2017 has presented a hot spring market fueled by high demand and low inventory. Buyers are doing their best to stay ahead of rising interest rates, but are often confronted with short time frames to view properties and end up competing against multiple offers. What can you do if you find yourself in this situation? Let’s take a look at six strategies for creating the strongest offer in a competitive homebuying situation.
Asses the comps. Throughout your home search process, you’ve gained a strong understanding of the market and how far your dollar will go by viewing homes and following what they sell for. Now that you've zeroed in on a specific house, take the time to review the most recent comparable sales with your agent to determine its actual value.
Think of market value as a bubble, spanning a small spectrum of prices. On the back end of the bubble, you are getting the house at a great price – indicative of a buyer’s market. The front end is the top dollar you would pay for the home without overpaying – a perfect example is today’s seller’s market. The sweet spot in the middle is a price representative of a mutually beneficial price.
While preparing the offer, assess the comps and find out what part of the bubble you are willing to pay for the house. Be sure to set your expectations accurately considering the perceived demand for the house as well as local market trends.
Ask questions. Do not assume the sale price is the end-all-be-all for the sellers. Have your agent find out where their priorities lie before constructing your offer. Depending on their life situation, previous real estate experiences and other important factors – there may be other ways to provide strength to your offer.
One example is to find out their ideal settlement time frame. While some sellers like to be out as soon as possible, others may want a longer timetable or lease-back to accommodate the purchase of their next house.
Have your deposit and financing in order. Again, the strength of your offer is made up of many factors. The deposit is one area you may be able to fortify by the increasing the amount, showing the seller you’re willing to put your money where your mouth is.
Talk with your lender to find out what loan options are available. It is imperative you don’t overextend or put yourself in a financially perilous situation. That said, there are certain mortgage programs a seller will find more attractive than others. Be responsible and financially knowledgeable to put yourself in the best position possible, both short and long-term.
Include an escalation clause. This is where it gets fun: An escalation clause can be added to the offer to incorporate incremental jumps in price above the highest offer. There is a cap in place to dictate just how far you’re willing to go.
An escalation clause is an excellent tool to span the “fair market bubble,” as it allows you to be highly competitive while not paying more than necessary. For example, if there are three bids on a property listed for $500,000, you can write a full-price offer with an escalation up to $525,000 that increases in $5,000 increments. If the second-highest offer is $510,000, you would only have to pay $515,000.
Why wouldn’t you want to make the increments as small as possible? You don’t want to allow consideration for any other factors the second-best offer may include, like financing or a better settlement time frame.
Write a letter. While we often look at an offer objectively when deciding what makes the most sense, there is always another human being on the other side of the transaction, foreclosures excluded. Recognizing the history of the property and telling the seller how you will build on it is an excellent way to set yourself apart. A hand-written note can tug at the owner’s heartstrings and tilt the scales in your favor.
Focus on what drew you to the house and what left the greatest impression. Be specific when you identify factors that set it apart from all the others you viewed and gave you that aha moment. Don’t tell the seller what was wrong with the property or what you’d do to improve the property, but explain how you plan to make it your home. It’s OK to play the growing-family card or any others you have.
It is not advisable to include a picture. While this has nothing to do with how good-looking you are, it has everything to do with violating fair housing laws. You don’t want the seller to feel any pressure one way or the other in their decision based on any of the protected classes – race, color, national origin, religion, sex, disability or family status.
[See: The Best Apps for House Hunting.]
Breathe. This may be the most beneficial (and overlooked) factor of all. Fast-paced seller’s markets can often cause frustration and anxiety which lead to poorly thought out, rambunctious decisions and buyer’s remorse.
Be sure to take a step back and analyze your thought process, decision and the short- and long-term ramifications. Rather than letting your competitive nature or emotional attachment to the property get in the way, take a moment to breathe and collect your thoughts before submitting your offer. This will help ensure your aha moment doesn’t become an “oh crap” moment six months later.
Teresa Mears | May 3, 2019
Conventional wisdom says 20%, but you can buy your first home with much less down.