Buying a Home in a Seller’s Market was a home seller’s fantasy during the recession (December 2007 through June 2009) and the subsequent crash of the housing market. During this time home buyers got familiar with the jargon
and practices of a strong buyer’s market. Many transactions were either short sales or foreclosures, so understanding these concepts was important.
Jump forward to 2022, a little over a decade later, buyers have a whole new set of jargon, terms, and practices to deal with. If you are considering buying a home in a seller’s market in Colorado Springs, read on to learn everything you need to know about our new seller-friendly landscape. Consider this your survival guide in a seller’s market.
How to Be a Competitive Buyer
Before we discuss some of the seller’s market tactics you’ll need to understand, let’s talk about how to increase your chances of getting your offer accepted in an environment of low inventory, and escalating home prices.
Pre-Approval
Back in the buyer’s market days, buyers had the option of being pre-qualified and/or pre-approved for a home loan before house hunting.
This was helpful when the buyers were ready to make an offer on a home. Pre-qualification, and especially pre-approval, strengthened offers. They indicated to the sellers that the buyers would most likely be able to secure the funding needed to close the deal. This made the sellers more comfortable accepting the offer.
But in today’s seller’s market, pre-approval is a minimum requirement (pre-qualification no longer carries much weight in getting your offer accepted). Before you even begin your home search, you should contact a lender to get pre-approved for a home loan. It’s also a good idea to get an approval letter from the lender. You will submit this with any offers you make.
All-Cash Offers
Even though mortgage rates are at historic lows, In many instances buyers are competing with all-cash offers. Investors and cash-heavy buyers leaving a hot market are an attractive option for home sellers. The cash offer eliminates the risks associated with a loan.
Any deal that Involves a mortgage loan comes with some risk. There are potential issues with the buyer’s qualifications, potential underwriting problems, and appraisal problems to contend with.
When home sales fall through due to financing, the seller has to put the house back on the market and start from square one. So, all other factors being equal, sellers prefer to work with a buyer who can pay cash so no one has to worry about obtaining financing.
Home loans have a difficult time competing with all-cash offers, a personal note (aka “Love Letter) to the seller could be useful. You could assure the sellers of your strong financial position and ability to secure financing. You could also express your plans for the house as a loving home. The seller’s real estate agent may get seller approval to reject these letters. They bring an emotional aspect to a business transaction and do open the seller up to some liability.
Many all-cash offers are made by real estate investors, who would flip or rent out the house. So you could sway a seller who has an emotional attachment to the house and wants the future owner to love and care for the home the way they have.
Escalation Clause
In an environment where the list price is just a starting point, one tactic that’s often used by homebuyers interested in buying a home in a seller’s market is adding an escalation clause to their offer. Instead of guessing how much over the asking price to offer, an escalation clause, sometimes known as an escalator, is a clause that escalates your offer when another buyer makes a higher bid. The idea behind this clause is that it’ll help you to edge above the competition, giving you a better chance at securing the property. Generally, you choose the amount you’d like your offer to escalate by (say $5,000), as well as the ceiling that you’d like your offer to cap out at.
Here’s how it works. Let’s say that you could make an offer for say $400,000 with a $5,000 escalator on a house. If someone else offers a higher price of $410,000. your escalation clause will kick in and your offer will go to $415,000. Homebuyers use this tactic in a competitive market because it can help to make their offers a bit more competitive, increasing the likelihood that they’ll end up finding success. But while an escalation clause can work in some situations, they aren’t always the best option. These clauses often carry a number of risks as well.
Appraisal Gap Clause or Provision
One of the main risks of an escalation clause is that your escalation clause will cause you to end up with an appraisal gap: the difference between what you’ve offered on the property, and the property’s actual appraised value. If you’re not careful, you could end up bidding more than the property itself is worth. This is especially problematic if you’re planning to finance the property and obtain a loan through the bank. The bank will not finance more than a set percentage of the property’s appraised value. If you’ve made an offer of $415,000 for a property and the appraisal comes in at $380,000, then you’ll be left with an appraisal gap of $35,000. When this happens, the bank will issue the loan based on the appraised value alone and you’d be responsible for coming up with the difference yourself. In this case, $35,000 –in addition to your down payment. It’s risky because it’s an easy way to end up over budget or paying more than a property is worth.
If you do end up adding an escalation clause, it’s important to ensure that it’s capped at a ceiling that’s within budget and very close to what the property is actually worth unless you are willing and able to make up the difference yourself.
Tactics Employed in a Seller’s Market
Now let’s discuss some of the tactics you’ll see sellers and their agents use under today’s market conditions.
Deferred Showings
Deferred showing is a tactic used to create a sense of urgency and demand for a particular property.
The tactic works like this:
The listing agent puts the home into the Multiple Listings Service (MLS) early in the week, ideally on a Monday morning. This timing brings the listing to the attention of all those buyers (and buyers’ agents) who are currently in the market for a home but didn’t find one over the weekend. The showing instructions for the property state that there will be no showings until the upcoming Saturday or Sunday at a particular time, usually 10 or 11.
The idea is to create a busy Open House environment with lots of potential buyers waiting to get in to see the property. The listing agent and home seller are hoping to generate and sense of urgency that will produce multiple offers and maybe even start a bidding war. This tactic is especially successful for the sellers in a seller’s market when many of those buyers have most likely lost out on previous homes because they were outbid.
There are a few additional details that make deferred showings even more effective.
First, it helps if the property is in a popular price range. This means the sale price should be close to the median sales price for the neighborhood. This ensures that many buyers will be interested because many buyers are looking in that price range.
Secondly, the location needs to be desirable. The property needs to be in an area that will appeal to many buyers.
An overpriced listing in an unpopular area isn’t a great candidate for deferred showings.
The Upside of Deferred Showings
Creating a potential bidding war isn’t the only upside of deferred showings for the sellers.
First, the schedule created by deferred showings is far more convenient for the sellers. Rather than working their schedules around multiple showings on multiple days for multiple buyers, the sellers can simply work around the Saturday/Sunday showings. They may even go away for the weekend and return to a multiple offer situation.
Deferred showings also create an environment where the sellers feel in control. If they receive multiple offers, they can compare the offers and vet the buyers side-by-side to find the best offer. This is much easier on the sellers than receiving a single offer and deciding whether to accept, counter, or wait to see if a better offer comes in.
When a property is well-priced and well-staged in a hot seller’s market, buyers’ agents will often write a good offer with a short timeline for acceptance. This gives the sellers an appealing offer, but it also creates a sense of urgency for them to accept the offer before it expires.
The Downside of Deferred Showings
One of the notable downsides of deferred showings is missing out on buyers because of simple scheduling conflicts.
Consider well-qualified, but out-of-area buyers, for example. It’s quite common for out-of-area buyers to schedule trips to Colorado Springs specifically to buy their new house. These relocation buyers (called “relo” for short) are often assisted with the move by their new local employer, so they are serious buyers and are able to secure financing. But if the deferred showing date doesn’t coincide with their buying trip, the seller could miss out on these well-qualified buyers.
Another significant downside of deferred showings is buyer’s remorse.
A bidding war environment creates buzz and excitement (especially for the winner!). But once the excitement wears off, buyer’s remorse usually sets in. Bidding wars pressure buyers to make hasty decisions and take advantage of the human impulse to win. This can leave the buyer with regret and maybe even a feeling of having been taken advantage of.
Unlike most bidding situations, sales of real estate aren’t final as soon as the bid is accepted. The escrow process typically takes 30-60 days and offers buyers many opportunities to back out of the deal based on any of the many contingencies found in a real estate contract.
If the buyer backs out, the seller is left at a serious disadvantage. And not only because they are back at square one in terms of finding a buyer. The real disadvantage is that the market will assume the buyer backed out due to a defect with the property.
After all, that’s the most common reason homes fall out of escrow: something is found during the home inspection which causes the buyer to walk away from the deal. So even if a buyer walks away because of buyer’s remorse or cold feet, the house will still be stigmatized. Once the buyer backs out, the house is categorized as Back on Market (BOM). And many of the homes on the BOM list are ignored by buyers and buyer’s agents because of the assumption that there was a problem with the inspection.
So this BOM category is bad for the sellers but could be a good opportunity for buyers. During a hot seller’s market, savvy buyers and their agents will ignore the deferred showings circus and will watch the BOM list instead. They know many of the BOM listings are simply the result of a bidding-war buyer getting cold feet, not a problem with the property. And they know they’ll have lower buyer competition for these properties because of that BOM stigma.
Highest and Best in a Seller’s Market
The term “highest and best” has become very popular in the Colorado Springs Real Estate market. It’s the listing agents’ way of saying, “offers should be the top dollar you’re willing to pay with the most favorable terms you’re willing to offer the seller.” Then the listing agent will present these “highest and best” offers to the seller and help the seller choose the winner.
This has created a fair bit of controversy in the local market for a few reasons.
First of all, good REALTORS® pride themselves on correctly pricing listings. This includes pricing properties in a rapidly rising market. When you say highest and best as an agent the message being conveyed is that you have no idea what this home could sell for, so let’s just let the market dictate the maximum value.
On one hand that sounds like a decent idea, the problem with this approach is that it creates a feeding frenzy, you might end up with a great offer and terms that ultimately end up closing. You are more likely to end up with a deal falling out due to a case of buyer’s remorse.
A Realtor’s role is to give pricing advice and guide a contract through to closing. This type of pricing model alleviates the real estate professional from their responsibility of correctly pricing a home. If the deal goes sideways and the buyer develops remorse, the agents don’t have a firm pricing foundation to stand on.
In a strong seller’s market, good agents will advise their clients to present their best offer if they are serious about owning a particular home.
Highest and best also indicates that the listing agent may be uncooperative. They may be unwilling to work with buyers’ agents to find solutions that are fair to both parties (buyers and sellers) because they know they have the upper hand in a seller’s market. And remember, the offer and acceptance is only the first round of negotiations in a real estate deal. Another round may be necessary after inspections to address any issues with the property. Agents need to be willing to work together throughout the transaction to ensure that both parties are getting a fair deal.
We should note that the term “highest and best” may actually be somewhat useful in those few areas of the country where real estate has gotten out of control (Silicon Valley or Manhattan, for example). In those extreme markets, prices may be on the rise faster than buyers can keep track of fair market values. So offers for the same property can vary widely between buyers offering rates in line with last month’s sales and buyers anticipating next month’s prices.
This is simply not the case in our Colorado Springs market. Offers the sellers receive will all be similar (it’s rare to see an extreme outlier). Additionally, we have enough new construction in the region so that buyers can choose to build if they become too frustrated with the resale Market. Commute times are not as severe in Colorado Springs as they are in other big cities.
Highest and Best Survival Tips
The most important thing to remember in the highest and best scenario is you need to keep your emotions in check. Don’t get so attached to a property that you take the attitude that you must have it at any cost.
Base your offer and terms on numbers and conditions you are comfortable with. If you are working with a good agent, they will advise you of what the property is actually worth. It’s ok to stretch a little but don’t set yourself up for remorse and regret. Remember, markets rise and fall, you just might have to wait a little while to get what you want.
If you lose out on a property as the result of the highest and best war, don’t give up. Both you and your agent should keep an eye on this home to see if it closes or more likely comes back on the market. Back on the market might mean there was an inspection or financing issue with the house. The more likely scenario is that the winning bidder got cold feet and decided to back out. This creates a great opportunity for you the buyer, to swoop back in and put it under contract, maybe for better terms.
Coming Soon Signs
Coming Soon signs are another tactic used by listing agents and sellers to create buzz around upcoming listings. This tactic requires the seller to authorize the listing agent to pre-market the home before actually listing it on the MLS.
Here is the stance taken in by our local Pikes Peak Association of REALTORS®. This comment speaks to just how controversial this practice is:
The RSC Board of Directors, with legal counsel, has concluded the following with respect to this practice:
- Per NAR, the PPMLS cannot make a rule concerning the posting of signs. Therefore, the PPMLS cannot prohibit a broker from posting an “Available Soon” sign.
- PPMLS Rules require that all Exclusive Right to Sell listings be submitted within 72 hours of seller signature.
- If RSC receives a written (or emailed) violation complaint that a property is listed, but is not in the PPMLS, then the RSC can request a copy of the listing agreement which would confirm whether or not there is an office exclusive. If RSC verifies that a listing is in force, and there is no “pink slip/office exclusive” then RSC will ensure that the listing is input into the PPMLS. (Note: currently there is no fine or sanction for not having put the listing in within the required 72 hours.)
- If the broker has an office exclusive agreement, then the listing is not required to be input into the PPMLS computer system (although a copy of the listing agreement is required to be filed with RSC).
- The RSC will not prohibit a listing broker from inserting additional terms in the contract such as withholding the listing from the PPMLS for a specified period of time.
- The RSC will not prohibit the listing broker from submitting the listing to PPMLS, but then, with the Seller’s authorization, temporarily withdrawing the listing from the PPMLS.
- If there is no listing agreement, but the seller has simply agreed to allow the broker to place a sign on the property, then the RSC has no jurisdiction in the matter, and no action will be taken.
The listing agent installs a sign with an accompanying rider that advertises “Coming Soon”. Seems innocent enough, right?
Well, the goal of this tactic isn’t only to build hype. It’s also to prey on anxious buyers looking to get the jump on the competition. Buyers who see the sign think, “I should contact the agent on that sign to see when the house will be on the market.” So they contact the agent on the sign directly, and that can lead to trouble.
You see, when buyers contact the agent on the sign directly, they are actually reaching out to a real estate professional that has an agency agreement with the home sellers. This means that until you enter into some type of agency agreement with that same Realtor, anything you say can and will be passed along to the sellers and used against you.
If you do end up deciding to buy that house and work with the listing agent you contacted from the sign, that agent will represent you as a “transaction broker”. This means the agent facilitates the transfer of the property but doesn’t advocate for the buyer. It also means they receive a much higher commission.
In cases where the buyers and sellers each have their own agent, the real estate commission is split between the two agents. But if the agent working with the sellers (either as a seller’s agent or a transaction-broker) can close this deal as a transaction-broker for the buyer, they are the only agent involved, so they get to keep the full commission themselves.
What’s Wrong with Using a Transaction-Broker?
The problem with using a transaction broker is that you miss out on representation. You won’t have a professional advocating for your interests. A transaction broker must follow certain legal requirements regarding disclosures and communication, but they do not work on your behalf.
Many buyers think this arrangement is acceptable as long as the agent is also acting only as a transaction broker (not a seller’s agent) for the sellers. That way the agent isn’t advocating for anyone, so it will be a fair transaction.
In theory, this sounds fine. But in practice, humans find it very difficult to be entirely impartial. Even if the agent doesn’t intend to favor one party over the other, they may do so subconsciously. This conflict of interest is the reason dual-agency (where the agent advocates for both the buyers and the sellers) has not been allowed in Colorado since 2003.
For a fair transaction in which each parties’ interests are represented, it’s best for buyers and sellers to each retain their own agents.
Protecting Yourself as a Buyer in a Seller’s Market
The best way to protect yourself and your interests as a buyer in a seller’s market are to engage the services of a buyer’s agent. Buyer’s agents are advocates, working on your behalf to get you a fair deal.
It just takes a few pages of paperwork to confirm that you wish to be represented by your buyer’s agent, then he or she can get to work for you. Their services include:
- Offering professional guidance throughout the buying process
- Negotiating on your behalf
- Assisting with the required legal documents
- Overseeing the transaction through to closing
And here’s the best part: their services won’t cost you anything. The seller traditionally pays the real estate commission, so it costs you nothing to add this important layer of protection.
And once you’ve engaged the services of a buyer’s agent, take advantage of their knowledge and experience, especially if they are an experienced agent. Heed their advice, and you won’t fall victim to these sellers’ market tactics!