Menlo Atherton Realty | Multiple Offer Bidding War

This page is oriented towards competing in and winning in a Palo Alto area multiple offer situation/Bidding War. However, many of the ideas and concepts put forth are equally applicable to non-multiple offer situations. Being an agent for more than 20 years I have successfully navigated hundreds of multiple offer battles. Having also represented many sellers in multiple offer situations I know exactly what the seller and listing agent are looking for in an offer.

Price Alone is Not Enough to Ensure Your Offer is Accepted

Whether you find yourself in a multiple offer situation or are offering on a “stale” listing which has been on the market for many months, secondary contract terms and ancillary documentation can sometimes make or break the deal. This is why I place so much emphasis on presenting a clean and comprehensive offer package. Please read through this document thoroughly and carefully consider all of the various points it conveys as this information can have a dramatic impact on your ability to purchase the dream home you and your family have selected.

This information will also help save you time, effort and frustration by avoiding writing offers which will not get accepted. Secondary contract terms can also have a huge impact on the attractiveness of your offer. Sellers and listing agents place varying degrees of importance on each term and condition. It is therefore smart to pay close attention to every detail in the contract and put forth every effort fill out each blank in such a way as to help our cause, not hurt it. This sounds logical and simple enough but what does it actually mean? A thorough understanding of this information on this page will give you the knowledge and insights necessary to get your offer right the first time.

Palo Alto Area Multiple Offer Bidding War Situations Explained

Silicon Valley and The Peninsula are very competitive marketplaces with many properties receiving multiple offers over the list price. Often in Palo Alto, Mountain View & Los Altos, many homes will receive multiple offers way way above the list price. Skillfully navigating Palo Alto multiple offer situations to a successful conclusion is often a very daunting task. Agents without the requisite skills often find themselves receiving the standard courtesy call from the listing agent telling them “thank you for your time but we have decided to go with another offer”.

These are the last words either of us wants to hear after having just gone through all of the effort to find a home, fall in love with it, analyze all of the disclosures and inspection reports, research pricing and finally make an offer, only to be let down It is almost impossible to win a multiple offer bidding war without applying the brute force of money. Your offer might be wonderful in every way but if there is another buyer offering substantially more money, you don’t stand a chance. If a buyer is aggressive enough to be the highest bidder, he or she is also likely to be receptive to a counter offer from the listing agent requesting some improvements to the other terms and conditions of the offer such as shorter or zero contingencies. No one wants to simply throw money at a multiple offer situation but without it you cannot win the war. But what can you do to minimize the amount of money you throw at it?

Here are a few tips:

Try to come to grips with the idea of offering super short or zero contingencies;
Offer a large down payment – the larger the down payment the higher level of certainty the listing agent will have in your ability to get a loan;
Present a clean, well-organized and fully-documented offer;
When visiting the open house try to make a friendly personal connection with the listing agent. If the seller(s) happen to be present then put on your friendly face and go meet them. Do your best to find common interests you can refer back to in your letter to the sellers. And whatever you do, don’t discuss anything negative, especially about the home;
Write a letter to the sellers in an attempt to make a personal connection;
Have your agent present your offer in person directly to the seller whenever possible. These days most agents request email offers but some agents still prefer the old fashion way – face to face. Getting in front of a seller with a clean, well-prepared offer and a nice letter from the buyers to the sellers can yield great results!
There are a few other minor things I will discuss later in this doc. Other than that, it boils down to money, money and more money!!!

Here is a fairly typical example of how Los Altos multiple offer situations play out: a Los Altos buyer with a 50% down payment and offering no contingencies is viewed as a very low risk offer. On the other hand, a Los Altos buyer offering a 20% down payment and a 14 day loan contingency (quite acceptable for non-multiple offer situations) will rarely (if ever) get that offer accepted in a multiple offer situation. If the 20% down 14 day offer is the highest price then it may (AT BEST) earn the buyer a counter offer requesting short or zero contingencies. But if your offer is in the middle of the pack in terms of price then you can forget about getting a counter offer. You will only get the standard phone call informing you they have chosen to work with a different buyer.

Contingencies greatly reduce the attractiveness of an offer. Some listing agents are of the mind that if you didn’t originally offer no contingencies you won’t be comfortable with a counter offer with no contingencies. You might sign it but you might also get squeamish once in escrow. The logic is that there are other buyers with offers as good or better than yours AND they don’t have any contingencies so why bother countering the offer which does have contingencies. In multiple offer situations sellers are generally receiving a price greater than the true market value of the home. This is due to what I call “emotional money.” Emotional money comes into play when Los Altos area buyers know they are in a bidding war and offer more than they planned to and more than they really want to. Here is why I call it “emotional money:” true multiple offer situations usually have one or more highly-liquid & exasperated buyers who are fed up with losing out in multiple offer situations and usually have a spouse railing on them to get a home, NOW!

These buyers will eventually give up and just pay silly money for a home just to put an end to the frustrating cycle of searching, finding a home they love, getting emotionally attached to the home, making an offer then losing out and having to start all over again. These exasperated buyers pose the greatest barrier to winning Palo Alto multiple offer situations. Homes which garner multiple offers are often priced slightly below market value. The goal is to allow the bidding process to raise the final sale price up above the asking price and usually above the true value of the home. An artificially low asking price also helps to create some buzz and awareness of the home and in the end will yield more offers than a home priced properly – yes many of these offers will not be competitive but they all contribute to the frenzied atmosphere surrounding homes priced artificially low.

Listing homes slightly below their perceived value is a proven strategy to gain multiple offers and get homes sold quickly and for the most money. If you are entering into one of these types of Mountain View multiple offer situations and are considering offering at list price or below you are most likely wasting your time. Palo Alto Multiple Offer Situations are very tough waters to navigate as all power lies in the hands of the seller and listing agent. An experienced listing agent will use this position of power to extract every dollar possible from buyers. It is very likely that one or more bidders (sometimes as high as 60% of bidders) will hold off until the last second to make their offer.

The logic behind this move is that it prevents the listing agent from giving buyers agents an accurate count of offers coming in. The fewer offers coming in, the less other buyers are typically willing to bid. If everyone bids less, those “last minute” agents perhaps stand a better chance of winning. The downside of this tactic is that most listing agents don’t like it and thus your offer can possibly be “tainted” by an unwise maneuver on the part of your agent. But in the end a high offer price will wash away any such perceived sins.

Who You Choose to Prepare and Present Your Offer is More Important Than You May Realize

Unfortunately many buyers feel as though real estate agents are all the same and that it doesn’t really matter who submits their offer. Unfortunately this couldn’t be farther from the truth. Listing agents have the potential to play a big role in determining whether or not your offer gets accepted, countered or rejected. Listing agents prefer to work with buyer’s agents who appear to be polite, skilled and well-prepared. This screening process somewhat reduces the likelihood of problems during the escrow process. This preference causes listing agents to exert pressure on their sellers to work with specific agents. This pressure introduces subjectivity into the deal. Once you insert subjectivity into the process it is no longer ONLY about the numbers. Intangibles now come into play. These intangibles can sometimes make or break a deal.

Let’s discuss what some of those intangibles are:

Listing agents prefer to work with buyer agents they like and get along with. They try to avoid going into escrow with agents who come across as brash, disorganized etc. Think back to high school and all of the personality types you encountered. The bullies, the brainiacs, the arrogant kids, the know-it-alls… and the list goes on. Those kids have grown up and are now real estate agents. This is why I work very hard to be organized, efficient and pleasant to deal with. It only takes a few minutes on the phone for a listing agent to get a feel for whether or not they would like to do business with you.
Clean and comprehensive documentation: There is much more to an offer package than just a contract. Ancillary documentation includes: lender letter, bank statements, signed disclosures, cover letter from Menlo Atherton Realty, personal letter from buyer to seller and a few other items detailed in this document. When listing agents receive an offer package which is comprehensive and well-organized it shows that the buyer’s agent is knowledgeable, thorough and well prepared. This indicates to the listing agent the entire escrow process is likely to be smooth.

Click on the links below to go directly to a specific section of this document.

Terms of the Contract:

purchase price
contingencies: financial and property condition
“As-Is” offer
initial deposit amount
liquidated damages clause
down payment amount
escrow period length
seller-specific terms

Purchase Price – How Much Should You Offer?

This is the million dollar question, how much to offer? Palo Alto multiple offer situations are very competitive. Typically, in order to win you must be willing to pay more than every other bidder. The goal is to bid higher than everyone else but not by too much. This is extremely difficult to do since we will have no idea how high the other offers are. It becomes even more difficult when you take into consideration this fact: In a multiple offer situation there will often be two highest bidders which are fairly close in price and terms. If so then the listing agent will do one of three things:

Take the highest offer and call it a day;
Give both buyers counter offers at a higher price and zero contingencies;
Pick one of the two offers (typically the larger cash down payment offer) he wants to work with (let’s call him buyer #1) and tell him there is another bidder (let’s call him buyer #2) at roughly the same price and that if buyer #1 can offer another $25k or $50k or reduce contingencies then the seller won’t counter buyer #2 and just give the deal to buyer #1.

The lesson to take away from the example is this: you might be the only all-cash bidder OR you may be the highest bidder OR you may have the shortest contingencies & escrow period but it is unlikely you will have al three. The seller and listing agent want all three in one offer! If none of the bids have all three features then they will give a counter offer to perhaps the top 2 or 3 bidders.

My goal for your offer is to AT LEAST get us a counter offer if not an outright acceptance. Unfortunately, 95% of the time bids DO NOT GET COUNTERED! Your first offer will likely be your one and only chance – so make it count! Remember, all but one or two of the bidders will get a phone call from the agent saying “thank you for your time and effort but we have chosen to work with another buyer”.

All your thoughts and efforts should be focused on trying to stay in the game and not getting the standard “thank you” phone call. Agents who are active in Palo Alto multiple offer situations use a pricing rule of thumb which goes something like this: in a Los Altos multiple offer situations the final sale price is likely to be approximately 1% – 2% (or more) greater than the asking price for every offer which comes in the door. There is nothing scientific about this number because no one keeps track of how many offers were received for each property. It may not be a very precise analysis but it does give you a little peak into the mindset of the buyer agents you will be competing against.

Contingencies – What You Need to Know

First let’s define a “contingency removal”. All contingencies stay intact until such time as you expressly remove them in writing and provide this document to the seller. In the event you do not remove your contingency within the time period specified in the contract the seller has the right to cancel the contract. This is the ONLY recourse available to the seller. Failing to remove your contingency on time does not entitle the seller to keep any portion of your deposit.

1. Financing Contingency

A financing contingency period is the number of days you have to arrange your financing and become comfortable with your ability to get a loan. During this period you will not get a final loan approval and you may not even be able to get the appraisal approved. The best you can hope for is a conditional approval letter from the bank. This letter will have a list of conditions you must meet prior to funding. During the loan contingency period, if you determine you are unable to get a loan, you can terminate the contract and get 100% of your money back. Most buyers believe they need a loan contingency period but I encourage my clients to always offer zero days for a financing contingency. Here is why. Sellers and listing agents want to be assured that the buyer will not have any difficulties obtaining financing.

To give them this assurance, many Mountain View buyers will offer zero days for a financing contingency and then request a property inspection contingency equal in length to the financing contingency they feel they need. This maneuver effectively removes any question marks from their ability to get financing and places those question marks squarely on the condition of the property. Property inspection contingency periods are very broadly worded paths of escape. Some buyers will look for any minor flaw with the home or the neighborhood and use this as their path of escape even though their true reason for wanting to terminate the contract is their inability to get financing or they simply changed their minds.

These are the buyers you will be competing against so I strongly encourage you to get your loan as pre-approved as possible prior to making an offer so you can be comfortable making an offer without a loan contingency. Obviously we would all love to have the protection of a loan contingency up until the moment the loan funded. Unfortunately Silicon Valley deals don’t work this way.

Sellers want certainty and usually get what they want when the market is strong. At some point during the escrow process the seller must make their final plans and arrangements for moving out of the home. The longer the contingency the less time the seller has (before the close of escrow) to make these arrangements. If the loan contingency were as long as the escrow, the seller would never know for certain if the deal is going to close and thus they are unsure if they should move out. With any contingency, the seller is completely at risk of the buyer not completing the sale and having to put the home back on the market and start over.

Additionally, requesting a long loan contingency tells the seller you really aren’t sure you can get the loan and this makes your offer appear risky. Sellers want to be compensated for this type of risk so if you want a long loan contingency then be prepared to pay a price for it in the form of stiffer negotiations from the seller and/or their demanding a higher purchase price. Not all sellers have the same motivations and fears but it is safe to assume that the longer you request for contingencies and escrow the less motivated a seller is to reduce their price or even sell you the home at all. As I mentioned before, sellers want to be compensated for the additional risk which comes with longer contingencies and longer escrow periods. This is why you will often meet resistance when you try to extend your contingency periods AFTER the seller has already accepted your offer.

This is essentially trying to renegotiate the purchase price after the fact. The seller is taking a risk by giving you a contingency period and you in turn are taking a risk by removing your loan contingency before you get final loan approval. That said, sellers may indeed put up resistance to extending escrow and contingencies but it is often quite easy (even in Palo Alto multiple offer situations) to get an escrow extension later down the road. The key for sellers is that before you remove contingencies you can walk away without penalty.

Once contingencies are removed the seller can keep up to 3% of the purchase price so they often feel fairly comfortable extending the escrow period once the buyer has removed all contingencies. During the contingency period buyers are normally able to get a pre-funding commitment letter. This is a non-binding commitment from the lender agreeing to fund the loan provided the buyer meets the terms and conditions outlined in the letter. The types of conditions usually found in this type of approval letter are: appraisal review and approval, explanation of certain items contained in your credit report, providing additional documentation regarding your income, funds, employment etc.

Loan contingency periods are not intended to give you a path of escape up until the point you get a final approval from your lender. There will always be a period of time you are at risk of the lender imposing additional restrictions or even possibly rejecting your loan completely. The most you can expect from a lender during your contingency period is an approval with funding conditions. Start the loan application process as early as possible in order to get yourself comfortable with making a non-contingent offer or requesting a very short contingency period.

Most of the offers in a competitive situation will feature a very short loan contingency or no loan contingency at all. These buyers are extremely confident they won’t have any problem getting a loan. They do not have a final approval or even a conditional approval. Yet they are confident and comfortable with offering a short contingency or even no loan contingency at all.

The loan contingency is arguably the second most important feature of an offer. Listing agents scrutinize loan contingencies very carefully, particularly in competitive or multiple offer situations. Loan contingencies are a super-highway of retreat for Buyers. It is quite easy and very common for Buyers to simply change their mind about a property or find another property they like better and simply exercise their loan contingency. Agents never verify a loan failure primarily because it is very difficult to prove or disprove. If a Buyer feels they need time to finalize their financing situation I encourage them to use the property condition/inspection contingency period. What this does is place the question mark of uncertainty squarely on the property, not on the forehead of the Buyer.

A loan contingency generally protects against 3 main items:

Appraisal – If the home does not appraise at the full purchase price, a Buyer can exercise their loan contingency and get out of the contract. If there is no loan contingency and the property does not appraise at the purchase price, you must come up with your portion of the difference between the appraised value and the purchase price. For example, if you intend to finance 80% of your $1,000,000 purchase, but the property only appraises at $960,000, the lender will only provide a loan for 80% of the $960,000 appraised value. Thus, the Buyer’s down payment now must be increased to make up for the smaller loan amount. Note: rarely does a property appraise below my client’s purchase price, but many appraise above. Before you make an offer I will prepare a comparative market analysis of what other comparable properties have sold for (the same data the appraiser will use), so you will know what a fair value for the property is and whether there is much risk of the home not appraising for the full purchase price.
Inability to Get the Loan – If your financial situation changes during the period of the loan contingency, perhaps from the loss of your job or a plunge in your stock portfolio, and you can no longer qualify for the loan, then the loan contingency allows you to cancel the contract without jeopardizing your deposit.
Spikes in Interest Rates – Page 1 of the contract is where I write in the terms of your loan, such as the interest rate, term of your loan, lifetime cap on the interest rate, and the maximum number of points that you are willing to pay for the loan. If during the loan contingency period rates spike up above what is written in these blanks, you can cancel the contract without penalty. The protection against rising interest rates this clause affords is actually very limited unless there is a long escrow period planned. Lenders allow Buyers to “lock in” a rate for 30 to 60 days (with a slight surcharge on the rate for the 60 day lock) once the lender has received your purchase contract. Thus, if the escrow is less than 60 days, the lender’s lock in protects you from interest rate spikes without the need for this clause. Note that for all of the protections mentioned above, they are good only for the term of your loan contingency. If after you remove your loan contingency you are fired from your job, the loan contingency will not protect you.

2. Property Inspection Contingency

This is by far the biggest and broadest of all contingencies. This allows the Buyer to have just about any type of inspection they want and use that inspection as cause to terminate the contract. Many buyers incorrectly believe they are only permitted to terminate if they find something negative in the inspection report but this is not true. The wording in the contract says the buyer must first approve “any matters affecting the property”. This is very broadly written on purpose to protect buyers by allowing them to inspect the home and neighborhood in any manner they wish. Listing agents will never question or challenge a Buyer desiring to terminate the contract via the property contingency period regardless of the flaw.

The contract vaguely states that a buyer can terminate the contract without penalty if they are unsatisfied with any “physical and non-physical matters that materially affect its value and desirability”. This is very much open to interpretation as to what might materially affect a home’s value and desirability. Let’s take Feng Shui for example. A Feng Shui expert could certainly find a flaw in just about every home in existence. This would certainly have an impact on the home’s perceived value by someone following Feng Shui principles. Whether a property contingency is desired is often based upon the findings of the inspection reports provided in the disclosure packet.

For example, if the property inspection mentions heavily sloped floors and calls for an inspection by a structural engineer, the potential for a damaged foundation would warrant a property contingency period to have the foundation properly inspected. If no property or pest inspections were provided in the disclosure packet, a property contingency is certainly recommended during which time any and all inspections should be performed. Any other issues dealing with the property, such as expansion and redevelopment potential should be dealt with either during the property contingency period or before making an offer.

Contingencies summary: It is always much safer for a buyer to have lengthy contingencies but in reality this is often not possible. Homes with broad market appeal which lack flaws are in great demand and often garner multiple offers. In these situations sellers will push for non-contingent offers. Unfortunately, in some Palo Alto multiple offer situations you will find yourself up against an all-cash or mostly-cash buyer willing to pay top dollar and offer zero contingencies. In those situations most buyers will choose to lick their wounds and move on to the next property. Once you have identified a specific property, ask me to review the various aspects of the situation so we can arrive at an appropriate contingency period tailored to the situation as well as your needs. Contingencies OF ANY KIND convey a sense of uncertainty. Markets of all types hate uncertainty (stocks, real estate, autos etc).

Long contingencies convey an even greater sense of uncertainty and will never get accepted in a Palo Alto multiple offer situation. 14 days is an eternity in a hot real estate market as most sellers in a Mountain View multiple offer situations are hoping for a close of escrow within 14 days, not contingencies that long! Property contingencies offer buyers the ability to terminate the contract for almost any reason imaginable. A buyer has the right to re-review any of the disclosures, get new inspections by professionals or even do their own visual inspection and subsequently terminate the contract without penalty. This easy path of escape is very dangerous for sellers in Los Altos multiple offer situations.

When a buyer terminates an escrow the seller must then go back to the market and relist the home for sale. When this happens it is difficult and sometimes impossible to recreate the same level of excitement and buyer interest as when the home first came on the market. Re-listing a home usually results in a lower sale price the second time around. This is why contingencies create a very tangible financial risk to sellers and listing agents. Sellers are usually willing to accept a somewhat lower-priced offer which has no contingencies over a higher priced offer which has lengthy contingencies. In essence, buyers must pay a financial premium for the right to terminate the contract without penalty.

Buyers who are willing to assume the risks associated with a completely non-contingent offer are rewarded by getting their offer accepted while the other bidders are sent home. Real estate is no different than most other aspects of life “no risk, no reward”. It is my job to help you accurately assess the risk as well as the reward. As for assessing the risk, this is what disclosures are for. Listing agents do their best to help us assess the risk associated with the condition of the property by providing us with all of the necessary seller disclosures and inspection reports.

The more comprehensive the documentation the more comfortable buyers can get with the idea of making a non-contingent, as-is offer. On the loan side of things buyers once again face more risk. The best way to minimize this risk is to get the loan process started as early as possible and make sure your lender has ALL necessary documentation. This will help you get comfortable with the idea of not asking for a loan contingency when making offers. Listing agents LOVE to see an offer with no loan contingency.

“As-Is” Offer

All sellers and listing agents prefer “As-Is” offers. I would estimate that only 10% of listing agents don’t care about the “as-is” clause. Roughly 75% of the time listing agents will request the offer be “As-Is” and approximately 35+% of the time the listing agent will insist on an “As-Is” offer and will tell you the sellers won’t sign a deal without it. Clearly you will be facing this “As-Is” issue when it comes time to make an offer so let’s look at “As-Is” and try to understand how it impacts you the buyer.

The “As-Is” clause in the contract is not as evil as many buyers make it out to be. The primary function of the “As-Is” clause is to remove Seller responsibility for all known and unknown defects. The caveat being a defect which was previously known to the listing agent or the Seller but was not disclosed. No amount of legal wording can remove a seller’s liability for defects which were known but NOT disclosed. Taking the property in “As-Is” condition, which unfortunately for Buyers is the norm in our area, generally means two main things:

The Buyer absolves the Seller of the responsibility for addressing any Section 1 repair items found in the pest report;
The Seller is not obligated to repair anything, thus the protection sections of the contract which requires the roof to be free of leaks, all built-in appliances be working, no broken windows, etc. no longer are enforceable.

For example, if the property inspector found that one of the window panes was cracked and the property is being taken in “As-Is” condition, it is the Buyers responsibility to repair the window if he so chooses. However, “As-Is” does not take away all Buyer rights. Additional property inspections can still be performed and are a necessity if the Seller has not already had all of the appropriate inspections and disclosures completed. If a defect comes to light via these new inspections the Seller still has no obligation to repair or compensate the Buyer for this repair. These items are typically negotiated between the buyer and seller with the seller always having the upper hand in the negotiation process since he is not obligated in any way.

However, if further inspections uncover previously unknown defects AND you still have a property contingency then you would have the right to terminate the contract during that contingency period. If a defect comes to light which was previously known by either the listing agent or the Seller but not disclosed, the Buyer certainly has the right to request repairs be made but may also be entitled to damages – even in an “As-Is” sale. The difficult part is proving that the seller or listing agent actually had prior knowledge of the defect. Whether or not you want to take the property in “As-Is” condition should be based upon the condition of the property as evidenced by all of the property inspection reports and disclosures.

Taking the property in “As-Is” condition when no property inspections or disclosures have yet been completed is not advisable. Property inspections cost approximately $500 and up (depending on the company and the size and type of the home). Pest inspections are approximately $250+ and are paid by the party who orders the inspections. If the inspections uncover more problems than anticipated, the first step is to try to renegotiate the contract to have the Seller address the problems or provide a credit for these new/unexpected problems. If these negotiations are unsuccessful, then the debate is whether to terminate the contract via your property contingency or proceed with the purchase and assume responsibility for the newly-found problems.

Initial Deposit Amount

A standard part of every offer is a copy of a check for the initial deposit (also known as the “good faith” deposit). The proper amount for the initial deposit varies from deal to deal. Below I will discuss three different types of offer situations. Each situation calls for a different minimum deposit strategy. This deposit check can be a personal check or cashier check and is made out to the title company where the listing agent has already set up the escrow. Since we are only submitting a copy of the check, it will not be cashed so the funds don’t actually have to be in the account when you write the check (think of it as a placeholder).

Once the offer has been accepted, you will have three business days to deposit the funds with the title company. When you make the deposit at the title company you do not have to use the same check you provided when you submitted the offer, only the same amount of money or more. You can give the title company a cashier check, personal check or checks from various accounts or wires.

Liquidated Damages and How This Clause Effects Your Deposit

Real estate contracts have a section titled “liquidated damages”. This section accomplishes a few things but for this discussion we are most concerned about how the “liquidated damages” clause affects your initial deposit. This section (valid only if initialed by all parties to the contract) places a cap (3% of the sales price) on how much money the seller can keep in the event the buyer terminates the contract without just cause. Below is an example: Let’s say you are making an offer on a home which is clearly a multiple offer situation and let’s assume the following:

List price = $900,000• Your offer price = $1,000,000
Your down payment = $400,000
Zero days loan contingency
Five days property inspection contingency

Let’s say you have decided to give the full down payment up front ($400k) as your initial deposit. The seller accepts your offer and six days later (one day after your contingency period expires) you are laid off and forced to terminate the contract. Since you no longer have any contingencies (assuming you already removed your contingencies in writing or you did not get a contingency extension) you are not legally entitled to terminate the contract. The seller is then entitled to keep 3% of the total sales price ($1,000,000 x .03 = $30,000).

The remaining $370k must be immediately returned to the buyer by the title company. If the property is subsequently sold for the same amount as you were contracted to pay then you could request to arbitrate the matter and seek a refund of some portion of the $30k. In the event the liquidated damages clause is not initialed by all parties the seller would have the right to seek damages from you for 100% of the difference between the eventual sale price and the price you agreed to pay in the contract.

Suggested Minimum Deposit for Multiple Offer Situations. Palo Alto Multiple offer situations are tricky competitions. The initial deposit is one of the ways a buyer can look aggressive and stand out among the other offers. This is when a buyer needs to really step up and offer the biggest deposit they can – I suggest to use your entire down payment as the initial deposit. Here are two reasons not to fear offering a large initial deposit: 1) No matter how large the deposit, the seller is only entitled to retain 3% of the purchase price in the event of a buyer default (assuming all parties have initialed the liquidated damages clause) 2) The check will not be cashed so if your offer is accepted you will have three business days to gather and deposit these funds into escrow. The only downside to this approach is that you will lose out on interest during the escrow period.
Suggested Minimum Deposit for Non-Multiple Offer Situations. “Normal situations” are homes which have been on the market longer than 14 days and are no longer likely to have multiple offers at the same time. Listing agents like to see initial deposits be a minimum of 3% due to the fact sellers are only entitled to retain 3% of the purchase price in the event of a buyer default (assuming both parties have initialed the liquidated damages clause). However, due to the lack of risk associated with larger deposits, I encourage buyers to offer the largest deposit they can. It is always wise to give the listing agent confidence in your financial capabilities as well as your serious desire to purchase the home. Sometimes listing agents associate small initial deposits with a lack of true desire to purchase the home or perhaps a lack of financial capacity.
Suggested Minimum Deposit for Short Sale or Bank Owned Properties. In short sales or any other type of bank-involved sales it usually takes a long time to get a response to your offer. Some banks can take as long as four months to respond. During this time it is quite common for a buyer to lose interest in the property for one reason or another. Additionally, once these types of deals are in escrow, they have a higher escrow failure rate for a variety of reasons. Suffice it to say the closure rate for bank-involved properties is much lower than deals which do not involve a bank. Due to the reasons stated above and the fact that most bank deals are not multiple offer situations, it is wiser and very acceptable to give an initial deposit of something less than 3%, perhaps 1% or $5k or $10k.

Down Payment Amount

The down payment is a very critical aspect of every deal, particularly in this difficult mortgage financing era. The size of the down payment sends a signal to the seller and listing agent. Most lenders are now requiring a 20% down payment. Anything less than 20% is looked at unfavorably by listing agents. The bigger the down payment the bigger the message you send to the seller and listing agent that you are serious about the home and you will not have any problems getting financing and closing escrow.

Escrow Period Length

For sellers, the sooner the better. A quick close provides the seller with a greater sense of certainty which is critical to sellers who are often in the process of purchasing another home. The faster the close the more you are showing how confident you are in your ability to close escrow. The longer the escrow the greater the risk the deal will fall apart. Sellers want to be compensated for this risk so try to keep your escrow as short as possible. Talk to your lender about a quick close.

Seller-Specific Terms

Sometimes sellers have some specific terms they would like to see in the contract. Maybe it is a long or short escrow or perhaps a free rent-back period. You stand a much better chance of getting your offer accepted if you can find a way to accommodate the seller’s needs. I always ask listing agents if there is anything specific their sellers would like to see in the contract. I will then discuss this with you to see if there is any way we can accommodate the seller and thus improve our chances of success.

Lender Pre-Approval Documentation

As you know, mortgage financing is much more challenging than years past. As such, sellers and listing agents have become increasingly scrutinous of buyers, mortgage brokers and their documentation. I cannot stress this enough. A “pre-approval” letter from Wells Fargo is much stronger than a “pre-qualified” letter from a lender no one has heard of. Additionally, buyers should get as far down the loan path as possible before making an offer. A letter which has wording to the effect: “subject to review of buyer’s credit and financial documents” tells the listing agent you have done very little to get pre-approved and therefore your approval letter is almost worthless.

Palo Alto Area Buyers should come prepared with a “pre-approval” letter as opposed to a “pre-qualified” letter. There is a world of difference between the two and listing agents are keenly aware of this. A true pre-approval letter can ONLY come from the actual source of the funds (lender) not an intermediary like a loan broker. A true pre-approval document can only be achieved after the money source (lender) has actually received, reviewed and approved the following: a completed application, credit check, tax returns, paycheck stubs and perhaps a variety of other ancillary documentation.

Anything short of this is only a “pre-qualification” letter, nothing more. This paragraph is worthy of serious consideration in light of the fact your loan approval status greatly affects the attractiveness of your offer and can have a dramatic impact on your offer’s success or failure, particularly in a Palo Alto multiple offer situation. If the home is for sure going to receive multiple offers then the quality of your lender pre-approval documentation can be very important.

In these Los Altos multiple offer situations there is a little trick I like to use which can really give you a leg up on the competition. Usually a listing agent knows right away whether or not his listing is going to attract multiple offers and he or she will tell you this right up front. Usually listing agents will set a future date on which they will review any and all offers at the same time. These few days before the offer date are all you need to get an additional pre-approval letter from the listing agent’s preferred loan broker.

Yes, that’s right, get TWO pre-approval letters. All real estate agents have a loan broker they like, trust and refer business to. The goal is to get the listing agent’s preferred loan broker to tell the listing agent your application and financial documents look great and that you should have no problem getting a loan.

This is a powerful recommendation from a trusted source. This can give you a little bit of an advantage over the other bidders. These loan brokers are more than happy to run your information through their system and give you a quote and pre-approval letter. They are hoping to earn your business. Whatever your current pre-approval situation, you can only benefit from seeking a secondary or backup pre-approval letter from the listing agent’s preferred lender. It never costs anything to get pre-approved and you are never obligated to use the listing agent’s lender once approved.

The listing agent will feel good that you were willing to go the extra mile and they will be happy they were able to refer a client to their friend/loan broker. Since you already have assembled all of your financial documentation to give to your first choice lender, it should be a very simple matter to email or fax this information to the listing agent’s loan broker.

This secondary pre-approval process becomes even more important if your current pre-approval letter is from a no-name lender. One important note: when seeking a second pre-approval make sure you don’t let them pull your credit again as this will reduce your FICO score by 3 points per bureau. Just give them a copy of the credit report pulled by the first lender you went with. Your first choice lender should be willing to send you a copy which you can forward to lender #2. You probably either paid for or will be charged for the credit report so it is yours and no loan broker should tell you otherwise. If they are unwilling to provide you with a copy of your credit report it is because they don’t want you taking your credit report and shopping around for a loan.

Bank or Brokerage Statements

You should always provide the listing agent with copies of your financial statements showing funds sufficient to close escrow (or more). Printouts of online statements are fine and you are welcome to cross out any account numbers or stock symbols you would like to keep private. The more assets you show the more confident the listing agent will be that you can get the loan and close the deal. These documents have become increasingly important as mortgages have become harder to get. In a Palo Alto multiple offer situation these docs are critical. The lack of financial statements gives the listing agent a reason to question your viability as a buyer because all the other serious bidders will supply statements so if YOU don’t, the listing agent will certainly be wondering why.

Personal Letter to the Seller

On the other side of every transaction is a seller, a human being. People with feelings and emotions just like you and I. If there is anything we can do to elicit some positive feelings and emotions we should do it. What I recommend is for buyers to write up a letter to the seller discussing why they love the home and the neighborhood as well as any personal connections you may have to the neighborhood. Perhaps you or a relative grew up in the same neighborhood or the home has the same floor plan as the home you grew up in and it brings back memories of…… (something good).

Another approach is to find out where the seller and the seller’s children or siblings went to school. Perhaps one of your siblings, friends or relatives went to the same school as the seller or seller’s siblings, children or grandchildren. Nowadays some of this information is readily available on the web. The goal is to make SOME connection with the seller. Even if it is a remote connection it is better than no connection at all. Most sellers are happy the buyer cared enough to at least try and make a connection. This same connection can be made with the listing agent as well. You will never lose a deal because you wrote up a letter and made a connection with the listing agent or the seller.

How to Tell if a Home Will Receive Multiple Offers?

There are a variety of factors we can examine in an attempt to ascertain the likelihood of this home garnering multiple offers. As we all know, some cities have a tendency to always attract multiple offers. A quick look at a spreadsheet of sales in your price range for the past six months will give you some idea of how competitive the market is in that area. Ask me to run a quick analysis for you. Without looking at a spreadsheet here are a few rules of thumb you can use to guesstimate the likelihood of any particular home receiving multiple offers:

Palo Alto is the epicenter of multiple offer craziness. If the home you seek is in Palo Alto there is a good chance you will be fighting a multiple offer battle;
The further you get from Palo Alto, Mountain View & Los Altos the less likely the home will receive multiple offers. For a variety of reasons everyone wants to live in these three cities and that buying pressure spills over into surrounding cities. The farther away from Palo Alto, Mountain View & Los Altos you get, its less likely the home will receive multiple offers;
Homes west of 280 very rarely get multiple offers (except in strong seller markets). The basic idea is the farther away from civilization the home is the less buyer are interested. Homes close to 280 but on the west side of the freeway sell pretty well but the farther west you go the lower the price and the less likely you are to encounter a multiple offer situation;
Homes which are vacant and staged are more likely to attract multiple offers. Here is why: a. Vacant homes are easy to show. 70% of all the traffic a home will ever receive happens in the first two weeks so a home which is available to show 24 hours a day will receive more traffic than a home requiring an appointment. b. Vacant homes show no traces of the current owners. It is more difficult for buyers to envision themselves living in a home which has personal belongings everywhere;
Does the home have Palo Alto schools? We already know homes in the city of Palo Alto often receive multiple offers but this also holds true for small portions of surrounding cities which are actually within the boundaries of Palo Alto schools or Cupertino schools;
Seasonal Influences – spring and summer are always more active than fall and winter. Peak activity is in the April – June time frame. A home being sold in this window stands a greater chance of receiving multiple offers than say a home being sold in August or January;
Price Range – if your target home is priced at the high end of the range for that neighborhood it is less likely to attract multiple offers than a home priced at the low end for that neighborhood;
Market Analysis – before we decide on a final offer price I will do a thorough market analysis which will help both of us more fully understand the current state of the market for your target home.

Conclusion

At the end of the process the winning bid will invariably look something like this: Price: 2% – 20% over asking price. Property inspection contingency: 0-7 days. Loan contingency: 0-7 days. “As-Is” purchase. Down payment: 30% or more. Close of escrow: 30 days MAX but often shorter. In Palo Alto it can sometimes be difficult to win a multiple offer battle without your offer being 100% cash with no contingencies.

This information is often tough for buyers to swallow. I know each city is different and each property situation is different and the market is not always hot but after years of experience with multiple offers I can assure you the information I am providing here is solid. Winning a multiple offer battle is not rocket science and there is no magic involved. If you have the best combination of price, terms and a savvy agent – you win!