When you find yourself in a market where there are more qualified buyers than there are homes for sale, you’re in a Seller’s market. And when buying a home in a seller’s market you have to bring you’re A-game!
Below you will find the most comprehensive list of strategies you can use when formulating the most attractive for any seller. Pursuing these tactics will surely make you stand out in the crowd.
Some strategies might be abundantly obvious and others you may not have known were even possible. Others still you may not even have the ability to do at all. Some tactics are mild and others extreme. Read through the list below though and you will surely learn a new strategy. And ask an experienced agent about the nuances and pitfalls of each when deciding how to compose your offer.
Risk
* Mild/Easy
** Moderate
*** Extreme/Difficult
Make your offer as clean as possible *
A clean offer should not be contingent on the sale of another property or have other financial constraints. It should also be free of seller concessions, which are things that a buyer asks for outside of the offer price, such as help with closing costs, seller financing, etc.
Offer over asking price **
When you’re likely to encounter a bidding war, offering above list price is table stakes. Work with your real estate agent to determine how high you should go so you don’t exceed your budget. If you’re concerned about that happening, search for homes below your ideal price range, so you can wow the seller when you come in with a high bid.
Offer to pay closing costs **
Traditionally there are lots of closing costs paid by the seller. One way to make your offer stand out is to absorb those costs on your side of the equation. Even if it’s only $2-3k, pointing out your willingness to do this on the seller’s behalf will be meaningful. And some lenders will even roll these costs in to your loan so you don’t have to come out of pocket any additional cash. Some of those fees you could absorb include;
- Title Fees
- Escrow Fees
- Retrofit costs
- Home warranty fees
- Notary fees
- Recording fees
Offer additional earnest money *
This doesn’t actually cost you anything. Your earnest money is a good-faith deposit indicating you’re serious about buying the home. Increasing the amount of earnest money you put down conveys that you’re very serious about wanting the home. And you’re not actually paying any more for the property because the money goes toward the home’s purchase. Seems like a wash but some sellers perceive it as a substantial concession.
Offer a larger down payment **
Again, in the end the contract purchase price is the purchase price. Whether your down payment is larger or small, you’re still paying the negotiated price. So, if you have the means to put down a larger down payment, the seller perceives this to be a stronger offer. It also means your LTV (loan to value ratio) is lower, thereby making it easier for your mortgage lender to get your loan approved.
Include an “Appraisal Gap” clause ***
Appraisal gaps are among the most common problems in a seller’s market. Including an appraisal gap clause is a very good strategy used by home buyers to get their offer accepted in a competitive real estate market. An appraiser will likely value a home for less than its contract price when homes appreciate faster than appraisers can justify with market data. A low appraised value can cause a deal to fall apart entirely in some cases. An “appraisal gap” is the difference between the appraised value of a home and the purchase price in the sales contract. An “appraisal gap clause” is used in a sales contract to guarantee that the home buyer will cover the monetary gap between the appraisal and the sales contract if an appraisal gap becomes an issue. Let me explain how this works below.
For example, if a home is listed at $1,000,000 and ends up going under contract at $1,100,000, it can be challenging. If the appraised value comes back at $1,000,000., either the buyer needs to bring an extra $100,000 cash to the table to close or the seller may need to drop the contract price back down to 1,000,000. Often, this gap causes the contract to fall apart because no resolution can be found.
When a buyer offers an appraisal gap clause, they’re stating that they have extra funds to fill in the gap between the appraised value and the contract price. This perk gives the seller extra assurance that they won’t be in a situation where they are asked to drop the agreed upon contract price.
If you’re a seller and accept an appraisal gap, be sure to ask for proof of funds that the buyers have the extra cash. Some buyers will offer the appraisal gap out of desperation to get their contract accepted, but they have no actual plans of going through with it.
If you’re a buyer offering an appraisal gap, take some time to understand this method’s ramifications. First, you are essentially paying more than fair market value. Second, if you happen to do this right before the real estate market tanks, you may be stuck with an overpriced house.
Pay with All Cash ***
Yes, I know. You don’t have another million dollars laying around in your wall safe, right? Not many of us do. You might be surprised how this can be accomplished though. Even if you have access to the cash for a short period of time, you can always immediately refinance the house to get your cash out to pay back the source of the money. A few sources of capital might be;
- Equity from other assets
- Short term loan from a friend or relative
- Credit line
- Short term bridge loan
- Funds from a retirement account (be aware of any penalties that you may or may not incur)
And then, once you purchase the home, refinance the home and pay back your lender.
Release your earnest money ***
This is an extreme tactic because you’ll most likely never get your earnest money deposit back if your transaction falls apart. But if the transaction stays on track and you close, it might have been the difference between successfully buying the property or not.
The way this works is you write a clause in to the contract that says your earnest money deposit “shall be released through escrow to the seller and become non-refundable upon removal of XXX contingencies”. You can make the release of funds trigger upon the removal of any of the contingencies you choose – loan, appraisal, inspections, title. etc.
Get pre-approved on your loan **
First, know the difference between “Pre-qualified” and “Pre-Approved”. Once you understand that. Get pre-approved. This will help you compete with cash offers too. Taking the risk away from the seller and not make him worry about you getting your loan approved is extremely attractive. If you prepare early you can have a big advantage over all those that did not.
Have mortgage lender contact listing agent *
You can have your mortgage lender call AND email the listing agent just to boost his confidence in your ability to secure your financing. They won’t do it without asking but I have yet to run in to a lender that wouldn’t do it when asked.
Shorten your contingency periods **
The California Residential Purchase Agreement has lots of default language in it including the time frames associated with the contingency period. For example;
- Loan – 21 days
- Appraisal Contingency – 17 days
- Inspection Contingency – 17 days
- Etc.
Abandoning the default language and shortening those contingency periods means less time the seller has to worry about falling out of escrow. If you’re going to cancel, you’ll have to do it faster thereby giving the seller the opportunity to find a substitute buyer that much quicker. This is attractive to a seller.
Waive some or all of your contingencies ***
Inspection Contingency:
Waiving your inspection contingency can be a risky move but it can really help seal the deal. Typically, findings from the inspection would be reported to the seller and agreed-upon repairs would need to be made before the deal could close. Depending on what issues are found, the seller could end up spending thousands of extra dollars in repair costs in order to sell the house. Waiving the inspection contingency sidesteps this issue altogether because you’ll accept the property “as-is.”
Even if you waive the inspection contingency, you still have a right to an inspection, which you should still do as it will tell you what repairs you’ll need to make once you take possession of the home. Also, if the inspection comes back revealing major defects with the house, you still might have other contingencies in place that will allow you to cancel if need be (like loan or appraisal, or seller disclosure contingencies).
Note: In California, it is the seller’s duty and obligation to disclose all material facts that may affect the value of the property in any way. So theoretically, the seller should be disclosing the major issues anyway in his disclosure package.
Appraisal Contingency:
Getting the house appraised ensures you’re not borrowing more than the home is worth. When an appraisal contingency is included in the contract, if the house doesn’t appraise for the agreed-upon price, the seller will need to accept a lower amount, or you can walk away from the deal. That’s a big gamble for the seller, especially in a market where homes are selling for a premium. By waiving the appraisal contingency, you agree to pay the contracted price even if the home appraises for less. In that case, you’d need to ensure you have cash on hand that you can bring to closing to cover the difference.
Be flexible with your timing *
Don’t offer to close in 10 days if that’s not important to the seller. Chances are, the person selling their home is simultaneously trying to buy a new home. Timing those two things perfectly can be tricky, and they may need extra time to find their new home before vacating their current one. To sweeten the deal, you can offer a flexible closing date that suits the seller’s timeline, or you can offer a leaseback option in which the seller leases the house from you and continues to occupy it for a specified period after you’ve closed.
As a rule of thumb, close fast on vacant homes and close slower on occupied ones when appropriate. Above all, know which is important to the seller and write your offer to accommodate them.
Use an escalation clause ***
So, you’ve put together the shiniest, most attractive offer you could think of. But what if someone else comes along and outshines you by just a little? It could tip the tables in that other buyer’s direction. One way to avoid that is with an escalation clause. This can be your secret weapon. By including one, you’re promising to outbid the seller’s highest offer, but not to exceed a certain amount. For example, let’s say your offer was $775,000, and it includes an escalation clause stating that you’ll “pay $5,000 above the highest bid, not to exceed $800,000”. Two other buyers submitted offers for $780,000 and $785,000, which means you’d pay $790,000 — or $5,000 over the highest offer.
Offer a seller rent-back **
Coordinating the sale of one home and making a seamless move in to your new homes is sometimes a tricky feat to accomplish. You can make it a lot easier on the seller by offering to allow them to rent their own house back from you after the close of escrow. Traditionally, the rent-back amount would be equal to the buyer’s PITI. But if you’re in a really competitive market, you may even need to sweeten the pot by allowing them to stay 2-4 weeks for FREE after the closing. Keep your eye on the prize though. This may cost you a few thousand dollars now, but may be a small price to pay in the grand scheme of things.
Avoid asking for / Agree to keep personal property *
I’ve seen furniture, drapes, pool equipment, yard toys, even cars get included with a real estate transaction. Don’t convolute your transaction by asking the seller to throw any personal property in with the deal. On the other hand, in some instances you maybe doing them a favor by removing the burden of having them move some of their old “stuff / junk”. Know the seller’s motivation and which way will be most attractive to them.
Make it personal (or should you?) *
Buying and selling a home is an emotional process, and sellers don’t always base their decisions on numbers alone. Writing a heartfelt note about why you love the house or the neighborhood can create an emotional connection that motivates the seller to choose you. Perhaps they have a gorgeous backyard and landscaping that they’ve put a lot of work into; you might comment on how you’re looking forward to entertaining guests in the lovely outdoor living area.
CAUTION: On the flip side, you and your agent need to be very careful in choosing which details to share about yourself as you don’t want to violate any fair housing laws, such as disclosing your familial status, religious affiliation, race, age, etc. Talk to your real estate agent for more details.
Use an experienced Realtor (of course!)
Your fraternity buddy’s wife’s sister’s uncle just ain’t gonna cut it in this environment. If you don’t choose a real estate broker that you can trust you’ll never achieve your goals. And in the business world Trust = Competence + Character. You want someone representing you that has dealt with and understands ALL the nuances pitfalls surrounding the ALL the strategies above. And the listing agent will definitely be able to tell if your agent knows what he’s talking about or not. Do yourself a favor, increase your odds of success and use an agent that has at least 10 years’ experience under his belt.
Note: Consider all the options above but make sure to formulate your offer and your concessions around the motivations of the seller. Give ‘em what they want! If you offer a quick 10-day close for example but the seller doesn’t need or want it, you may have just made your offer less attractive. It is critical to know the seller’s motivation. Make sure your agent asks about the sellers’ motivations. And if the listing agent doesn’t have clear, concise, thorough answer, have your agent politely nudge him to find out.
