There were reportedly 40 offers on the table — yes, 40 — and every one of them was over the seller’s asking price. It was only 48 hours after the desirable Brook Park home officially hit the market. With interest rates below 3%, buyers can justify escalating a bid. And with limited inventory, particularly in price ranges that are a sweet spot for first-time buyers, it’s fair to say, this means war.
The 40-bid scenario didn’t surprise Katy Dix Brahler, a real estate agent with Re/Max Above and Beyond based out of Westlake, though usually a house will collect only a dozen or two offers for a seller to review. “Buyers want to get into homes, and there is not a lot out there, so they can go in hours,” she says, mentioning that this home was “done” and move-in ready and fell into an accessible price range. “We are not seeing this market change.”
Adding to the low inventory is some pent-up demand for homes among buyers who decided to lay low during the pandemic. Here are other trends we’re seeing in today’s competitive real estate market.
During the last 14 to 16 months through the pandemic, stable interest rates — remarkably low rates, at that — have attracted buyers to a market where inventory is sparse. With rates lower than 3%, buyers can justify paying full price or over asking price for a home because the savings on interest offsets extra dollars spent on a home.
“With mortgage rates continuing to stay at the low rate they have been, it’s good for our housing market,” says Teresa Slowey Whitham, a Howard Hanna real estate agent based out of Solon. “We haven’t seen rates like this since World War II. That has kept our buyers ready to buy.”
Arguably, many buyers are quite desperate to buy now and lock in low rates. Even if they must make a higher offer on a house. “Money is cheap, so that’s the trade-off,” Brahler says.
The interest rates pump up buying power. Those in the market for a home can afford to pay more and possibly end up with lower monthly mortgage payments since interest rates have shrunk.
Will the low interest rates last forever? Probably not. Melissa Lendvay, a real estate agent with McDowell Homes Real Estate Services in Mentor, thinks rates will creep up. “This is creating a lot of anxiety so not only are buyers being beat out, they feel forced to beat the clock because as the economy improves, interest rates go up and, therefore, their monthly payments will increase if they don’t get locked in,” she says.
Even though low rates are good news, the buying pressure that comes with those can be frustrating, Lendvay acknowledges. “If rates go up, there will be fewer people in the market, or they will wait,” she says, noting that perhaps inventory then will catch up with demand.
As for inventory, the housing market has been in a sort of drought. There are many more buyers than homes to purchase for a couple of reasons. Some sellers hesitated to list during the pandemic for health and safety reasons. Others made home improvements rather than choosing to enter the market. “People have renovated their homes and are enjoying them,” Brahler says. “They put money into their property and they are deciding to stay rather than move.”
Since families are not listing houses as much, this is perpetuating the inventory lag. “There are not a lot of houses on the market to choose from, so they’re saying, ‘If we sell our house we don’t know where to go,’ ” Whitham says. Bridge loans, which serve as a short-term loan to help people buy a new home before they’re able to sell their current one, are a solution for some. “This lets sellers move more easily so they can take away the stress of not knowing where they’ll live,” Whitham says. “It’s a more comfortable process to buy a house, move, get adjusted, and then go back and sell your house.”
While the low inventory means homes are selling in record time, sellers should caution against listing their home too far below value. Lindsay Kronk, a Howard Hanna real estate agent based in Cleveland, says she’s seen some sellers list for less to drive bidding wars.
“This causes extreme demand and it’s not good for anyone involved,” she says. “When you get sellers with 20 offers within 48 hours, buyers can’t compete because a cash offer will always be king, so first-time buyers can have a hard time in that situation.”
While every situation is different, it’s not unusual these days to offer $15,000 over asking price and still not get the deal. “We are seeing 10 to 15 offers on the table, so you have to be aggressive, otherwise I advise buyers to sit back,” Brahler says.
If buyers end up paying $10,000, $15,000 or even $20,000 over asking price, does that mean they are losing in the end by paying more? Not really, considering the low interest rates that wash out escalated prices. But buyers who offer over asking price to seal a competitive deal might have to close an appraisal gap — that’s when the home does not appraise for the price offered, so to continue the deal, someone has to come up with the cash. “An additional addendum on the contract can state that the buyer is willing to make up some of the difference,” says Kronk.
Another leverage point to get a buyer into a home with multiple offers is setting an escalation clause. Related to the above-and-beyond asking prices, this would allow buyers an “in” to add a given amount of money over asking price (with a cap) to compete against other buyers. “That way, you can trump other offers, as long as the terms are similar,” Lendvay says, recommending that buyers come in at least $5,000 over asking price. For many buyers, paying over asking price could be a wise financial decision. “Because of low interest rates, there are more abilities in buyers’ checkbooks to [offer over asking price],” Whitham says.
Buyers who want to get into a home are coming to the table with the strongest offers possible, ready for closing costs, and they’re even willing to go in without a home inspection in some cases.
With a rising competitive market, removing a contingency like a home inspection could be beneficial for buyers, but it depends. Even if a home is solid, only a pro can see what’s behind the walls and truly evaluate whether mechanicals and other key infrastructural elements are sound. But for sellers, the relief of not undergoing an inspection and potential costly repairs to seal a deal is huge. “It’s a game-changer,” Brahler says. Another contractual trend is the appraisal waiver, which is what happens when the buyer commits to meet in the middle or come out of pocket for a predetermined amount of money if they don’t make appraisal because the buyer decided to compete for the house and escalate the offer over asking price.
Overall, buyers must be prepared to go in strong — and to be patient. “We are giving sellers everything they could possibly want to get into these homes,” Kronk says.
But in the end, if you don’t win the bidding war on the first house you have your heart set on, don’t fret. “Stay true to your goals,” says Jerry Kayser of Keller Williams Chervenic Realty. “There are enough properties coming online every week, you just have to be prepared to bid against other buyers.”