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John Fyten's Blog

By John Fyten | Agent in Palo Alto, CA

Just how common are non-contingent offers?


One of the biggest challenges our market throws at new buyers is the idea that offers here, especially in the extreme seller's market we've had since early 2012, are "often" (definition of "often" not given) made without contingencies—of any kind. No property condition contingency. No financing contingency. No appraisal contingency. No mother-in-law contingency.

None. Zip. Zero. Nil. No grinding on the seller for real or imagined defects in exchange for releasing your contingencies. No room for second thoughts, or at least the kind of second thoughts that don't cost you anything. No discussion, period. Get in contract, and you close escrow or put your initial deposit at risk.

That seems so, I don't know...drastic. So much like commitment. Yes it does, because it is. Sellers like to see commitment—they're funny that way. And if you were making offers back in September 2011, instead of September 2013, your indicated commitment level could have been much lower. Mother-in-law doesn't like the house? Then walk away and get your entire initial deposit back. Good luck, Mr. and Mrs. Seller, and good bye. That's why they called it a buyer's market.

"Often": let's try to quantify that word, as used in the sentence "these days, buyers of mid-Peninsula and South Bay properties often have to make offers with no contingencies in order to be successful". To do that, do we need to see every successful offer (or a representative sample) made in our marketplace to know whether it had contingencies or not? That would be optimal if a) all the listing agents would show me the winning offers they received, and b) I had a legion of grad students to review those offers without really knowing what they were looking at or for. That would be Science! but, alas, I don't have access to over-educated cheap labor (and worth every penny!), and agent collegiality only goes so far.

I've been advised that breaking into every local brokerage and stealing its transaction files might subject me to legal penalty, so we'll make do with the next-best thing, reading the MLS for whatever information it offers us between the lines. What status did the listing agent select the day he or she changed the listing from "active"? Did she change it to "pending show"? Then the accepted offer almost certainly had contingencies. Or did she change it to "pending do not show"? Then the accepted offer almost certainly did not have contingencies. The only reason I qualify either statement is that assuming that every agent is a stickler for detail introduces a margin of error to your results, size of margin unknown but potentially substantial (but less substantial than the grad student margin of error).

We'll analyze the same ten markets we used two weeks ago, during the same Q2 2013 time period.

noncontingent1

As you can see, there seems to be a strong positive correlation between average sales price and percentage of non-contingent offers, at least until you reach a certain elevated price point. But in fact, what we're really seeing is something that any agent who works a broad range of prices and cities could already tell you: that the closer you get to what I call the Zone of Gracious Living, whose epicenter is, by coincidence yet not entirely by coincidence, Stanford University, the more aggressive the buyer. And vice versa. South Bay buyers are, by and large, not nearly as aggressive as mid-Peninsula buyers, which is why South Bay buyers who drag their South Bay agents up to the mid-Peninsula to help them find a home so often do so poorly. I know why South Bay agents aren't the gunslingers mid-Peninsula agents tend to be: you tailor your way of doing business to your clients, and if you have conservative clients, you do business conservatively. What I don't completely understand is why South Bay clients are so much more conservative. It may be partly that the South Bay generally doesn't generate the kind of I've-got-to-have-that-house/neighborhood/city emotion the mid-Peninsula does. I'm not being provincial—I think the difference in sales prices bears out the contention that people generally consider the mid-Peninsula more desirable. But I also think that the mid-Peninsula attracts people who are more willing to take calculated risks, and in fact—here's a life lesson—that willingness may be why they can afford the mid-Peninsula.

Okay, now that I've alienated an entire region of California, let's say that you're thinking of making an offer on a hot new listing—you, and maybe twenty other buyers, of whom perhaps five or ten may actually make offers, of varying efficacy. The home came on the market Thursday, was open Saturday and Sunday, with offers due next Wednesday—the usual hyper-competitive, blink-and-you-miss-it scenario. You'd like to know how likely it is that the winning offer won't have contingencies. So you look at, say, San Carlos SFR and say "there's a 75 percent chance", or at Mountain View condos and townhomes and say, "there's a 67 percent chance". And you'd be shooting yourself in the foot, because those percentages include not just hot new listings but also cold stale listings, and how likely are you to make a non-contingent offer on a home that's been on the market eighty-five days? (Although it happens.) We need to separate the hot new listings from all listings, analyze those selling in, say, ten days or less (although in some markets almost all new listings are hot new listings) and see what kind of offers they've gotten.

noncontingent2

The non-contingent offer curve looks pretty much the same, only higher on the chart. Now you can see that 74 percent of San Carlos SFRs selling in ten days or less had non-contingent offers, as opposed to 65 percent for all San Carlos SFR sales for the same period. That's three in four sales, instead of two in three sales, and forewarned is forearmed. BTW I could have used fourteen days instead of ten and gotten the same results. The percentage doesn't change until about day eighteen or so, and even then, watch out for (and don't wait for) price reductions, because they can generate non-contingent offers (and the multiple offers that produce them) too.

On the other hand, the percentage difference between hot new listings and all listings doesn't change much, if at all, for the Santa Clara and Cupertino SFR markets. Los Altos' percentage, on the other hand, shoots from 75 percent to 84 percent, and Palo Alto's from an already sizzling 87 percent to an almost unbelievable almost 100 percent. And check out Mountain View: I doubt that you'll find another condo/townhome market that rivals or even exceeds neighboring SFR markets in competitiveness.

So why does the percentage of non-contingent offers drop sharply at about $3M? Partly it's that our marker for the $3M market is out in the hills, where the market is far less competitive than in the flatlands, although even in Portola Valley it depends to a certain extent on price range—the "cheaper" stuff is more likely to attract a non-contingent offer, simply because there are more $2M buyers than $5M buyers. You see the same thing in Atherton, where "affordable" Lindenwood, starting at about $3.5M, can be extremely competitive while more-expensive central Atherton is much less so, except for $4M teardowns. And while $5M listings won't attract a blizzard of offers even in hotspots like Palo Alto, they can attract a few very clean, top-dollar offers.

So will you have to make a non-contingent offer to get your dream house? Or even your nightmare house? Some of you are constitutionally unable to make non-contingent offers, while others will shrug and say, "I'll do whatever it takes". Most of you fall between these extremes, and to you I give this unequivocal advice: it depends.

Thank you, and good night.

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copyright © John Fyten 2013

 
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