The First Commandment.
It’s always great for shock value when you hear about a San Carlos home that got some obscenely high number of offers. It sends the rumor mill into overdrive, and makes for great conversation around the (virtual) water cooler. Speculation always runs rampant in situations like these: “I think somebody from Facebook bought it,” or “I heard the winning buyers threw in a free vacation”… you get the idea.
But aside from all of the juicy gossip and rumors, in situations like these when there are a double-digit number of offers there’s usually a very good lesson to be learned when you actually dissect the pile of offers and look at the price distribution. Why? Because here’s a little secret — regardless of whether there’s 5 offers or 25 on a house, only 2-3 of them will rise above the crowd and become the ones that will be seriously considered by the sellers. Yep, the other 2-22 offers quite often don’t even get a second look.
What’s is the lesson to be learned here? It’s simply this: If everyone involved in the transaction truly understood the market they were dealing in and acted accordingly, there should never be that many offers on a house in the first place.
Let’s take a look at a couple of scenarios that illustrate what I’m talking about.
The Unrealistic Buyer.
It’s almost a guarantee — in a bid situation where you have a double-digit number of offers, there’s invariably a handful of offers that will be written right at the asking price, or perhaps even below. Really! I’m not making this up. And they are the ones who are most shocked when you call them afterwards to tell them they didn’t get the house. You have to wonder what the mindset of the buyer or their agent is when they’re putting together their strategy. If it’s already known that there will be over 10 offers (or even a high probability of it) what’s the logic behind writing a non-competitive offer in a hot market like this?
The problem this creates for other serious buyers is that these non-competitive offers will jack the number of offers to an artificially high number, which then forces the bidding even higher. Obviously, sellers love when this happens, but for those of you who are angry about why prices are escalating out of control in San Carlos, this is a primary reason.
This year alone, I have “waved off” more buyers from writing offers on properties than I have actually written offers. I certainly don’t need the practice, and the buyer’s time is far too valuable to waste it writing an offer that has no chance of succeeding.
The Under-Priced Listing.
Another significant factor that propels the number of offers to dizzying heights is when the listing is significantly under-priced. I’m not sure why, but there’s a common belief that the more offers you get, the better. In reality, it’s the more good offers you get, the better. There’s a big difference. Here’s a good example…
868 Cordilleras Avenue was a 4BR/2BA 1,980 sq foot home on a 7,425 sq foot lot that was listed for sale at the beginning of this year. It went on the market at $925,000 — a price which effectively caused a massive and collective double-take from buyers and agents alike. How could a 4BR home in a prime San Carlos neighborhood be priced at $925,000 at a time when there were very few listings at all on the market, and certainly no other 4BR homes? What’s even more baffling is that there was a smaller 3BR home right across the street at 853 Cordilleras Avenue that sold just a few months before at $1,280,000.
To the surprise of absolutely nobody, this house garnered a boatload of offers. I waved off one of my buyers who thought that offering $100K over the asking price would make for a competitive offer. I told them that the house would very likely sell for about $1.2M and unless they were willing to go that high, they shouldn’t waste their time or the sellers time by bringing in a non-competitive offer. They probably thought I was out of my mind for refusing to write an offer with a $100k premium — but in the end, the house sold for $1,210,000, or a premium of 31%. (I missed it by only $10K!!) The point here is that without proper knowledge of the market, they would have been wasting their time and getting their hopes up for absolutely no reason.
Compare this to the home at 344 Oakview Drive (3BR/2BA, 1,800 sq feet) in San Carlos that listed recently at $1,150,000 — a far more realistic price considering where the market is at. And what happened? Instead of getting a pile of offers that were all over the map, this home got only 4 offers. But all four were very strong offers, and the house will still close at significantly above the asking price. The difference? Knowing the market allowed the listing agent to price the house close to market value, thus weeding out a bunch of unrealistic offers.
And I would be remiss if we didn’t take another look at 148 Chestnut Street, since it has been the topic du jour this week. Even though this home generated 22 offers, I do not believe that this listing was significantly under-priced. You only have to look at the recent home sales history in Cordes to know that 3BR homes usually fetch in the $800K-$900k range. So at $999,000 I still believe Chestnut was priced very well when taking into account past sales history and the condition of the market. What ultimately happened in this transaction sent shock waves throughout the market, as we discussed earlier this week.
Significantly under-pricing a listing actually can hurt the sellers too. Why? Because our aforementioned unrealistic and uninformed buyer is often too fixated on how much they’re spending over the list price, rather than focusing on how much the house is actually worth. It’s far easier to rationalize that you had paid fair market value for a house, instead of coming to grips with paying 31% over the asking price. You get to the same place, but it’s all a matter of perspective.
The Bottom Line.
If you take nothing else away from this post, it should be this: In order to be successful in this hyper-competitive San Carlos real estate market, you must adhere to the First Commandment – Know Thy Market. Regardless of whether your buying a home or selling one, a focused, intelligent campaign will always win out over “throwing it against the wall”.
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