Bidding wars over houses, which were rampant mid-last year, may come back this spring, in part because of the real estate slowdown that this cold winter has imposed. So if you’re looking to buy this spring, it’s a good idea to arm yourself.
New data out from Redfin provides some insights into what wins a bidding war—and in Chicago, it’s surprising. While Redfin’s data says that nationally, all-cash offers are the most common way to win a bidding war, its Chicago data ranked all-cash offers third. According to Redfin’s study of thousands of 2013 Chicago home sales that its agents were involved in—the exact figure is proprietary to Redfin, but the firm gave me a credible figure—the strategy that won most often was waiving the inspection contingency. Redfin says 60 percent of the successful winners in those transactions did it; 45 percent wrote a personalized cover letter, and just 37 percent offered cash.
(Nationally, cash was 28 percent, waiving the inspection was 15 percent, and cover letters were nine percent.)
Renee Leung, a Chicago Redfin agent, says the tactic of dropping the inspection contingency “lets the sellers know that [the buyers] won’t try to re-negotiate after they’ve gotten the property under contract. It reassures the sellers.”
She says the frequent use of that strategy might have come from three factors:
- “There’s not as much cash going around” as in places like tech-booming San Francisco.
- Many properties—especially foreclosures and short sales—are being offered “as is” anyway, so there’s already no room for an inspection contingency.
- Perhaps the most important: because all real estate transactions in Illinois have an attorney review requirement, some buyers may feel that they still have an out if they don’t make the offer contingent on an inspection. They still get an inspection, and if worrisome flaws show up in the property, they can use the attorney’s review as their chance to alter or void the contract.
That “reduces the risk” of waiving the inspection contingency, Leung says. She cautions that going entirely without an inspection is very risky, and not something she’d typically advise a buyer to do.
Coldwell Banker Jenny Ames, one of the city’s top-selling agents, is skeptical of Redfin’s data. Of the “dozens and dozens” of multiple-offer scenarios she was part of in 2013, Ames says, “I think only one dropped the inspection contingency.” Her experience parallels Redfin’s national data, with all cash offers as the most common winning factor in a bid.
Not all cash offers actually become cash purchases. Some buyers who are certain they can get financing make a cash offer to look strongest in the sellers’ eyes. A closely related tactic with a similar effect is to refrain from making the offer contingent on getting financing. Redfin says that was used by nine percent of winners in Chicago bidding wars, and by 15 percent nationally.
Attaching a personal cover letter to the offer appears to have done better in Chicago than elsewhere: Redfin’s data says 45 percent of biding war winners used it here, while just nine percent did nationally. (Part of the difference could come from the fact that Redfin has a small share of the market here.) Leung says she represented buyers last year in a bidding war over a West Town home. They were active in the community, she says, and said so in their cover letter. They lost the bidding war, but when the winners’ contract fell through, the sellers came back to Leung’s clients largely on the strength of their cover letter. Even so, the clients did end up paying more than they first offered, she says.
There’s one bidding war strategy that Ames likes but that doesn’t register in Redfin’s list of top tactics: Putting down extra earnest money. Putting a big chunk of cash on the table at the opening of the contract talks signals “that the buyer is stable and is serious,” Ames says. (Some buyers don’t have the option of pulling together a showy pile of earnest money, of course. But those who are already in the position to make an all-cash offer could.)
Ames and Leung both say that bidding wars may come back big this spring. That’s in part because the inventory of homes for sale is low. But it’s also because this dreadfully cold winter has slowed people down from doing any serious house-hunting. The number of pending sales is down as a result. But when we finally thaw—and that can’t come soon enough!—the pent up demand may combine with low inventory to spark a whole new round of bidding wars.
As Ames forecasts it: “We’ll see four or five months of sales activity squeezed into three or three and a half months.”