How to Handle Bidding Wars and Low Appraisals

by Osman Parvez

The WSJ had a recent piece on the impact of bidding wars.   From Bidding Wars Can Lead to Home Appraisal Headaches

If the appraisal comes in below the agreed-upon purchase price, the buyer will have to make some tough decisions.

The buyer may ask the seller to agree to a revised, lower purchase price that’s in line with the appraised value. If the seller declines, the buyer will either have to walk away from the deal or put extra cash down to make up the difference between the appraised value and the purchase price.

In such cases, buyers will also have to accept that they’re overpaying based on the current market value of the property. It’s possible that the value will rise during the time period that they own the home. But it could also decline.

You should read the whole piece, it's part of what I tell my clients.   Here's what is missing: 

1.  In a bidding war, the highest priced offer is not necessarily the best offer.   Sellers, read the next sentence carefully. The best offer is the highest priced offer that actually closes. Buyers have many potential contractual exits with little or no penalty.  If they get cold feet, you pay the price in terms of lost marketing time and a tainted listing. 

2.  More money down is not an indication of a buyers commitment to purchasing or to their financial fitness. If you're the listing agent, always ask for verification of funds. 100% cash is king because it removes appraisal and credit quality risk.

3. Smart listing agents slow down the bidding war. I can't emphasize this enough. In the last bidding war I managed, I extended the offer submission deadline to encourage interested buyers to visit the property again. Surprise, surprise - two potential bidders disappeared. It's better that they left before going under contract instead of terminating mid-way through the process, leaving the seller with a tainted listing. The buyers who remained in the bidding war were deeply committed and we closed substantially above asking. 

4.  Appraisals are not market value. If you really want to understand the value of a property, (a) sit down with your agent and carefully evaluate the comps,  (b) look at sales over a longer period of time to establish the trend, and (c) study how similar homes behaved during the last real estate cycle. Appraisers are locked into a very narrow, rear-mirror focused way of evaluating market value. Appraisal quality is also all over the place. Don't trust the round-robin selected appraiser any more than you'd trust the listing agent to tell you what it's worth.

5.  In a bidding war, winning offers address unspoken seller risks.    Clauses can be written into the contract to address inspection issues, credit quality, and low appraisals. Contact your experienced buyer's agent for details. If you're the listing agent (or seller), use the bidding war to negotiate and remove contingencies, not just raise the price. Of course, savvy buyers agents don't wait to be asked. They proactively address seller concerns if they know multiple offers are on the table. 

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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.