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Backup offers are a bad idea except for this 1 reason

by John Rice

Backup offers.

They seem appealing to buyers who missed a house they wanted.

However, they are 99% of the time, a bad thing to do.

Why?

  1. It ties you up. You have an accepted contract on a house contingent on the primary buyer’s contract falling apart. Should another house come on the market that you want to make an offer on, you have to rescind your offer IF you have verbiage in your contract that allows you to do so. If you don’t have that language in the contract, you are stuck. You are missing out on houses you could get right now in hopes that the sale of one you previously missed will fall apart. This is a recipe for never getting a house.
  2. You are really helping the seller more than yourself. Think about it from the seller’s perspective. You are putting them in a spot where they have two people wanting the house. If the primary buyer asks for repairs after a home inspection, the seller is just going to say “Look, I’ve got a backup contract. If you want this house you’ve gotta do what I want you to do. If not, walk away and I’ll just let the other buyer have it.”
  3. You are going to pay a premium. The seller has no reason to accept an offer less than the primary contract they already have. If you’re a seller with an accepted contract for $400k on your house, would you bother with an offer for $390k? This means you are most likely going to have to make an offer stronger than the offer they currently have with the primary buyer.

When is that one single time when it might make sense? If the house is 110% exactly what you want and you are not going to be happy with any other house. If that’s they case, make that backup offer. Pay too much for it. Give the seller all the power. Pray the sale with the primary buyer falls apart. Then wait and see what happens.

If the house is just a really nice one that you liked a lot, just keep looking. Another one always eventually comes on the market. Oh, and remember, the best way to not have to make a backup offer is to have been the strongest offer the seller got when it was on the market. Beat the other buyers when you have a chance. Be that primary buyer that another buyer hopes will not be able to close the deal.

When is the best time to sell?

by John Rice

I get asked this often.

If you’re really not into reading, I will go ahead and tell you. The best time to sell is when you are ready to put the house on the market.

Why wait? There are buyers out year round. Always have been. Always will be.

There are a few things to consider though.

The goal in any market is to get as many buyers as possible wanting your house. You do that by pricing it correctly and presenting it well. Usually the first few days on the market is your best shot of getting multiple offers. Once a listing grows stale, buyers are not afraid of losing it. They will pay top dollar for it if they are afraid somebody else will get it first. So, that means the first few days are the most critical to get right. Again, always has been. Always will be. That is why most realtors put their listings on the market on a Friday. Most people are off work on the weekend which means more showings. If your first weekend on the market is going to be a big UK home game, a big day for Keeneland, Mother’s Day or some other holiday when people will be traveling or have events with family/friends, it might be best to wait a week.

With so few houses for sale any more, you don’t have to worry as much about competing listings. I don’t worry about what time of the year is best and you shouldn’t either. If we ever get back to having a lot of inventory, my advice might change. Right now, any time is the best time.

Why are rents so high?

by John Rice

It’s because all Landlords are greedy SOB’s, right?

Hahahaha. Well, some might be but that is NOT the real reason rents are so high.

Reason #1:

Inflation. I know you know that word. For some reason, with the price of everything having gone up since COVID, people tend to be shocked that rents have gone up too. Inflation affected everything, including rent values.

Reason #2:

We have been in a housing shortage since the Great Recession ended. That means we don’t have enough housing for everybody, regardless of whether you are renting or buying. More demand than supply means scarcity. Scarcity means higher prices. If there are 99 people looking for a place to live and 100 properties available, prices will go down. If there are 99 properties for rent and 100 people looking, prices will go up.

Reason #3:

Interest rates/Property Taxes/Homeowner’s Insurance. Put yourself in the shoes of a landlord. Why do you think they put up with middle of the night calls about stopped up toilets? It is because they want to make money from letting you move in their property worth hundreds of thousands of dollars for merely the deposit of a single month’s rent and the hope you will pay next month’s rent. If they cannot make money, they won’t do it. Would you go to your job if you didn’t make any money? Rates are higher. Property values have gone up, forcing property taxes to go up. Homeowner’s insurance has gone up as well. They have to pass these expenses onto tenants just as any business has to do.

Reason #4:

The high cost of buying a house. Rent prices are somewhat indexed with real estate prices. Let’s say you live in a house worth $200,000 that you rent for $1500 a month. If you were to put down 3% and buy that house yourself, it would cost you over $1600 a month for a mortgage. (That is principal, interest, taxes, insurance.) Plus you would have to pay out of your own pocket to maintain the house. When you put it in that perspective, renting sounds like a bargain.

The wrong way to make housing more affordable

by John Rice

I keep seeing a bit of enthusiasm in the media regarding the market softening to the point that real estate prices will drop.

With the logic of a 5 year old, sure, it makes sense that lower prices make things more affordable. There are however more variables that go into a mortgage payment. There is the price you pay, your interest rate and the length of your loan. There is another variable independent of real estate and that is wages. I read this morning that wages are going up as workers are demanding more income to combat inflation. I predicted this. Inflation came first and hurt all of us. I knew that in time, wages would have to go up as well. I used to have a lawn care business when I was younger. I remember a customer who built their house brand new in the 1960s. They told me their payment was something like $160 a month and some months it was hard to make ends meet. We laugh at that payment today, but keep in mind that it was probably still about 30% or more of their income.

Let’s say that we all wake up tomorrow and real estate prices have dropped 20%. Yay affordability!! It won’t make a bit of difference. Why? Having lived through the Great Recession, I can tell you that Buyers will not view this as an opportunity. They will be afraid to buy. The self claimed shrewd Buyers will try to time the market and wait for prices to go down more. Those Buyers usually end up waiting so long that prices have started to rebound before they feel comfortable to pull the trigger.

Let’s also take into consideration what softening real estate prices will do to those who already own a home, which ultimately affects everybody. For most middle class folk, their home is their greatest asset. If they feel good about the value of their home and their job security, they will go out and spend their money. They take vacations. They go to Lowe’s and Home Depot. They buy furniture. They spend on landscaping. It’s good for the whole economy. They stop all that when the value of their home goes down. How do I know? I saw it from 2007-2011.

What is the solution? Build more houses. We have been in a housing shortage since the Great Recession ended. Yes, people right now are not moving since they got super low rates that don’t exist anymore. That is keeping prices high in these times of higher rates. But think back. When rates were super low and everybody was eager to buy houses, we still didn’t have enough houses available.

And if you think affordability and low inventory are bad now, just wait until rates drop down to around 6% or hopefully less. That will create a bit of a frenzy. There will be even more bidding wars and prices will continue to go up, making housing less affordable.

“Are any of the offers cash?”

by John Rice

I went to an open house with a buyer client this past Sunday. We were already out looking at two other listings. This one had an open house so I thought we’d hit it rather than schedule a time to see it before or afterwards.

We got there about 5 minutes early. The realtors were not there yet and there was a line of people waiting to get in.

Once the realtors opened the house, the first thing I asked was how many offers did they have. One of the two that were there said they had 10 offers and were expecting more.

I then asked if any of them were cash. One of the realtors said “We aren’t allowed to say whether or not we do.” That isn’t exactly true in general. It could be that the seller instructed them not to disclose that type of info. If that was the case, kudos to the seller’s realtor for saying this.

But more than likely, they just didn’t want to say.

Why would they not want to say?

Because if there were any cash offers, disclosing so would deter any buyer who would be financing the purchase from making offers. What these realtors want to do is get as many offers as they can, hoping to get one with a higher price or better terms than the cash offer, then go to the realtor with the cash buyer and say “If you can match these terms from the better offers, your buyer can have the house.” Nothing at all wrong with that. They are representing their client’s best interest in doing so. It is what I would do for my sellers as well.

These two realtors were a lot of fun. I enjoyed meeting them. They didn’t know I was a realtor at first, so my response was “Don’t worry about it, I’m a realtor too and I can read between the lines.”

So yes, they did have at least one cash offer.