Bidding wars: Bad for buyers?

According to a recent press release from the Northwest Multiple Listing Service, the inventory of listed properties is “severely restrained.” In recent weeks we’ve seen an increase in new listings, however the inventory of homes is still well below normal   approximately 1.9 months inventory. Normal is considered to be four to six months of inventory. This is impacting our local real estate market in a number of ways.  

First, the lack of inventory is helping to drive prices higher. In King County, home prices are up 11 percent compared to one year ago, according to the Northwest Multiple Listing Service.  

Second, the limited supply of available homes means any new listing may receive multiple offers, potentially resulting in a bidding war.

Third, the lack of inventory is driving prices higher and faster. Low appraisals are increasingly common.  Appraisals are not keeping pace with rapidly rising sale prices. An appraisal is based on recently closed sales and not active listings. That means an appraiser is looking backward in time, while today’s prices are moving forward, faster.

Fourth, some buyers are experiencing “buyer’s fatigue.” After submitting offers on one or two homes, and losing them, buyers feel frustrated. Some buyers are taking a step back from the market.

If you’re planning to sell your home, you need to understand the dynamics of the local real estate market, and how to price your home correctly for current market conditions. This is where an experienced Realtor demonstrates their worth.

Personally, I’m surprised when agents take steps to encourage a bidding war. Pricing a home below the market value is one tactic to generate a bidding war. Delaying presentation of offers is another strategy, where no offers will be accepted until a future date, usually a week after listing. This strategy forces all buyers to present their offer on the same day, putting added stress on buyers to compete.

Curiously, it seems like we hear nothing but good stories about bidding-wars. Agents boast, and headlines (were headlines written about such matters) proclaim the winning bidder paid hundreds of thousands above the listed price. The fact is, bidding wars can fail. Nobody likes to be manipulated, and setting up conditions to generate a bidding war can backfire. I was asked to intervene and rescue a sale when a listing agent bungled a bidding war and lost three buyers. The home had to be pulled from the market, re-priced, and then re-listed. It sold promptly.   

Common sense and proven sales strategies tend to fly out the window when there are rumors of a bidding war just down the block. Sellers and agents are lured to set the stage for a bidding war, as if this is the ultimate goal. The ultimate goal is actually a closed sale to a qualified buyer. By pursuing a bidding war strategy, sellers may be missing out on a better deal.

In many instances, sellers are too willing to go along with the advice of their listing agent when it comes to setting-up a bidding war scenario. Sellers should instead challenge their agent to present them with all options when listing their property.

Typically, I avoid bidding wars because the outcome is unpredictable and there is a higher risk of sale failure.  

Instead of pricing below the market value, I prefer to look at all relevant sales and establish a value at the correct price for current market conditions. In a rising market, that will include a percentage increase over recently closed sales, in order to keep pace with rising values.

Instead of delaying the presentation of offers to a future date, I prefer to accept offers at any time. This encourages more buyers to view my client’s listing. More buyers mean better odds of a sale, and the opportunity for a better offer.

Buyers dislike the bidding war process. By limiting exposure of your listing to one week, and delaying presentation of offers, you may be discouraging potential buyers from viewing your home. Some buyers will opt out and avoid your home because they dislike the manipulation. Others will presume they cannot compete because they’re unable to pay outright in cash. Even a well-qualified buyer with an approved mortgage may avoid your home, on the assumption they cannot compete with cash buyers.

The highest offer is not always the best offer. In some cases, a buyer with a pre-approved mortgage may be superior to a buyer with cash in hand. Every offer is unique, and the terms must be evaluated independent of competing offers. But the goal of agents should be to encourage as many buyers as possible to tour your home and present offers. Their goal should not be to discourage buyers.

We’ve established bidding wars are unpopular with buyers, and hardly the best strategy for sellers. So why encourage bidding wars?  

Well, the mythology of a bidding war suggests a quick sale at a record price. The person who benefits most from promoting this strategy is the listing agent. They do less work when determining the listing price than they would in a traditional sale. The house is only listed for a week, and they invest less time and effort in marketing. The listing agent has one busy evening as they review offers. Then they move on to the next house.

Your home is your most important investment. Make sure your agent has undertaken a thorough analysis and presented you with all marketing strategies so you can make an informed decision.  In some cases, a bidding war can be one option. In most cases, using a more traditional marketing strategy will result in a better outcome for a home seller.

Ray Akers is a licensed Realtor for Lake & Co. Real Estate in Seattle. Send your questions to
ray@akerscargill.com or call 206-722-4444.