In San Francisco’s Bidding Wars, Home Prices Go Ballistic

WSJ: In San Francisco’s Bidding Wars, Home Prices Go Ballistic –  August 27, 2015

In the San Francisco Bay Area’s hot real-estate market, the question for many sellers isn’t whether they’ll get an offer. It’s how much over the asking price the offer will be.

“It’s easy to sell,” said Ken DeLeon, a real-estate agent based in Palo Alto. “The key is getting the extra $100,000.”

Even in an extreme seller’s market where bidding wars are common, upfront prep work and smart marketing are essential to getting top dollar for a property, homeowners and real-estate agents say. Sellers who invest $15,000 or more when listing their homes can recoup their costs many times over.

Several weeks before listing their 1,800-square-foot, loft-style condominium on Haight Street in San Francisco, Melanie and Adam Gensler spent $6,639 to repaint and recarpet the unit, $1,740 to repair and refinish the concrete floors and nearly $13,000 on staging—complete with contemporary paintings leased from local galleries through the San Francisco Museum of Modern Art. The effort was coordinated by the couple’s real-estate agents, Gregg Lynn and Alex Hachiya, of Sotheby’s International Realty.

The Genslers—he’s a financial and tax planner and she works in advertising sales—said they understood the need to freshen up and stage their condo before selling because they’d recently been house-hunting themselves. “For me the contrast has been pretty stark,” said Mr. Gensler, whose home’s interiors were handled by Mark Lopez at Guild Staging and Design. “Though I was surprised at the cost.”

Roh Habibi, a Bay Area real-estate agent who stars on Bravo’s “Million Dollar Listing San Francisco,” said he and a client, a 20-something Google employee, made 12 offers before finally winning a bidding war on his 13th offer, a place in the Mission District that he purchased for $900,000—about $200,000 above asking.

Mr. DeLeon said low pricing can create an “auction dynamic” that draws high bids. After a 1,904-square-foot home in Menlo Park, listed for $1.895 million, was sold for $1.92 million, Mr. DeLeon listed a comparable home on the same street. He intentionally priced it low, at $1.498 million, which he said helped bring in 13 offers and a final sale price of $2.29 million.

In Palo Alto, where the median sale price of a home is $2.667 million—up from $1.42 million four years ago, Mr. DeLeon said he experimented with extreme pricing, asking just $1 for a small condo he owned. “I knew I couldn’t have a client take a chance on that,” he said. It sold for $385,000, which he said was a record price for the complex at the time.

Setting prices artificially low leads to some guesswork for buyers. Nora Dahr and Firas Azmeh have been looking for a four- or five-bedroom house for themselves and four children in Menlo Park, Palo Alto or Los Altos. The couple, who moved to the Bay Area from Texas for Mr. Azmeh’s job at a mobile-security company, have put in seven offers and increased their budget from $2.5 million to just under $3 million with a large cash down payment and no contingencies. “The challenge now is that sellers aren’t even willing to accept asking price these days,” she said. “You’re almost bidding blindly as to what they want, which encourages you to come in way above ask.”

Mr. Lynn said underpricing can drive traffic and create momentum, but he has also seen it backfire. “Sometimes Realtors end up with egg on their faces” if a home gets no offers or only one low offer, he said. “It’s basically like you’re a Hollywood producer and you didn’t do well at the box office.” Other agents say if a home receives no offers, they’ll take the counterintuitive step of raising the price, as a way to indicate to buyers the price they’re willing to accept.

In the end, the Genslers priced their Haight Street loft at $1.55 million—the higher end of the expected price range. Mr. Gensler said he’d be happy with any offers above $1.6 million. Ms. Gensler said she hoped it would sell for much higher, though she said “the most important thing is that we sell it, so we could just focus on our family.” The couple purchased the condo in 2006 for under $1 million and spent nearly $150,000 on improvements.

Agents say the right price tag and attractive staging are key to prompting the kind of quick decisions that spark a bidding war. Mr. Lynn and Mr. Hachiya, like many Bay Area agents, also encourage sellers to get a thorough pre-sale inspection report, which for the Genslers’ loft cost $500. (Typically, buyers pay for this during the closing process.) A satisfactory pre-inspection report makes potential buyers more willing to put in offers that aren’t contingent on a home inspection. Buyers willing to waive the contingency on bank financing are also more attractive to sellers.

A few days before the brokers’ open house at the Gensler home, the listing got picked on Curbed, a popular real-estate blog, which gave the home “two thumbs up” and described it as “a tad underpriced.” Mr. Lynn and Mr. Hachiya held three open houses, one for agents on a Tuesday and two for buyers the following Saturday and Sunday.

Three days after the Sunday open house, the Genslers received two offers, one for $1.57 million and another for $1.62 million with a large down payment, no inspection or loan contingencies, a 21-day closing window and a four-paragraph personal letter with a photo of the buyers, a young couple relocating from Seattle. They accepted the higher offer, which was $70,000 over their asking price. The home went into contract nine days after it was listed.

Mr. Lynn said he thinks the property might have gotten even more offers if it had listed in the spring or the fall, peak selling seasons in San Francisco, but that the highest offer was strong.

Mr. Gensler said he hoped for a higher offer, but was happy with the three-week closing and no contingencies. “In the end, we got pretty much what my conservative working number was,” he said. Plus, they can now focus on enjoying their new place in the Oakland Hills. They paid $1.75 million for it in a bidding war, offering about 17% over the asking price.