Homebuyer demand has shot up at the same time as home inventory has plunged, resulting in more and more bidding wars and buyers willing to take risks to win them, according to a Redfin report.
In June, 19.9 percent of successful home purchase offers submitted by Redfin agents in Washington, D.C., New Jersey, Boston and Portland waived an inspection contingency, up from 13.2 percent in June 2019. The brokerage collects data on offer contingencies through an internal tool available to Redfin agents in certain markets so that they can quickly and easily complete offer paperwork for clients using their smartphone, the company said in its report.
Redfin also found that 20.6 percent of winning offers submitted by Redfin agents in Atlanta, Los Angeles, Philadelphia, San Diego and Washington, D.C. waived an appraisal contingency, up from 17.4 percent in June and the largest share since at least 2018 when Redfin began tracking offer data.
The report stressed that waiving the inspection and appraisal contingencies is a common strategy homebuyers use to make their offers more attractive to sellers, but the strategy has its risks.
“The inspection contingency allows the buyer to cancel a purchase or request repairs if they find an issue during the inspection period. The appraisal contingency allows the buyer to cancel a deal or renegotiate the price if the appraisal comes back lower than a specified amount,” the report said.
“In the event that a buyer waives the appraisal contingency and the appraisal comes in low, the buyer must have enough cash to cover the difference between the appraised value and offer price. These stipulations are built into standard home purchase agreements as protections for the buyer, so waiving them can put the buyer at risk.”
Why take the risk? The answer seems to be because the market is hot. Redfin noted that bidding wars have been increasing; 53.7 percent of Redfin offers faced competition in June, up from 51.8 percent in May and 44.4 percent in April. The brokerage attributes this to record-low mortgage rates driving buyer demand and a “severe shortage” of inventory, with active listings falling for 10 straight months, including a 20.7 percent year-over-year plunge in June.
“The situation is out of control,” said Lindsay Katz, a Redfin agent in Los Angeles, in a statement. “I put a house on the market the other day and within about 24 hours I already had 42 showings booked.”
The coronavirus pandemic is also playing a role. Katz recently sold a home listed at $685,000 that attracted 12 offers and sold to a buyer for $770,000, which wasn’t the highest bid, but the buyer waived the appraisal and inspection contingencies and agreed to get their loan approved in 10 days rather than the standard 21 days for the area.
“We could’ve gotten another $30,000 for the house, but we opted to take the safe bet over the highest offer because there was so much uncertainty due to the pandemic,” Katz said.
The report pointed out that the share of offers waiving inspection contingencies fell from 23.1 percent in March to 15 percent in April, likely because buyers wanted to have flexibility amid the uncertainty of stay-at-home orders. But those orders have largely been lifted in most states.
Inman has asked Redfin how many offers overall, not just winning offers, waived inspection and appraisal contingencies in June and will update this story if and when we hear back.
A Redfin survey of nearly 400 agents this month found that buyers can make their offers more competitive in other ways as well, including by having the buyer write a personal letter to the seller, having a good relationship with the listing agent, and rent-back agreements where the buyer rents the house back to the seller after closing while the seller finds a new home. One Redfin agent recently sold a home to a family whose bid was one of six offers but was the highest bid and offered to adopt the sellers’ chickens.
Email Andrea V. Brambila.
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