What a difference one year makes. In December 2011, the Temecula and Murrieta Valley (defined as Southwest Riverside County) had a 2.7 month supply of homes. That means that there was so much inventory and sales were so lethargic, that it took almost 3 months to sell a home. For homes priced $299,000 and above, there was a 3.7 month supply of homes on the market. That’s more than 3 months of inventory! The thought of a multiple offer situation on anything but a bank owned sale was simply laughable.
Fast-forward to today where in the Temecula and Murrieta Valley, we have a 1.2 month supply of housing and 2.1 months in the $299,000 and above category. In the Temecula and Murrieta Valley, the number is only 1.15 months (the lowest inventory level since December 2006 – pre-recession) and in south Temecula neighborhoods south of Temecula Parkway, that figure falls to 1.02. The south Temecula neighborhood of Morgan Hill (zip 92592) is at an alarming 0.95 months supply of housing.
This trend isn’t just confined to Temecula and Murrieta Valley. The Hemet area in 2011 had 3.35 months of inventory and now in December 2012 the area of Hemet has 1.8 months of inventory.
The result of these low levels of inventory are multiple offers and bidding wars among multiple buyers for the same house. So how do you win a multiple offer situation? Here are a few tips to improve your offer to win multiple offer situations:
Reduce the Contingency Period
The California Purchase agreement has only two dates that are of any relevance in the contract: the contingency period and the closing date. Under the contingency period, a Buyer must complete everything necessary for them to complete the sale if they want to retain their earnest money deposit. Earnest Money is refundable during the due diligence period and becomes non-refundable after the contingency date.
Items for a contingency include the Buyer’s loan application, appraisal, home inspection, survey, and anything else the Buyer needs to make a decision to purchase. Frequently, Buyers will ask for a 17 day contingency period so that they can take their time to complete their tasks. 17 days is great for the Buyer but it keeps the house off the market for 17 days while the Buyer can decide not to buy and terminate without any further obligation.
The truth is that with the right lender on board, no one needs 17 days to complete a contingency period. Mortgage bankers like New American Mortgage can underwrite a new contract in about 10-14 days while other big banks need 45 days at a minimum. Therefore, work with a lender who can get the mortgage completed and ready to close quickly so that you can work off of a much shorter Contingency period like 10-14 days.
Increase the Good Faith Offer
Money talks in every real estate transaction and the good faith offer (paid the time of an accepted contract to escrow) can say how serious you are about purchasing the house. Earnest money is non-refundable only after the end of the contingency period so offering large earnest money deposit and long contingency period is absolutely pointless… much like wearing suspenders and a belt. Keep in mind that if you fulfill the contract, the good faith deposit will be credited to you on the HUD-1 but if you terminate, the money is non-refundable. Consider offering the Seller in a multiple offer situation a larger good faith deposit for the time you intend to keep the home off the market.
As a Seller, it is a much smarter play to accept the offer of a Buyer with a larger good faith than one that offers a substantial amount over the asking price if that buyer intends to finance the purchase of the house. Unfortunately, appraisers are under a lot of scrutiny to be conservative therefore you stand a greater likelihood of the home not appraising, the buyer terminating under the due diligence period, and walking away with nothing.
Choose your Lender Wisely and Obtain a Loan Commitment
Certain mortgage banks (with emphasis on the bank) have a habit of underwriting the borrower so many times so that they decline the file at the last-minute with little to no explanation. Other lenders take less than 5 minutes to issue a pre-approve a borrower, basing their decision on a quick conversation where nothing has been verified. Regardless the transaction (and especially in a multiple offer situation), work with a lender who will verify all of the information required for the mortgage and can issue a loan commitment letter. The difference between a pre-approval letter and a full loan commitment is that nothing is verified on a pre-approval or pre-qualification letter. In a commitment, the lender or their processor had verified the borrower is employed, has funds for the down payment, has a sufficient credit score, has taken a 1003 application, and probably obtained a tax return from the borrower.
At the end of the day, it’s about selling a home and not collecting a bunch of due diligence money for a home that can’t close.
With todays competative market somtimes it might be worth eliminating some contignecies to make your offer more attractive. With that being said, a Buyer can offer to purchase a home contingent on the sale of their home or require third-party approval to ensure the transaction can move forth. Unless your home is already under contract, it is very difficult for a Seller to consider a contingent offer over one that doesn’t have that provision.
Offer Over Asking Price
Ignoring all of the above and simply offering over asking price is a recipe for disaster. Unfortunately, appraisal values are not rising as fast as the market may dictate in a multiple offer situation. Therefore, it is highly likely that the Buyer’s appraisal may not agree with the contract price which may result in the transaction not closing. So think smart before offering well above the asking price. If there are values to support such a price, they bid away. However, if the values do not agree, don’t expect an appraiser to bring the house in for your contract if it can’t be supported.
The California Offer to Purchase and Contract does have an appraisal contingency while there is also one in the FHA addendum (for FHA and VA borrowers), it does not require that either party agree to the lower price. Therefore, the seller can choose to not sell for the lower price, the contract is terminated, and for both Buyer and Seller it’s back to square one.