When we work with buyers and they find a home they love, the first question they ask is “How much should I bid?” Unfortunately the answer is not always easy. They need to not only figure out what the value of the property is to them, but also a bidding strategy that will get their offer accepted, and not tee the property up for another bidder who will pay a little more.
In order to develop a winning bidding strategy without over-paying, we advise our clients to consider these three points:
The first step to establishing how much you should bid for a home is by looking at comparable properties. We consider a “comp” as a property that is comparable in size, bed/bath count, amenities, neighborhood, condition and view. If looking at an apartment, the best comps are in the same building you are looking in, and preferably in the same “line.” If you’re bidding on a house, the best comps are on the same block, ideally built at same time by the same builder. For a comp to be relevant, it needs to be from a similar “market.” So if prices have not increased from last year, a year old Spring market comp could be relevant this Spring. But in a quickly appreciating market, even a recently closed comp could be too old. In this instance, it is better to use comps that are just entering contract and try to find out the contract price, or make an assumption based on “time on market” (more about that later). But remember, you are not appraising the property – you are figuring out the value to you – which could be higher or lower than what your comps say. Once you have established a target price based on comparable properties, you can go to the next step.
2. Ratio of Sold Price : List Price
The second point to consider is the sold price : list price ratio for the current market. In the current market, we at RealDirect are seeing homes sell on average for a 3-4% discount to ask. So a $1,000,000 property is selling on average for $970K. Of course this is just an average and you will want to look at your specific sub-market, but in this case, if your comp comes in at less than 4% below the asking price, you should be alerted that it will likely have very competitive bidding around the property, and you should consider bidding at the high end of your target price range. If your discount to ask ratio is higher than that, you will likely have more time, and can afford to bid lower initially, with the hope of getting a bargain.
The third point to consider is timing. The average home is on the market for 2-3 months before a contract is signed, but the reality is that there are homes that sell in the first two weeks, and then homes that take considerably more time to sell – or don’t sell at all. If a home is on the market for less than two weeks and priced correctly, the likelihood that they will accept an offer below the average “sale price to list price ratio” is very low. However the longer a home is on the market, the more likely the sellers will recognize that they have priced their home too high, and they will be more receptive to an offer outside of the average discount range. Keep in mind, though, if the home had a considerable price reduction, it’s a do-over for timing purposes – consider it as if it just went on the market. So if you value a property at more than 4% off ask, and it just went on the market, don’t expect to get a positive response.
Using this information, if you are bidding on a recently listed home with an estimated value within 4% of the listing price, expect it to sell in the first two weeks, and submit your target price bids early and at the higher end of the your range (though we recommend leaving about 1% more to increase your bid if needed).
If you are bidding on a recently listed home that is more than 4% higher than you are willing to pay, you have some time. In this case, we recommend submitting a low offer, and then holding steady if rejected. Instruct the seller to contact you if they decide to lower the price.
If the home has been on the market more than 30 days, we recommend an offer of ~4% below your target price, and engage the seller in a negotiation. It will likely be a less competitive environment, so you have a better shot of getting a good deal.
One “wildcard” is condition. If a home is in “triple mint” condition -i.e. either brand new, or a new, high end renovation, and is priced within 10% of your “value”, you should consider being aggressive and bid the high end of your range. These apartments sell for significantly more and sell in a shorter time than average. And the same goes for “wrecks” that need a ton of work and show poorly. In this case, the discount off of a comp in good condition could be significantly more than simply the cost of the renovation, so feel free to offer lower bids for these properties.
All this said, you never really know the motivation behind the seller – and sometimes low bids work and buyers get bargains. But keep in mind that if you are a bargain hunter, it will usually be quite difficult to get a deal done on a new listing in a competitive market.
Which is why in this market, it’s even more important to work with a RealDirect broker. Our clients receive a buyer rebate of up to 1% of the closing price and save over $10K on average vs. a working with a traditional brokerage. And this can often be the difference between a losing and winning bid.