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VOL. 45 | NO. 13 | Friday, March 26, 2021

Buying frenzy sends prices on self-perpetuating climb

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As the residential real estate market remains ablaze, a ritual for showing and selling homes has been established. The properties are listed and made active on a Friday, then are open for showings with 15-minute windows Saturday and Sunday, some with open houses Sunday so that shopper can view the frenzy firsthand.

Offers are to be submitted Sunday afternoon, and the results announced Monday.

With most homes receiving between 15 and 30 offers for tens of thousands of dollars more than list price, there are concerns with the listing agents and sellers as to whether the homes will appraise for the contract price.

It should be noted that most of these houses are not underpriced when they hit the market in the first place. And when the dust settles, most of the houses sell for an average of 12% more than list price. When the transactions close in 45-60 days, home values will be featured in tax records and the Multiple Listing Service as being 12% more.

At that point, new listings will be priced based on the most recent comparable sales – the sales that are 12% more than the houses were thought to have been worth.

Then the agents will pad them a bit, and the new listings will be as much as 15% higher.

What happens then? Will buyers have to tack on another 12% to the new price? Unfortunately, the answer seems to be yes.

Buyers used to be covered with three contingencies: Appraisal, financing and inspection. Now, listing agents are not even considering offers with appraisal contingencies since they know the appraiser will likely not be able to hit the mark.

With appraisal contingencies eliminated, financing contingencies are not acceptable. That means lending institutions and buyers might not be able to hit the moving target of sale price and appraisal.

For example, if a property is listed for $350,000 and the person is getting an 80% loan, that buyer needs $70,000 for a down payment. Make it $400,000, and the buyer would need $80,000 for an 80% loan, assuming the property appraises for $400,000.

Here is the rub: Suppose the home under contract for $400,000 appraises for $350,000, which is the right price, based on the prior comparable sales. The listing agent listed the house for the price supported by comparable sales.

If the buyer is getting an 80% loan, it is 80% of the $350,000, or $280,000. But the buyer has agreed to $400,000. Rather than needing $75,000, the buyer must come up with the difference between the sale price ($400,000) and the loan amount ($280,000). That means a down payment of $120,000.

The $45,000 difference could sink a first-time homebuyer, but would probably not be impossible for a relocating New Yorker or California who sold their former residence for millions.

By the way, the buyer is forced to provide proof of funds for the purchase.

For that reason, financing contingencies have joined appraisal contingencies in the obsolete bin.

That leaves only inspections as safeguards for buyers.

Most buyers say they will inspect on a “pass/fail” basis, meaning they will either terminate or take the house in “as-is” condition. They inspect the house, cite some deficiencies and ask for a few thousand dollars.

Realizing that trick exists, listing agents persuade the seller to accept contracts with no inspection contingency.

An example that occurred last week with a house for sale off Edmondson Pike near Old Hickory Boulevard, yet within the borders of Davidson County.

The house was listed for $550,000. One buyer wanted to go 10% more than list price, understanding that there could be no appraisal and no financing contingency. However, she felt she must have some protection and asked for an inspection contingency, but stated she would ask for no repairs. She would take it or leave it.

With an offer of $607,750, she came in fifth place. Four people offered more. So next week, when the situation repeats itself and the mass showings lead to multiple offers, this person will offer $70,000 more than list, leaving others in her wake or, perhaps, come in third.

There is no relief in White House, Madison, Mt. Juliet, Rutherford County or even Thompson’s Station. Those in need of contingencies may want to venture to Columbia, a great place to live.

Richard Courtney is a licensed real estate broker with Fridrich and Clark Realty and can be reached at richard@richardcourtney.com.

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