their purchase without having to obtain other means of financing to purchase the home.
What happens when a buyer waives the appraisal contingency?
Again, the buyer can move much faster in a bidding war as he does not have to satisfy this contingency before heading to closing. However, lacking a formal appraisal of the property, the buyer may be setting themselves up for failure if the appraised value of the home proves to be substantially less than the asking price, leaving them unable to secure mortgage approval of the total purchase price agreed to by the seller. This could be especially troublesome in bidding wars with multiple purchasers during a housing boom.
What is an Appraisal Gap Clause?
This is a clause that is typically found in real estate contracts where bidding wars take place. The real estate contract has a clause that requires the buyer to cover the difference between the property’s sale price and the property’s appraised price in the event that there is a difference between the two.
What are the most common ways for cash buyers to avoid bidding wars with other buyers in the real estate market?
Affluent buyers always have an inherent advantage in buying a home in bidding wars as they often have more than enough cash to offer. To avoid a bidding war, try taking these steps:
- Offer 10 to 15 percent or more over the asking price of the home without the need for loan approval.
- Waive all contingencies before closing on the home including financial contingencies, home repair contingencies, appraisal contingencies, environmental contingencies or title contingencies.
Wealthy buyers can also leverage their interests in a bidding war by being able to get ahead in line by:
- Covering one-half of their earnest money payments or deposits up front or sometimes even covering the full earnest deposit.
- Covering the full amount of transfer or real estate tax recordation fees on property.
- Covering all Appraisal Fee gaps that may result from differences between the appraised value and requested sales price of a home.
What are some common contingency waiver clauses used in real estate contracts?
Clauses waving home inspection repairs may state:
“Buyer hereby waives and removes its inspection contingencies as referenced in the above purchase and sales contract and elects to proceed with the closing without delay. Buyer in removing its contingencies hereby makes the $100,000 earnest money deposit non-refundable per the terms and conditions of the above-referenced purchase and sale agreement.”
Clauses waiving financing contingencies may state:
“Purchasers obligations under this agreement are contingent upon it securing adequate financing from a financial institution upon terms acceptable to purchaser, in purchaser’s sole discretion, within a reasonable time, which shall be no less than ___ days from the execution of the agreement. Nothing contained herein shall obligate purchaser to make any specific efforts to make any particular inquiries or applications with respect to financing. In the event that purchaser fails to obtain adequate financing, purchaser may provide notice to seller within ____ days and to terminate this agreement.”
What other contingencies may real estate contracts have to protect buyers?
Seller-Purchaser contracts may also have contingencies mandating that sellers provide adequate utility services, adequate access to public roads, and satisfactory condition of any improvements on the property.
What are the risks to waiving the home contingency inspection?
The buyer assumes the risk of immediately incurring thousands of additional dollars after closing to fix home leaks and deteriorating floors and defective appliances potentially affected by faulty wiring or water damage. In addition, this buyer will assume the full risk for assumed undisclosed defects, and not be able to secure property insurance or ever sell the property as it lacks marketable title.
In addition, this buyer may not be able to negotiate a price reduction with the seller as he assumed the risks of repairs in waiving this contingency. The buyer may therefore lose his earnest money deposit and be stuck with being held in breach of contract at the time of closing and have to incur additional attorney’s fees as he may not know when to timely walk out of the contract before it is too late.
Though bidding wars can create a stressful environment for buyers and investors of real estate properties, implementing some of these strategies can help avoid them in high value transactions. Anyone looking to waive any contingencies should consult with an attorney to hep them best protect themselves during a real estate purchase.
Sources:
The Real Deal - Bidding Wars Supercharge NYC Market
Sell NYC Homes - Don't Wait to Sell Your House
RocketMortgage - 8 Tips for Winning a Bidding War
Real Estate Lawyers - Buyer/Seller Contingency
Original Article Published on PropertyShark
Want more Real Estate news? Check out our legal news blog