They're back after barely a decade: Escalation clauses in real estate contracts, “naked” contingency-free offers and lowball-priced listings designed to pull in dozens of bidders and turn routine sales transactions into auctions.
These are all techniques last seen with frequency during the frothiest months of the housing bubble in 2004-05, when prices were rising at double-digit rates, buyers thought they couldn't lose money in real estate, and mortgage financing was available to anybody who could sign a loan application. Now they are reappearing in some of the hottest sellers' markets from coast to coast — the byproduct of severe shortages in houses listed for sale combined with strong demand by qualified purchasers. Nationwide, according to surveys of 800-plus local markets by Realtor.com, inventories are down by 16 percent from year-ago levels. But in the hottest areas, listings are down by double or even triple that and prices are moving up fast.
Buyers, meanwhile, are out in droves, scanning newspapers and online realty sites for the latest listings, and signing up for alert services provided by realty firms. In the San Francisco Bay area, for example, agents say that realistically priced new listings are attracting dozens — sometimes even hundreds — of shoppers to open houses and stimulating bidding competitions with 30 to 50 or more participants.
Bidding wars are also increasingly frequent on well-priced listings in Washington, D.C., and its Maryland and Virginia suburbs, much of California, Seattle, Phoenix, Las Vegas, Richmond, Va., Boston and parts of Florida, among others. In a handful of fiercely competitive areas, some listing agents reportedly are even restricting buyers' access to properties to narrow time windows — say, a few hours on Saturday and Sunday — in order to fan the flames.
To get a leg up in such situations, some buyers and their agents are using techniques that can be effective, but that also come with drawbacks and snares. Among them:
• Contingency-free and contingency-light offers. Carl Medford, an agent with Prudential California Realty in the San Francisco East Bay market, says these are almost routine for buyers determined to win a bidding competition. He calls them “unprotected” contract offers. Essentially the idea is to strip away some or all of the customary contingencies in an offer that might irritate a seller or render the buyer's bid less attractive. The financing contingency, which makes the entire transaction dependent on the buyer obtaining a satisfactory loan and appraisal, often is the first to go if the bidder is confident of qualifying for a mortgage, has been preapproved or is willing to pay what could be a lot more than market value.
Many buyers are also willing to delete the inspection contingency, which Medford considers much more risky, since the bidder agrees to fly blind with no way out of the deal if costly defects — tens of thousands of dollars' worth, potentially — later arise. Tracy King of Teles Properties in northeast Los Angeles says she knows of buyers who have waived the inspection contingency and later discovered sewer lines clogged with roots and a chimney cracked so badly that it was condemned.
• Escalation clauses. These are add-ons to contract language that keep bidders in the competition, even when the price soars well beyond the original asking amount. Typically the bidder agrees to match and exceed any verifiable, bona fide competing offers by set increments — say, $500 to $1,000 — up to some to some maximum amount. Tom Conner, an associate broker with RE/MAX Gateway in Gainesville, Va., says “we're seeing them all the time now” in multiple-offer situations. The upside: Properly used, they work. Bidders with the highest maximums often get the house. Downside: If you need a mortgage, the appraisal could be a problem because it's likely to come in lower than the purchase price. Be prepared to throw extra cash into the deal upfront.
• Lowball listings. Rather than list a house at the price that comparable recent sales in the area indicate it's worth — say $495,000 — the sellers, advised by their agent, cut that to $479,000, hoping to stimulate a bidding war. Astute shoppers immediately spot the house as a “bargain,” and multiple competing offers push the final price to $520,000.
Good for the sellers, right? Probably. They get top dollar. But the ultimate buyers end up committed to a contract requiring them to pay what may be $25,000 over the likely current appraisal value — and that could have negative consequences for both the buyer and the seller.
Kenneth Harney is executive director of the National Real Estate Development Center.