Call it a buyer’s security blanket.
Frustrated by a lack of inventory on the market in Manhattan and parts of Brooklyn, and, perhaps, burned by one-too-many losses, some buyers are bidding on apartments that they’re not entirely sure they even want. The idea: Win now, decide later.
It’s not until an offer is actually accepted that these buyers are taking a good hard look at the fought-over property. At that point, some are deciding that the home is not a good fit for them, while others are getting scared off by the very fact that they’ve won a bidding war and therefore might be overpaying.
“Essentially, would-be purchasers are buying time instead of the apartment,” said Warburg Realty’s Lisa Larson.
While this is not a new phenomenon — New York has especially lax rules surrounding making offers on properties — brokers say they have seen an increase in the last few months because inventory is so tight and so much of the new product coming online is high-end luxury with hefty price tags.
[vision_pullquote style=”3″ align=”center”]
[/vision_pullquote]
Larson recently represented the seller of an Upper East Side three-bedroom in the $2 million range. Sixty prospective buyers saw it within the first week, and eight submitted bids. But the winning couple backed out five days into the due-diligence period when the two could not agree on whether they both wanted the apartment.
While this may seem like an innocent strategy to buyers who are simply trying to find a home in a tight marketplace, it can be seriously detrimental to a seller.
That’s because, as Larson explained, a failed deal can cast a shadow on the property.
“You’re losing that important first week or two on the market when you have momentum building,” she said. “When that’s gone, it’s hard to get it back.”
Karla Saladino, managing partner of Mirador Real Estate, a boutique firm that works closely with developers and building owners, said the strategy has become so commonplace among buyers that she’s come up with her own system to protect her sellers.
“I’ve been sending out more than one contract for my sellers, as it damages them to have it on market too long,” she said.
Compass’ Julia Hoagland said the stakes are especially high in the $2 million-and-under category, where the inventory is tighter than ever and demand is especially strong.
“Buyers end up bidding on properties they don’t necessarily even like, and thus are not committed to the property after they win,” she said.
Hoagland said buyers do it because they’re tired of losing bidding wars. Timing is often a factor as well because many buyers have their own properties to sell or apartments they need to vacate.
“They’re looking in parallel at multiple apartments because there’s no financial commitment — it doesn’t cost anything to put in an offer — and they’re putting in more offers than they have in the past,” she said. “Nothing is ever final in real estate.”
Kathy Braddock
While the practice may frustrate sellers, an accepted offer isn’t binding until the contract is signed by both parties and a deposit delivered. That’s not the case in many other states, where offers must be submitted in writing and are legally binding once both parties sign.
“For good or bad, it is the way New York law is set up,” said industry veteran Kathy Braddock, co-managing director of William Raveis NYC. “Having your offer accepted is nice, but you’re not at the finish line.”
In New York, sellers may have three or four contracts out to see which buyer comes back first. Buyers, too, may bid on several properties. (However, the latter is less common, she noted, because most buyers aren’t going to pay a real estate lawyer to review separate contracts.)
Of course, backing out of deals is not universal.
Brown Harris Stevens’ Greg Roache said he hasn’t seen many buyers with “buyer’s remorse,” though he and business partner Roger Gillen have noticed some buyers offering significantly more than the asking price in order to shut down requests for final (and best) bids. While the phenomenon isn’t new, Roache said he’s seeing more buyers attempt to circumvent bidding wars because there’s so little “affordable” inventory coming onto the market.
For example, Roache said 50 people attended the first open house for one of their recent listings, a two-bedroom on East 79th Street that was asking $1.5 million. One buyer came back within hours and offered $1.5 million in cash — contingent on the sellers agreeing not to shop the apartment to anyone else.
The deal was signed within three days.
“They overpaid a little bit, but they didn’t want to risk [losing] yet another one,” said Roache, who tries to avoid having buyers back out of deals by insisting they return to see the property a second time before submitting a bid.
“This way, you don’t accept an offer after [the buyer] was in a crowded apartment for 10 minutes,” he said. “If you bring everyone back in a second time … that’s where the serious people step up.”