Strategies to Help Homebuyers Win Multiple Offer Situations

Low inventory and rising prices have created a market environment where multiple offers are increasingly common. When prices are rising and new listings are priced using historic 3-6 month old comparable sales, new inventory is often underpriced. Educated brokers and buyers understand this and quickly offer list or better when the market supports this.

With home prices on the rise and gaining momentum buyers are pouring back into the market as they attempt to lock in today’s prices and historically low interest rates! This creates additional challenges for buyers who falsely assume the market is what it was 2+ years ago and seek to submit aggressive offers, below list (or even at full list in some instances) on desirable, well maintained homes only to have another buyer (who has likely been in the market longer and perhaps lost a home or two along the way) submit a much better offer. Many real estate agents are failing to properly educate their clients on the current market environment while many buyers refuse to accept this reality until they’ve lost a home or two in a competitive bidding situation. There are a number of strategies home buyers can employ to enhance the appeal of their purchase offers and win in these multiple offer situations and below you will find a few of the more common less advanced strategies. (the more advanced strategies are reserved for our clients)

Show the Sellers You’re a Qualified Buyer – Almost every multiple offer will be accompanied by a lender letter. To stand out, ask your lender for a loan preapproval letter, which is different than a prequalified letter. Being preapproved makes you a stronger buyer in the seller’s eyes.

Present a Clean Contract – The key to preparation is understanding the related factors of risk and reward in a contract. Every contract requires a home buyer to deposit earnest money into escrow, usually 1-5% of the sale price. This money is applied towards the purchase at closing. The buyer must either buy the house and close, or forfeit the earnest money to the seller.

If the buyer wants the earnest money back, the buyer must have a contractually permitted excuse for not buying. One type of excuse is an open contingency. A contingency is an event that must occur before the buyer is required to close. Contingencies, like the inspection contingency, are common. The inspection contingency gives the buyer the right to inspect and approve of the house’s condition. After inspecting, the buyer can terminate the contract with a full return of the earnest money if any adverse conditions are found which are unacceptable to the buyer.

But even where there are no contingencies, a buyer could walk away at any time, even the day before closing (an extreme example of “buyer’s remorse”). If that happens, the buyer forfeits the earnest money to the seller, however, they could also be sued by the seller for nonperformance, as well as their agent for the real estate commission and both parties could also sue for attorney and court fees. So a buyer includes contingencies in the contract in order to reduce the risk of losing the earnest money and being sued.

If you make one of several offers on a house, the risk of losing your earnest money is directly related to the reward of having your offer accepted. And that is of course an essential first step in buying your Dream Home! To increase the chances of having your offer accepted (the reward) you must be willing to increase the chances of losing your earnest money (the risk). To a seller, the perfect offer has no contingencies at all. If your offer has no contingencies, you have a strong incentive to close because the only alternative is forfeiting your earnest money. And more than anything else, every seller wants to close. But at a minimum the seller will probably get to keep your earnest money if your offer has no contingencies.

If you are competing against other buyers, you should consider submitting an offer without contingencies, or with as few contingencies as possible. If you do, this will increase your risk of losing your earnest money, in exchange for increasing your chances of getting your Dream Home.

Include as few contingencies as possible and definitely avoid such contingencies as: a spouse or partner’s approval, attorney’s approval, seller providing seller concession or leaving personal items. These items could very well be the determining factor in the seller choosing a competing offer over your own.

And don’t not even think about asking the seller to pay closing costs. It is not happening in the current market. Instead find a lender who offers competitive fees to keep your closing costs to a minimum and to help reduce your expenses and avoid the need for such assistance.

Skip the Inspection Contingency but Never the Inspection – The inspection contingency is a seller’s least favorite contingency. It not only allows the buyer to walk away with the earnest money, it also provides the buyer with an opportunity to attempt to renegotiate the terms of the sale after they contract terms have been agreed to. For example, if the buyer decides to test for radon and the test reveals levels above the recommended threshold, it would be common for a buyer to ask the seller to install a radon mitigation system prior to closing, or else the buyer might walk. And boy, do sellers hate to renegotiate in order to satisfy the inspection!

But it would be absolutely foolish for a buyer to forego the inspection entirely.  The only thing worse than missing out on the Dream Home? Buying it, only to discover it is a cash-sucking, time-consuming, stress-inducing lemon of a house. Not every story with a run down house has a happy ending.

A prudent and aggressive buyer, willing to assume a little risk but not too much may consider the following:

If it’s a home you love and if possible, evaluate the property’s condition (best if done by a professional home inspector) and waive inspections prior to making your offer. If the systems are old, the roof is old, or the siding is damaged take these issues into account in your offering price. Homes with unknown conditions, code violations, termite evidence, missing wiring or plumbing, mold, shifting walls or foundation problems or other red flags are valid reasons to avoid the home or negotiate an inspection period, but keep it short 7-10 days. Offer to provide the seller the inspection report.

Another option is to include the inspection clause but to waive the right to a remedy request. In this instance you retain the right to inspect the property, but agree that you will not ask the seller to make any repairs or improvements. In this instance you are agreeing to accept the property “as-is” but only after it has been inspected and you are aware of the home’s conditions and what it requires. If any issues are identified you would still have the option to terminate that contract and be entitled to the return of your earnest deposit, however, you should not ask the seller to make any repairs. That said, if an issue is identified that would otherwise prevent you from moving forward with the purchase, you could offer the seller the opportunity to reach an agreement that would allow you to confidently proceed with the purchase.

Skip the Financing Contingency But Make Sure the Seller Knows About Your Mortgage – Another contingency that may be omitted is the financing contingency. Under the financing contingency, if the buyer’s financing fails such that the buyer cannot complete the purchase, the buyer gets to walk with a return of the earnest money.  Oh my, do sellers hate it when financing fails on the eve of closing….

Unlike the inspection, there is no way to get the reward without assuming most of the risk. If you are absolutely confident in your financial condition and your ability to get a mortgage, then you may want to consider skipping the financing contingency. However, if your financing fails, it’s your problem, not the seller’s, and you will forfeit the earnest money.

Note that you should not simply omit the financing contingency. If you simply omit the contingency, you are telling the seller you don’t need a loan. If in fact you do need a loan to complete the purchase, you have breached your contractual promise and the seller no longer has to sell you the house and can simply keep your earnest money instead. To avoid that lousy outcome, you need to revise the offer so that you inform the seller you are getting a mortgage, but if it fails you will forfeit the earnest money.

Go as Big as You Can on Price – Obviously, assuming all of the risk alone won’t make you a winner. Price is of course the most important term. If you’re competing, forget any notion of getting a “deal” on the property. Decide how bad you want it, and offer that amount. The best way to pay as much as you need to without paying too much is through use of an escalation addendum. Remember, if you are financing your purchase your offer, and the purchase price are subject to the home appraising at this level. If the home fails to appraise at the contract price, you and the seller will need to reach an agreement as the bank will not issue a loan in excess of the home’s appraised value.

Include Appraisal Gap Coverage – Currently, on many listings in sought after suburban communities we are seeing offers as high as 10% or more above list price. While most of these properties will not appraise at the agreed contract price, to further compete and win the home, many buyers are offering appraisal gap coverage. What is appraisal gap coverage? Appraisal gap coverage is a buyer’s agreement to pay out of pocket (outside of their loan, and their down payment) a defined portion of any potential appraisal shortfall. For example a buyer might submit a $275K offer on a home priced at $250K, and offer $10K in appraisal gap coverage. In this example if the appraisal were to come in at $265K, the buyer would be responsible for covering the $10K shortfall. If the home were to appraise at the contract price of $275K the buyer would not be responsible for any additional out of pocket expense.

Submit a Large Earnest Deposit – Pending home sales sometimes fall apart. Many sellers are worried that once they commit to an offer, the winning buyer might back out of the transaction or default on the contract after all the other buyers have moved on and/or found other properties. The earnest money deposit is part of your down payment. By increasing it above normal limits, you are showing the seller you are serious about closing. You’re only offering the seller more money a little sooner than later, but it speaks volumes.

Many offers will include $500 or $2,000 of earnest money depending on the value of the home. To strengthen your offer consider offering a 3% or 5% earnest money deposit. Higher amounts of earnest money communicate to the seller your intention to close and financial strength.

Cooperate – When responding, provide everything in the form the seller requested. Corporate sellers that have specific forms and specific timelines and requirements will reject your offer if not completed in full and as instructed. Additionally, their agents may not even be required to present incomplete offers even if it is the highest.

Escalation Clause – Know the value of the home and make your best offer. You may not have a second chance. This may be well above list price. Consider an Escalation Clause; if two offers are deemed to be equal state you are willing to increase your offer by X dollars to break a tie with an equal offer. Often $1,000-$2,000 is a guide especially if you are in love with the home, provided you are not willing to lose this home over $1,000-$2,000.

Back-up – Permit your offer to be held as a back-up 10, 15, 20 days. It is not uncommon for the high bidder to make an irrational bid and not deliver earnest money or stop payment. The seller may accept a higher bid with an inspection, financing, or appraisal contingency that fails early in the contract. A seller might want or need a back-up buyer. This is especially true if they went out and contracted non-contingent on a new home.

Determine Seller’s Schedule – Offer to close quickly, 10 to 14 days for vacant homes. Sellers are concerned about liability, theft, holding costs and hazards with a vacant home. Offer to close at the seller’s convenience with occupied homes. Be flexible if the seller needs to find a new home, provide them that time and consider delaying possession after closing for more than the standard 3 days.

Additional Tips – Have your REALTOR communicate with the seller’s agent to get as much information about the number of offers, range of offers and time limits in a multiple offer situation. Have your agent request to be present if the agent is presenting the offers in person.

Communicate your offer prior to the deadline but not too far prior. Sometimes the listing agent will shop your offer seeking a slightly higher from a preferred client or agent or a competing agent in their office may see your offer. CONFIRM THE OFFER WAS RECEIVED.

If possible try to meet the seller and make a positive personal impression, develop a warm relationship. Meet the five nearest neighbors, make nice, and enlist them in promoting your offer and their desire to have you as their neighbor. These people may be long-time friends and still in contact with the seller even if the seller has moved. Let them know you plan to live in the home as opposed to leasing to a tenant. If you plan to paint, landscape, improve, be active in the community, have children their ages, went to the same college, or share similar interests, don’t keep that a secret. Develop an advocate.

Follow up persistently. Sellers may take a while to respond that shouldn’t mean you remain in the dark. Ask for an answer either way. I like to ask if my buyer were the highest so the buyer can move on if we weren’t. Then I ask if we were close. If so, I communicate that to my buyer and give them the option to submit a higher offer. Many sellers will consider higher offers even after the deadline.

In hot markets the goal is to get the home you want without paying too much over today’s real market price. Many markets, including Columbus and Central Ohio are seeing 3 or more offers within days of a desirable property hitting the market, as many as 20 or more offers within a week for properties that are highly desirable or underpriced. Some agents will purposely underprice new listings to draw multiple offers.

The real estate market is hot and the window to buy while mortgage interest rates are low and prices are reasonable is closing fast!

If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!

The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235

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