More buyers are making concessions to win bidding wars amid a deepening housing shortage, record-low interest rates.
In June, 19.9% of successful offers submitted by Redfin agents in select major U.S. markets waived the inspection contingency, compared with just 13.2% during the same month in 2019. Winning offers waived the appraisal contingency at a similar rate—20.6%—up from 17.4% in June of the prior year and representing the largest share since at least 2018, when Redfin began tracking this data.
Waiving these contingencies is a common strategy homebuyers use to make their offers more competitive by assuring the seller that the deal will close without unforeseen hiccups and negotiations. 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. 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. The decision to do so should be made carefully with the guidance of a trusted real estate agent, who can also advise on the possibility of doing a pre-inspection before submitting an offer. A pre-inspection allows a homebuyer to learn about any potential issues a home might have before making an offer without the inspection contingency.
Bidding wars have been on the rise in recent months, with more than half (53.7%) of Redfin offers facing competition in June, up from 51.8% in May and 44.4% in April. Record-low mortgage rates, which fell below 3% for the first time in history this month, are driving strong homebuyer demand amid a severe shortage of homes on the market. Active listings—the count of all homes that were for sale at any time during a given month—dropped 20.7% year over year in June, the 10th-straight month of declines.
“The situation is out of control,” said Lindsay Katz, a Redfin agent in Los Angeles. “I put a house on the market the other day and within about 24 hours I already had 42 showings booked.”
Katz recently sold a home, listed at $685,000, to a buyer who beat out the 11 other bidders by waiving the appraisal and inspection contingencies, and agreeing to get their loan approved in 10 days. The standard in California is 21 days.
“The $770,000 winning offer wasn’t even the highest bid,” Katz said. “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.”
The share of offers that waived inspection contingencies dropped to 15% in April from 23.1% in March, with the share of offers waiving appraisal contingencies seeing a similar decline. This is likely because buyers were seeking out flexible arrangements due to the uncertainty caused by stay-at-home orders, according to Redfin lead economist Taylor Marr. With these restrictions now lifted in most states, the share of successful offers waiving these contingencies has rebounded.
Waiving contingencies isn’t the only way buyers can make their offers more competitive. About 20% of Redfin agents say that having a buyer write a personal letter to a seller has helped them win a bidding war, according to a July survey of nearly 400 agents. A similar share said that a good relationship with the listing agent came in handy, while 8% mentioned so-called rent-back agreements, in which the buyer rents the house back to the seller after closing—sometimes without charging any rent at all—so the seller has ample time to find their next home.
Some buyers are devising rather unorthodox strategies to win bidding wars. Ken Wile, a Redfin agent in Westchester, NY, recently sold a home to a family that offered to adopt the sellers’ chickens (the sellers kept their duck), beating out five other offers. The $540,000 winning offer was the highest bid, at $11,000 over the asking price. Believe it or not, that wasn’t the first time poultry was used to sweeten a deal.
“The market was totally dead during the first two weeks of March, but since mid-April, the phone has been ringing off the hook,” Wile said. “Now everyone is prepared for a bidding war.”
Data on offer contingencies is collected with a proprietary tool available to Redfin agents in select markets to enable them to quickly and easily complete offer paperwork for customers via their smartphone.
Statistics on inspection contingencies include data on all successful offers submitted by Redfin agents in Boston, New Jersey, Portland and Washington, D.C. Statistics on appraisal contingencies include data on all successful offers submitted by Redfin agents in Atlanta, Los Angeles, Philadelphia, San Diego and Washington, D.C.