It’s Sunday evening and John and Mary Homeseller and Anita Deal, their real estate agent, are sitting at the dining room table, ready to confront a pile of purchase agreements. The Homesellers were smart to listen to Ms. Deal’s advice and decided to entertain all offers simultaneously, rather than have them trickle in, piecemeal.
It’s a hot market, and the Homeseller’s own an attractive home, priced right. One of these offers will win the day. Which one? And, why is your offer the one that didn’t? What does your competition have that you don’t?
- They have full loan approval
Even a suspicion that you may have trouble qualifying for a mortgage could cause the seller to eliminate your offer from consideration. Your competition took the time to prepare for the war by speaking with a lender, and not just going through the pre-approval process, but by also taking it a step further (my preferred lender can do it in 24 hours) and going through the full underwriting process.
They will provide a letter from the lender stating that they’ve completed the underwriting process and they’re ready to go, pending the home appraisal. This also allows them to go in without a loan contingency, and be able to compete to an all-cash offer, which means lower risk to the seller, and better odds of winning.
Benjamin Franklin was right. “By failing to prepare, you are preparing to fail.”
- Their offer contains an escalation clause
Suppose Mr. and Mrs. Homeseller are asking $550,000 for their lovely home. Since your competition knows there will be multiple offers, their aim is to submit the cleanest, strongest offer possible.
So, their real estate agent, I.M. Best, writes the offer above full price, adding an escalation clause stating that Mr. Best’s client will pay $2,700 more than competing offers up to a specified maximum – an amount his client is comfortable paying, where there are no regrets if the Buyer doesn’t win the home for that amount, yet not too high that they are stretched beyond their means.
In essence, this buyer’s offer will increase incrementally up to that maximum. Is this a smart move? There are two schools of thought — yes and no.
Those who think it’s a wise move say that the strategy shows that you are earnest in your desire to win the home. And, in fiery real estate markets, the strategy grabs most sellers’ attention. We were able to secure “back-up” position today on a property that had over 10 offers, with a mere 10% down, with the help of this technique. My Buyer wanted to use this method so that he could bid aggressively, yet know that he was never paying much more than the highest bid, up to his max that he was willing to pay for the specific property.
The naysayers feel that buyers may get carried away and place the maximum bid higher than they can live with should they win the bidding war.
I always include within my escalation clause the request to show justification of the offer that escalated the bid pricing, and it’s always a good idea to request that your offer be held in backup in case the accepted offer falls through. It happens frequently in multiple-offer situations. In their frenzy to win the battle, many buyers make irrational offers that they can’t fulfill.
- Your offer has too many contingencies
Think about the scenario we painted at the beginning: Mr. & Mrs. Homeseller and their pile of offers. Unlike kids in a candy shop, they and their agent will scrutinize every line of every offer, down to the smallest detail. While we may not know exactly what their hot buttons are, we do know that they want top dollar. So, naturally, the offering price will be the first place in the contract they look.
After that, they will scrutinize the terms of each offer. How many contingencies is each buyer requesting and how long do they want to be able to take to fulfill them? Are there any deal-breaker contingencies, such as the buyer needing to sell his or her current home before consummating this deal? I just helped a couple sell one property to purchase another, and can say that there are tricks that can make the offer more appealing, yet this can still be a hard sell when there are multiple offers on the table. It’s usually best to sell the first home first, so you are then a cash buyer, which comes with many advantages in this market.
Offers with too many demands and contingency periods that are too lengthy for the current market trends will most likely end up at the bottom of the pile.
The competition that wins the home won’t ask the seller to buy him a home warranty, pay for closing costs or get nit-picky on the repairs he wants the seller to either make or pay for.
- They have more cash than you
Cash is just as much, if not more so, “king” in real estate as it is in any other financial transaction. As I just mentioned, all-cash buyer has an enormous advantage over buyers who need financing to buy the home.
If you can’t pay cash for the home, a larger down payment will be attractive to the seller as will proof that you have the funds to close the deal and the cash reserves to make up the shortfall if the appraisal is too low. Just like my client found out today, if you have less than 20% down, yet have access to gifted money from family, if you write that in to the purchase agreement and provide the family member’s proof of funds, it may provide the seller with just enough extra confidence to move forward and accept the offer. Yet some sellers don’t realize that even with 30% down payment from a buyer, where there’s more “skin in the game”, it doesn’t necessarily mean that the buyer is any more likely to take another penny out of his own pocket if the appraisal comes in low. Yet in that case, in the seller’s mind, at least, there’s the room (and proven funds) enough to try to negotiate on how to make up the difference and close escrow.
Some sellers are impressed with a larger earnest money deposit. Yet your earnest money (good faith) deposit, regardless if you are in a in a bidding war situation, should be the customary 3% of the purchase price, which will be applied toward your total down payment. It goes to escrow within a few days of mutual agreement of the purchase contract, and is held in an escrow account (this deposit is what comes back to the buyer if escrow is cancelled within contingency durations, instead of the contingencies being removed in writing to move forward to closing).
- They did their homework
You most likely lost the bidding war because your competition outsmarted you. They hired the right real estate agent and researched comps to discover current market value in the neighborhoods so they knew exactly how high to bid and when to stop. An agent that knows the market trends in the neighborhood should have a good feeling on how much attention a property will get, and a price range that it will most likely sell in.
The agent took the time to speak with the listing agent to find out what the seller’s hot buttons are – what their motivation is for selling and what the buyer could do to help the seller reach his or her goals, and then structured the offer to purchase accordingly.
For instance, suppose the seller is hoping to be able to rent back the home for a month or two after closing while he closes on his new home. This is valuable information for the buyer to be privy to because her agent can structure the offer to allow the sellers to remain in the home after closing, as tenants. In particularly hot markets, some buyers even offer the seller a reduced rent during the rent-back period.
- They’re faster than you
If you’ve missed out on any number of homes by not being among the first to view them, you understand that time is of the essence in a sellers’ real estate market. Sure, it’s challenging to create spaces, especially at the last minute, in a busy schedule to tour homes for sale, but it’s a must if you hope to be competitive in a multiple-offer situation.
Your competition has signed up on their agent’s website to be notified of new listings as soon as they hit the market. Their agents are on top of their game by vigilantly seeking listings that fit their clients’ criteria, and notifying them shortly after they are listed.
Like any battle, it’s incredibly hard to win a bidding war against an equally matched foe. Hone your tactics and strategy and enlist a battle-hardened real estate agent and the chances are good you’ll prevail. Your offer structure, with price and terms, as well as your agent, with communication and presentation of your offer package, really does matter, and will set you apart from the competition.
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