Hearing the phrase “seller’s market” strikes fear in many home buyers. But while buying a home in a seller’s market isn’t easy, it can be done. You just have to know how to make an offer on a house that will stand out among multiple other offers.
There are a lot of “soft” or creative ways to improve your chances, things that appeal to the emotions (or laziness) of sellers. But for now, let’s focus on the concrete ways you can present an offer to make it more appealing than the competitors. And remember, in a hot market, other buyers are your competitors.
Sometimes buyers will put a short expiration on an offer in hopes of forcing the seller to accept before someone else has a chance to make a bid. In a hot market, this doesn’t always work. The sellers know they have all the leverage and aren’t going to be too worried about you walking away because they took an extra day to get back to you.
Escalator going up
You want a house and you know have serious competition. Do you bust the bank and offer an outrageous amount over the asking price, only to find out the other offers were only at asking price or even below? Nobody wants to pay more than they have to, even in a super-heated market. Enter the escalation clause. You make an offer to buy the house at a set price and agree to “escalate” the price by a set amount over any other offers.
Of course, you have to set a cap to your escalation. Say you offer $300,000 with a $1,500 escalation with a cap of $326,500. If someone else offers $320,000, the seller can accept your offer at $1,500 more than that, or $321,500. You should request to see the offer that triggered any escalation.
But beware. Escalation clauses require you to bare your soul, or at least your top offer, to the seller upfront. Only include it if you know there are competing offers. An example might be a seller who announced they will open all offers on a certain date. If there aren’t other offers, the seller now knows what your bottom line is and will probably make a counter offer to bring you closer to it.
Time is (kind of like) money
Besides coming in with the top price, the best thing you can do to rise to the top of the offers pile is to eliminate as many contingencies as you possibly can. Do you need to sell your current house before buying? In a buyers market or even a balanced market, you may be able to make your offer contingent on the sale of your existing home. Fat chance doing that in a hot market.
Why should they wait for you to sell your house before they sell theirs when they’ve got other buyers lined up and ready to go? But while the sale of a current home is what a lot of people think of when they hear the phrase “contingent offer,” the truth is there are a lot of contingencies in a typical home purchase contract. Each one is a possible deal-killer and the seller knows it. On the other hand, each one is designed to protect you, the buyer. So how much protection are you willing to give up to boost your chance of getting the house?
You may be tempted to waive all contingencies, including inspection, appraisal and financing. But in most cases, that’s a risky bet that most real estate pros advise you not to make. Instead, reduce the impact of the contingencies.
The first way to do that is by shortening the compliance time. Instead of 15 days to respond to the seller’s disclosure form, agree to do in in five. Rather than agreeing to have a home inspection completed in 10 to 14 days, agree to do it within a week. At this point, the seller is looking to get to the end of the sale as quickly and easily as possible. Given the choice between a buyer who is ready and able to move fast and one who seems to be dawdling, the buyer ready to move is going to move into the home.
If the seller has set a date to consider all offers, schedule a pre-inspection before that date. You’ll get a full inspection report and can make your offer with no inspection contingency at all. If that’s not an option, you can also change the terms of your inspection contingency. Instead of a traditional inspection contingency where you can come back and request repairs from the seller, you can buy the house “as-is” but with a due-diligence inspection. That means you have a specified number of days to conduct a detailed inspection of the home.
If you find the kinds of minor things that would normally negotiated with the seller, you just accept them. But if you discover something truly deal-breaking, like a roof about to collapse or a giant sink hole in the basement, you can simply cancel the sale. The benefit to the seller is they know you aren’t going to nickel-and-dime them for every little thing you find wrong or delay the sale for minor repairs.
Cash is king
Financing contingencies are the next big hurdle. You are pre-approved (or should be) before making an offer, but you still want to include that contingency in case something happens to keep you from getting a loan. What could happen? You or your spouse could lose a job, your bank accounts could be hacked or any number of messy things that probably won’t but possibly could happen. That’s one reason why cash is king. A buyer who doesn’t need a loan to buy a home is going to rise to the top of the offer pile.
But if you don’t have a few hundred thousand in cash sitting around, you are going to need to secure a loan to buy a house. You can help make the case that your financing is solid by providing a pre-approval letter and putting as much toward a down payment as you reasonably can. It doesn’t make any difference to the seller’s bottom line if you put 5 percent down or 20 percent down. But the larger down payment indicates that you are in a stronger financial position and less likely to have financing issues come up.
Slightly different from the financing waiver. This one says if the house doesn’t appraise for the sales price, you can negotiate downward. It’s all just on paper, right? You know what you’re willing to pay, so shouldn’t that be the only appraisal that matters? Nope.
If you’re using a mortgage, your lender will insist that the house appraise for what you buy it for. If it doesn’t, you can either renegotiate price, pay the difference up front or walk away. But if you’ve waived the appraisal contingency, you’ll walk away without your earnest money.
The importance of being earnest
Earnest money is the deposit you make on a house when you write up an offer. Again, it really doesn’t impact the seller one way or another if the deal goes through. The whole point is to show that you’re serious and you’re willing to put some cash toward proving it. You won’t back out of the deal for no reason without losing your earnest money.
So to a seller, a big earnest money deposit signals that you are not a buyer to be trifled with. If you put up $1,000 in earnest money and the next buyer puts up $5,000 all other things being equal, the other guy is going to get the house.
Enjoy the halo effect
Some neighborhoods are just hot. It’s easy to see why. They have the coffee shops, trendy stores, restaurants, parks and nightlife that everyone wants to enjoy – and the prices to match. Everybody seems to want to live there, meaning you have a lot of competition. If you have some patience, consider looking in the less-cool neighborhoods right around these hot spots. You’ll have less competition and likely get a better price.
Best of all, the things that make the premier neighborhood so desirable often will begin spilling into adjacent neighborhoods.