Pitfalls to avoid in a low inventory market

April 15, 2021

The weather is heating up and so is Utah’s housing market. Sales are booming, prices are rising and the number of homes for sale has tumbled.

In April, the average number of active listings fell 72% from one year ago, according to preliminary data from UtahRealEstate.com. In other words, for every three to four homes that were on the market last year, this year there’s only one.

With an unprecedented number of buyers actively searching for homes, it means there’s likely going to be intense competition for every home that goes on the market.

It’s creating a situation where buyers are making aggressive offers. For example, some buyers are agreeing to purchase real estate without contingencies. Others are agreeing to forfeit their earnest money as soon as the seller accepts their offer, and some are offering to pay cash above the appraised value.

These aggressive offers create risk for the buyer. Before you decide to use one of these strategies, make sure you understand the associated pitfalls.

Making earnest money non-refundable

In order to make their offers look more attractive, some buyers are choosing to forfeit their earnest money as soon as the seller accepts the offer. That means if they decide to back out of the purchase for any reason at any time, they will not get their money back.

One risk of doing this is that you might discover during your inspections that there is damage to the home that is significant enough that you no longer want to buy the house. If the earnest money is non-refundable, you will lose your deposit should you walk away from the deal.

For buyers who are putting down thousands of dollars, the risk may be substantial. To help minimize your risk, here are some tips:

  • Avoid making earnest money non-refundable if you’re making on offer on a house that you’ve never visited in person.
  • Ask to see the seller disclosures before you make your offer.
  • Make it clear in the contract that the earnest money will be returned if the seller does not follow through with their contractual obligations.
  • Specify in the contract the circumstances when the earnest money would be returned.
  • Make sure you are truly committed to buying the house and will have the financial means to do so.

Waiving contingencies

Some buyers are choosing to waive the due diligence condition, appraisal condition and financing condition that are found in the standard Real Estate Purchase Contract.

Waiving these conditions is risky because you’re offering to purchase a property without inspecting it, without knowing how much it’s worth and without the opportunity to know if you’ll get financing.

If you are thinking about using these strategies, here are some tips:

  • Clarify that you still have the right to cancel even if you forfeit your earnest money.
  • Clarify that you still have the right to inspect the property and get an appraisal on the property.

Paying above appraised value

Some buyers will offer to pay above the house’s appraised value. While this strategy will help your offer stand out, it’s important to clearly specify what you’re offering to do.

Here are a few tips:

  • Clearly specify a purchase price and an appraisal floor. An appraisal floor is the lowest appraisal value you’re willing to accept. Make sure you can cancel if the appraisal comes in lower than this amount.
  • Make sure you have cash to pay the difference between the appraisal floor and the amount you’re willing to pay above that floor.
  • Make sure you are comfortable paying more for a property than it may be worth.

When making aggressive real estate offers, there are many additional risks and risk mitigation measures not included in this article. Make sure you a working with an experienced Realtor who can help guide you through the pitfalls of this current market. Use our directory to find a local Realtor.