If you buy a home today in Denver you are most likely overpaying, but that is what you have to do if you want it. Perhaps the home value will grow into your valuation over the next year or two…that is the logic we are starting to use. I don’t know if it is record prices in the stock market, bitcoin reaching all time highs, or enthusiasm over COVID ending, but buying a home is not easy.
Looking at data year over year the Denver market is up 16% compared to January 2020. That is a crazy amount of short term appreciation by any measure. I sold a house about a week ago that went for about $25,000 more than the same new build down the street that is under construction. This home was about 2 years old, but it was available and thus demanded a premium over a brand new build! Anything that is move-in ready is just very competitive. New builds are 1+ year out for a townhome or single family home and even condos are 6+ months. The buy side is so tough that sellers are now asking for up to 60 days of free rent after selling the home so they have enough time to buy the next house. They would ask for longer if it wasn’t for that being the limit that Fannie & Freddie will allow before it becomes an investment property with higher interest rates.
Quite simply we just do not have enough homes for sale to absorb the number of buyers in this market. The number of offers on a “hot” property has gone from about 5-10 to over 20 in just a few months. Unless we see a material increase in homes hitting the market, the number of buyers will continue to stack up and it will only get worse before it gets better. Homeowners are stretching further and further away from Denver. I have two listings under contract in Brighton that are both cash buyers at way over asking price and non refundable earnest money. Several months ago Brighton was still one of the few places that VA and FHA borrowers could turn to.
The typical property comes on the market on a Thursday with showings through the weekend. Offers are due Sunday night and the Seller will review offers on Monday. We still have COVID-19 protocols so we are not supposed to do overlapping showings. Some homes have over 100 showings the first weekend. If you don’t watch your computer and book as soon as you can you may be blocked out of even getting to show the property. The agents who are doing this part time while they have another job just can’t keep up.
Now that I have laid the groundwork for Armageddon, I will say you just have to be smart and methodical. We have still had some luck getting homes under contract at close to asking price, but it has to be the right situation. Sometimes agents or homeowners make mistakes and misrepresent square footage, have too restrictive of showings, tenants still in place, very messy house, etc. These are all opportunities that you should act on. When I see lack of photos or really bad photography it is at the top of my list…because it is getting passed over by many.
The number of real estate agents in Colorado is starting to drop for the first time in a long time. Agents are getting burnt out of showing homes every single weekend, making tons of offers every weekend and coming up short. The listing side is fun, but you also get at least 30 calls the first weekend from agents trying to see where offers are at and submitting and resubmitting offers. They are desperate to be the top offer. If there was ever a time that agents earn their money it is definitely now. Lately I have had more clients than I have ever had and I am thankful. My day starts around 7 AM and goes to about 9 PM every day 7 days a week, granted there are some breaks in there and I usually get a workout in, but it is still go go go. It is not for the faint at heart. Further to this you have to be smart at contract writing as a Seller isn’t going to counter when they have 20 offers, they are going to pick the best and cleanest offer from an agent that knows what they are doing.
The current market just requires a change in mindset, you have to think about it as a financial transaction as well as what you are willing to risk just to have a shot at it. Non refundable earnest money is quickly making its way into most deals.
Loan Type is Very Important
Similar to before it is still very much a quality war, but the biggest issue we now have is that offers on homes are consistently exceeding a reasonable value that an appraiser would determine. This means you need “appraisal gap” coverage to put extra cash down to give the Seller comfort they will achieve that price. Without this coverage you can come back to the Seller and ask them to reduce the price if it doesn’t appraise. FHA and VA loans cannot contain this language and if they do contain this language it is not enforceable. This puts these loans at the bottom of the stack even if the price is to the moon. This ultimately means only cash and conventional offers are competitive.
Further to this you should use a local lender or at least a lender where you have a dedicated person to talk on your behalf. Remember they have a pile of offers and if there is anything that looks like you could be riskier than the others you just simply won’t get the house. Online lenders lure you in with great advertised rates, but they are well known to be full of delays and processes that infuriate everyone. Local lenders are just as competitive from what I have seen and listing agents like them.
While talking with your lender make sure they work weekends. Also, make sure they are willing to call the listing agent on your behalf when you put in an offer. These are small things, but everything helps in this market.
FHA and VA Borrower Options
As difficult as it is for all buyers, FHA and VA have an increasingly difficult time. The best option here is to consider new construction from day one. Most new construction is 10-14 months out, some even have waiting lists just to see pricing in 3 months. Builders are not picky (yet) about loan type, so this is a great option for FHA and VA borrowers if you can wait a year.
Now Standard Offer Terms
In my previous article I wrote about different offer terms to help make your offer stand out. I would say now these terms have become standard and then some. In competitive situations expect to have language that minimizes inspections or takes the home as-is, part of earnest money is non refundable, and appraisal gaps are large or appraisals waived altogether. This is all very fluid, but it is getting more and more rigid every week and more and more beneficial for the Seller. Buyers are also starting to pick up Sellers closing costs in many situations.
I have seen and now somewhat expect the contract price to be about 10% higher than asking. This is of course when asking is a fairly reasonable value. If you have a $500,000 home expect to be around $550,000. Armed with this information you should look at homes that are about 10% lower than your max, just so you can compete.
There are always exceptions in a market as large as Denver. A good search to perform on a weekly basis are homes that have been on the market for at least a week. For whatever reason these were passed over and asking price may pick them up. If you hear of someone wanting to sell, have your agent approach them and not with a lowball offer! Give them an offer almost as good as you would in a competitive situation and take it before it is marketed.
Sometimes your agent may get a sense if the other agent is disorganized, doesn’t seem to care, or the seller just wants it sold. In these instances still make a great offer, but get it to them fast before the weekend crowd hits!
Things move so quickly that we are also experiencing a high level of buyer’s remorse. Look at back on the market opportunities and jump on anything that pops back up.
The condo market and downtown Denver are starting to heat up a little bit, but still nothing like the single family home market.
Perspective Of The Competition
To prepare yourself mentally to write a good offer you should browse real estate in coastal California. Many buyers are moving here from California as they cash in on their huge equity gains and move to Colorado and pay cash. To them these homes are cheap and paying over asking with all cash isn’t a big deal for them. They are accustomed to crazy housing markets and bringing it with them. Now I have nothing against California or the people there, but you should study real estate there a little bit so you understand the perspective of the top buyers.
If you want that house and it is definitely the one, be prepared to be competing against 20 others. Be prepared to make an offer that risks some money to have a shot at it. Just make sure you still understand the value of the home and what risks you are taking.
Bidding War Tips
In trying to rationalize the bidding wars I was watching Ralph Breaks the Internet with the kids and suddenly I realized what I was doing wrong. Now hopefully there is more logic than this, but the first minute is a must watch.
Happy House Hunting!
Most important of all, do not give up! Just turn more stones to find the one, adjust your mindset, and always look forward.
I hope you enjoyed this article, please share your thoughts. Please fill out the contact form if you would like more information or to schedule a call.
Not responsible for accuracy or for updating this content, readers should perform their own due diligence and seek proper legal and tax counsel prior to making any decisions. This is intended as an informational opinion piece only. Original content is created by Greg Taft.