It’s no secret that the local real estate market is extremely competitive and oftentimes difficult for buyers. We’re sitting at historically low inventory of homes for sale as well as historically low interest rates for buyers. It’s a simple story of supply and demand that is driving this crazy market right now. So how do you position yourself as a buyer to make sure you’re writing the strongest offer that you can? Unfortunately that is an extremely loaded question. There are so many variables that go into the structure of an offer. However, below I outline how you can set yourself up for your best possible chance to win the deal.
The lender that you choose to work with plays an important role in your transaction. This is the person who will be originating your loan and essentially getting you the money to be able to purchase the property at the date of settlement. It’s extremely beneficial to work with a lender that can move and settle quickly. It used to be that a 30 day settlement was fine and most lenders can work within those terms. However, we’re increasingly seeing value in lenders who can close in as little as fourteen days in order to strengthen your offer. I bank personally and professionally with a large national bank. However, I would not use them to originate my loan because they cannot operate with the timeliness that we need to win in this market and oftentimes don’t close on time. Not to mention, a local lender that the listing agent is familiar with goes a long way in making your offer more attractive. Check out more on this topic in a previous article that I wrote: How to Choose the Right Lender.
Believe it or not your pre-approval letter can play a large role in a competing situation. There are a lot of lenders in the market that make the suggestion to write offers with pre-approval letters that show you’re pre-approved for the exact amount that you’re offering. This theory of negotiation only hurts you as it looks like you are qualified just enough to purchase this property and may be stretching a little to make it happen. If you’re qualified to purchase a property up to 1 million dollars but are only offering $750,000, my suggestion is you get your pre-approval letter for 1 million dollars. You’re not going to pay 1 million for a $750,000 property, but it shows that you’re highly qualified to purchase that property and makes the seller feel more comfortable about your offer.
The amount of down payment that you put down can affect the strength of your offer. If you’re in a competing situation you may be offering substantially over list price. With this, the seller wants to make sure that you are financially qualified to actually get to settlement and close on the property. Oftentimes in competing situations, offers are very similar. If you’re putting 5% down payment and another offer is putting 20% down payment, with all other terms in your offers being similar, the 20% down payment offer looks stronger. The higher down payment makes it look like they are financially stronger and capable to close instead of stretching to buy the property.
It may be that you are capable of buying the property with a larger down payment but you’re choosing not to for one reason or another. If that is the case, make sure your agent is clearly conveying that to the listing agent.
Earnest Money Deposit:
There’s no standard for how much earnest money deposit to put down but what we often see is somewhere between 1-3% of contract sales price. Depending on how competitive the property is will guide how aggressive you want to be with your earnest money deposit. This does play a role in the strength of your offer. The seller wants to see that you are committed to closing on their property, and if you don’t for any reason, they will potentially be compensated for their lost time on market.
Home Inspection Contingency:
The home inspection contingency is a way for the buyer to void the contract and retain their earnest money deposit. Within the terms of the contract the buyer has a specified number of days to complete the inspection and can void the contract without reason within that time frame. It used to be that ten days was a common contingency length, however the market has changed and a ten day home inspection contingency window is now a sign of an agent that doesn’t know the market. More on that later. It’s now common to see five day home inspection contingencies written in offers. We’re even seeing a lot of buyers submitting offers without home inspection contingencies in order to win deals. That’s a scary thing to do and I never suggest offering on a property without a home inspection but there is a way you can submit your offer without a home inspection contingency and still get the inspection done. For more information on that, read my previous article: Is a Home Inspection Required to Buy a Home?
Buyers who are highly financially qualified are using the appraisal contingency, or lack thereof, in this market to their benefit. The appraisal is paid for by the buyer but is really in place to protect the lender. The property must appraise at or above the contract sales price in order for the purchaser to secure the mortgage. If the property doesn’t appraise at or above the contract sales price (purchase price), one of four things must happen:
- The seller reduces the contract sales price to the appraised value
- The buyer and seller meet in the middle
- The buyer makes up the difference between the appraised value and the contract sales price in cash
- The buyer sends notice to void the contract and retains their earnest money deposit
Having this contingency in place isn’t a concern if the seller believes the property will appraise for the contract sales price. However, in a hot market, home prices often escalate well above the value that the property will appraise for. As a result, structuring an appraisal contingency to where the property doesn’t have to appraise for the full offer price or waiving the contingency all together can be very beneficial.
The financing contingency is there to protect the buyer in the event that they can’t secure financing to purchase the property for any reason. However, it’s one of those contingencies that doesn’t leave the seller in a good position. For those who are highly financially qualified and secure in their employment, removing the financing contingency can be a way to make your offer significantly stronger than the competition. However, it should be noted that this should only be considered after serious discussion with your lender and realtor.
Escalation addendums are a great way to try and win the deal at the lowest price that you possibly can. However, they’re also a great way to lose a deal over a relatively small amount of money.
From my previous article, Negotiating the Deal: An escalation addendum, sometimes called an “escalator”, is a way for a buyer to say “I will pay “X” price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my offer to “Y” price.” This strategy can be a good way to win a property at the lowest sales price possible, however it can also backfire on you and cause you to lose the deal. For example: buyer “A” offers $500,000 on a property with escalation increments of $5,000 up to a maximum sales price of $550,000. If another buyer offered $510,000, the offer from buyer “A” would automatically increase to $515,000 and net the seller $5,000 more. Seems like a no-brainer for the buyer, right?
Now, let’s say the second offer that came in at $510,000 was a cash offer without a financing or appraisal contingency (a common occurrence with cash offers). Buyer “A’s” offer would still escalate up to $515,000 and net the seller $5,000 more. But is your additional $5,000 enough to overcome the level of protection the seller felt with the cash offer? Maybe, maybe not. But had buyer “A” submitted the $550,000 all-in best offer from the start, they’re probably winning the deal.
Offering to rent back the property to the seller or using a Seller’s Post Settlement Occupancy Agreement is a great way to sweeten the deal. This would be where you make an offer on the property with a settlement date of “X”. For example, a settlement date of June 1st. That means you purchase the property and own it starting on June 1st. However, with a rent-back, the seller can still retain access to the property for a determined amount of time.
With a rent-back agreement you can ask that the seller pay for the time that they’re renting the property back from you or you really sweeten the deal and offer it to them at no cost. Something to consider is that you pay your mortgage in the rears and your first mortgage payment is generally at least one month after you close on the property. However, keep in mind that unless you’re paying cash for a property, in most cases the property needs to be your primary residence within 60 days of settlement per the terms of the loan.
As-Is Property Condition:
This option is less used than others noted above but it can be beneficial. With the As-Is contingency, the following items could be wiped clean from the sellers responsibilities prior to settlement:
- The seller doesn’t have to deliver the property free and clear of trash and debris. This way they could leave furniture that they don’t want. This could be extremely beneficial for the seller in a hoarder situation.
- The seller doesn’t have to clear up any violations with the city or county prior to selling. These would ultimately now be the problem for the new buyer to take care of.
- The seller doesn’t have to remedy any violations within the HOA or Condo association. These items would ultimately now be the problem for the new buyer to take care of.
Your Realtor Matters:
Who you’re working with as your realtor can have a huge impact in a competing situation.
- A realtor who has some clout in the real estate community may have a relationship with the listing agent
- A realtor who sells a lot of homes has a track record of showing they can get the deals to close.
- The guidance of which of the options to use above and when to use them can only come with experience.
Please find more on this topic in a previous article: How to Choose the Right Realtor
Check out some of our past articles and look forward to some Coming Soon articles:
- How to Choose the Right Realtor
- How to Choose the Right Lender
- Negotiating the Deal
- Settlement During COVID-19
- Does a higher down payment help with negotiations?
If you have specific questions or would like to set up an in-person meeting to discuss your scenario, please call or email me directly at 703-915-2244 / [email protected]. If you enjoyed this post and would like access to more of my articles/videos, visit the video/blog section of my website at: https://jcurrygroup.com/videos/
Licensed Realtor: VA & DC
J Curry Group at KW Metro Center
2101 Wilson Blvd #100
Arlington, VA 22201