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All’s fair (not quite) in love and bidding wars

by special contributor

All’s fair (not quite) in love and bidding wars

They say if you don’t like the weather in Chicago, wait 10 minutes and it’ll change. Well, the real estate market often feels the same way. 2021 is my 25th year in the industry, with the first five-plus as a full-time real estate agent before moving to the association management side. Take it from me (and many others), real estate is cyclical, as well. Well, it normally is, anyway. 2020 brought with it a new challenge — a “different” market for many.

The seller’s market that we’ve seen in so many locations in the Chicagoland region has extended beyond the usual. Most typically, a “market” lasts one season, maybe two. But this time the seller’s market that started somewhere around 2014 hasn’t let up. In fact, for many areas it has persisted greatly.

The National Association of Realtors has long suggested that a balanced market is around six months’ supply of inventory (aka, absorption rate). I’ve suggested for years that in Northern Illinois, a “balanced” market is closer to four months’ supply. My office is in Crystal Lake (McHenry County), and just doing a quick look back, in April 2016, the absorption rate was 4.7, and just a year later it had fallen to 3.5 months’ supply. In January 2020, it was 2.9, whereas in January 2021, it fell to a staggering 0.8! Never have I ever seen it that low. To say it is a seller’s market in McHenry County (and many of the suburbs) is a gross understatement.

Not only is it a crazy low “MSI” (months of supply inventory), but my other favorite statistic — percent of original list price received — shifted heavily. Just a year ago (January 2020), sellers in McHenry County were getting 93.8% of their original asking price. Now that number is up to 96.7%. In this category, it is my opinion that 95-96% is a balanced market.

But what makes this truly different is how agents today are dealing with multiple offers. We all know a buyer’s agent had better prepare their client to make an offer very quickly if they find a house that meets many of their needs. Notice I said “many,” as waiting for a home that checks all desired boxes may be impossible if you hope not to have to wait many months or years to find it. But in stark contrast to bygone days, when a listing agent might let all potential buyers know they are in a multiple-offer situation, today’s buyers had better be bringing their highest and best offer from the start, not expecting to get a fair warning of such. The market is moving fast, and sellers and their agents aren’t messing around with multiple attempts to secure the best price. Great offers are coming in from the start, and if your client wants to be taken seriously or have any chance of securing the purchase, they’d better bring their best up front.

Additionally, we’re seeing clients get creative with their offers. I recently heard of a buyer who suggested the seller could leave behind anything they didn’t feel like moving out. This example was an estate sale with an out-of-state executor. This clause really took the stress of having to clear out the house off the administrator.

Of course, “love letters” — those letters buyers sometimes write explaining what a wonderful family they are and why the seller should sell to them — have become very problematic for listing agents and sellers, as too often they include protected class information and, even worse, photographs. Many listing agents are letting their sellers know these are concerns and explaining the brokerage firm’s policy on such letters, often including not accepting them.

Lastly, let’s mention the crazy “escalation clause” offers. First and foremost, Illinois Realtors’ legal hotline discourages their use, as they often present issues for sellers, buyers and agents. However, we know some firms think they’re a surefire way for their client to win the bidding — often not true. To explain, an escalation clause is one where the offer includes a statement that the offer is $X but can increase to outbid any other offer by $Y. So, what happens when two (or more) offers include escalations? What if two (or more) are written to increase by the same dollar amount? And then if two (or more) are written, where does the bidding end? I understand that often these escalations include a high-end dollar amount, so wouldn’t that just become the offer amount? Furthermore, assuming we can work around the pricing issues, appraisers are still having trouble when the offer on a property is exorbitantly high. If the appraisal comes in low, it brings back other issues. For these and other reasons, escalation clauses may not be the savior some agents think they are.

In today’s market, finding new approaches to put the twinkle in the seller’s eye is key.

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