The Phoenix residential real estate market is very hot right now, continuing its streak of low supply, pent-up demand, and record-low interest rates. In the second week of September, the Valley of the Sun’s median home price hit a record high of $315,000, according to the Arizona Regional Multiple Listing Service. That does not mean that transactions are a slam-dunk for sellers. The first strategic aspect is what we call bulls-eye pricing, taking into account what’s happening in the overall marketplace and down to the specific neighborhood, which are in a period of rapid change. The second aspect is to vet and review buyers to ensure they are going to perform: the amount they intend to make as a down payment, how large a loan they are qualified for, and contingencies.
Sure, it is a thrill to receive multiple or above-market offers, but you need to make certain you are getting the right deal. If you don’t get the right buyer, your property is going to go back on market—known by real estate agents as a BOM.
Let’s look at an example. A listing agent prices a property in Gilbert at $450,000. The home is in excellent condition and in a great neighborhood, and the seller receives six same-day offers. They choose the top buyer, who offers $490,000—and who ends up not qualifying for the loan because the appraisal will not support the value.
Unfortunately, similar BOMs are blowing up daily across the Phoenix residential real estate market.
Taking Advantage of Today’s High Home Prices
How does a seller take advantage of today’s crazy prices while avoiding a BOM? A lot of different strategies can come into play, but the first caveat is to never take a 100% conventionally financed deal on pricing that’s $40,000 above fair market value. (For example, if five of the six offers are using FHA financing, that is a warning sign.) If the comparables are telling you and your agent that the market can support $450,000, you might be able to squeak up to $460K or $475K. An appraiser, however, is unlikely to justify getting to $490K; as a seller, you are equally unlikely to be interested in giving a $40,000 discount simply so someone can qualify for their home loan.
The appraisal does not necessarily kill every deal, of course. Using the above example, say there was a slightly lower offer among the six, for $485,000, but they were coming in with significant cash and only needed 50% loan to value. Maybe they are even willing to waive an appraisal contingency. An eager, financially sound buyer can close the gap on the pricing differential, and with a waiver of the appraisal contingency, the seller has a much higher level of assurance of buyer’s performance.
Keep in mind that appraisals are particularly challenging at the moment, since comps go back six months, which means incorporating the downturn from COVID-19 in March and April, as well as the subsequent boom. In an upcoming Strategic Seller post, we will discuss what you can expect from the appraisal process—and how you can assist your appraiser in maximizing the price of your home.
Read previous articles in the Strategic Seller series:
In a seller’s market, a savvy real estate expert can ensure you secure the best deal for your home. Contact R.O.I. Properties at [email protected] or call 602-319-1326, and we will help you formulate a strategic plan to make sure you’re getting the right buyer at the highest price.