When there’s a bidding war, cash is king. And a recent Redfin study confirmed that it’s the only sure-fire way to win that dream house in a market this crazy.
Homebuyers who offer all-cash improve their chances of winning a bidding war by 290%, per Redfin’s study of clients buying homes between June 2020 and February 2021. And waiving the financing contingency is the second-most effective bidding-war strategy, Redfin officials said – improving homebuyers’ odds of winning by 66%.
Interestingly, Redfin data showed waiving the inspection contingency and conducting a pre-inspection – meaning the buyer conducted an inspection before making an offer – had no significant impact on whether a prospective buyer wins a bidding war.
That’s likely because those strategies are so common in a competitive market. And don’t even think about making an offer below asking price in 2021, officials said. You won’t win the bidding war.
“Offering all cash is usually an effective bidding-war strategy, but the market is so hot that even the number-one strategy has evolved this year,” said Nicole Dege, a Redfin agent based in Orlando. “All-cash buyers used to be able to go in a little below list price, but now I’m seeing a lot of cash offers that are at list price or higher. Anything below list price, regardless of the terms, just can’t compete.”
At the head of this particular snake is the COVID-19 pandemic, which forced lumber mills to close in 2020 due to health and safety concerns, thus crippling builders and construction crews with skyrocketing material prices. This, in turn, significantly cut the number of new builds in the country – meaning, if someone was looking to buy a home, they most likely focused on existing lots.
But an odd side effect of the pandemic kept buyers busy, even with home prices jumping due to demand: mortgage rates dropped below 3%, which kept the market busy – including with first-time homebuyers. The result: a bottleneck with scores of would-be buyers in a low-inventory market.
“The supply-demand imbalance has led to a sharp run-up in home prices, with the median sales price up almost 16% nationally, and almost 21% in the West,” said Mike Fratantoni, Mortgage Bankers Association senior vice president. “The lack of inventory on the market is preventing home sales from being much higher.”
Jim Johnston, a Redfin agent in San Diego said he’s recommending buyers look at homes listed around $75,000 below their budget so they have room to negotiate with the seller.
“I educate my buyers on the market so they’re not shocked when listing agents ask them to waive the appraisal contingency, which is often necessary in a competitive market because sale prices can be bid up well over the appraised value,” Johnston said. “When that happens, sellers want to know buyers have the cash to cover the difference between the appraised value and the sale price.”
Experts do believe inventory relief is near, especially when the spring buying season concludes, mortgage rates continue to creep above 3%, and the COVID-19 vaccine rollout reaches more people. More vaccinated people means the reopening of lumber mills, which should drive down building material prices and increase the number of new builds – leading, then, to less demand and less bidding wars.
But for now, inventory is still struggling to catch up to demand, and a cash offer is the best way to snag a home, Redfin officials said.
“It’s important for buyers to sweeten their offer in any way they realistically can,” said Rachel Wilson, a Redfin agent in Spokane, WA. “Sometimes that’s more cash, sometimes it’s waiving contingencies, but other times it’s a matter of figuring out what the seller wants, like a fast close or a provision to allow the sellers to rent the home back for a few months.”
