Strengthen Your Offer in a Seller’s Market
As you probably know, real estate is very cyclical. A few years ago, the market was still recovering from the crash of the 2007-2008 time frame. We were in a buyer’s market, with inventory thick with foreclosures and short sales. With supply driven up and demand simultaneously driven down, buyers were finding great deals for several years.
Now, in 2019, it’s a totally different story. The market pendulum has swung the opposite direction, putting us in a seller’s market. Extremely low inventory coupled with a mortgage market that has rebounded gives today’s buyers a much bigger challenge to acquire the home they want.
In such a difficult situation for buyers, many are getting frustrated that they can’t “win” in a multiple offer situation. The first assumption is that they simply aren’t willing to pay as much as someone else. While that’s definitely a factor in many situations, price is not always what puts an offer over the top. Let’s take a look at some of the different ways you can strengthen your offers against other buyers in this market.
Let’s get the obvious out of the way. Price is important. With inventory lower than it has been in 20+ years, you’ll need to ask yourself “do I want to get a deal or buy a home?” If you’re focused on getting a home at X% under list price to feel like you got “a deal” then you are not going to win a multiple offer situation for a home that’s in demand. IF this is of paramount importance to you, you probably shouldn’t buy a home in this market. If a home presents with value to you, you simply need to be willing to pay a competitive price for it. In the first week a home is on the market, it’s unlikely to get a seller to move off their list price.
After so many years of a buyer’s market, people have become accustomed to having a seller pay for at least a portion of their closing costs when purchasing a home. From a seller’s perspective, this is now not necessary, as there are likely multiple buyers for their home. Every penny requested in seller paid closing costs is straight out of their pocket, so “clean” offers that don’t request them look much better to sellers.
To prepare for strengthening your offer in regards to closing costs, you should try to save an extra 2-3% of the purchase price you are targeting so you can pay your own closing costs. This is the first big step to keep you in the running for a highly competitive home. Asking for the seller to pay closing costs up front gives a seller an impression that you don’t have much cash. This is a problem, because even if your price is acceptable to them, they may be wary of how the inspection process will proceed with you, as they expect you’ll ask them for a long list of repairs that you can’t afford after the sale.
A second way you can strengthen your financial appearance to a seller is by increasing the amount of the earnest money deposit you offer them. Typically, we’ll see most transactions with $1,000 in earnest money. However, if a seller sees an offer come across with $2,500 or more, they’ll think “this buyer really wants our home.” This is to your benefit, as you want the seller’s mental picture of you to be a party that will be committed to completing the transaction with them.
Here’s the great thing about the earnest deposit; it’s highly misunderstood that you’re at high risk of losing this money. You would lose your earnest money if you chose to breach the contract you’re making with the seller. You’ll have the right to cancel the contract at several points throughout the transaction due to a disagreement over inspections, appraisals, or if your economic situation changes and you can’t secure financing. In all those situations, you’ll receive a refund of your earnest money. It’s a very low risk of losing it, so why not use it to make you look better to the sellers?
Your current housing situation can have a big impact on the quality of your offer in a seller’s market. Sale contingencies and closing & possession dates can help you win over other buyers, even with a slightly lower total offer.
Contingencies are an extremely frustrating subject during a seller’s market. Let’s say you have your current home under contract to sell and close 40 days from now. Your mortgage approval for your next home requires you to complete the sale of your current home to qualify. In a multiple offer situation, you’ll have a hard time competing with buyers who are offering the same terms as you that don’t have a property they have to sell first. Renters who are looking to buy instantly have a leg up on you, because the sellers won’t be worrying about their existing deal falling through.
There are a few ways you can tackle this challenge. First, explore options for temporary housing and move into a short term rental before finding your new home. Yes, this is painful, but if you plan on competing for a home in a popular location and price range, could be essential. Start watching the market and finding out if a high percentage of homes you like are getting multiple offers. If they are, you can avoid disappointment by arranging a temporary situation sooner rather than later. The worst case scenario leaves you without a new home to move to on the closing date of your current home. Plan ahead to avoid this pain.
Additionally, not all buyers will require their current home to be sold to qualify for another mortgage. If this is your case, take advantage of your financial strength and write an offer without a contingency.
One thing most people don’t consider is choosing a home that has most of what they want, but simply needs cosmetic upgrades to make it their dream home. These days, some lenders have renovation loan programs that will allow you to purchase a home and renovate part of it all with a single closing. That way, you can purchase a home that other buyers have rejected and you won’t have to deal with multiple offers. Depending on the time the home has been on the market, you may end up finding a more economical solution through this path.
Closing and possession dates are frequently tied to a buyer’s contingent sale as well. This is another great reason to explore temporary housing. If you can give a seller flexibility in closing and possession, your offer will be much more desirable. Remember, if the seller has to find their next home, they may be feeling the same pressure you are. If you are willing to use a temporary housing solution and other buyers are not, your flexibility can be key to winning the home you want. If you are renting, make sure you can go month-to-month at the end of your lease or arrange your closing with a month left on your lease. This will allow you to “generously” give the seller a longer close to make them comfortable.
As you can see, most of these strategies require a little work on your part. Buying your home in a seller’s market is a lot like hard work! If you’re willing to do the things that other people aren’t, you can dramatically increase your chances of winning a competitive offer situation.
The final key is this; make a plan early in your process. Of course, I think it’s best if you employ an experienced agent to help you plan and execute your plan. Don’t be disappointed that you don’t get the home you want if you aren’t willing to do the work to get it.