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Whether you’re trying to buy a condo or a five million dollar home, like the photo above, there are some tricks in the trade that you’ll want to be sure you’re aware of so that you have the highest chance of winning in a multiple offer home purchase bid. Here in Silicon Valley, like the rest of the nation, we’re in the midst of a serious housing crunch that’s not expected to change anytime soon. With a lack of homes for sale compared to the number of buyers, coupled with soaring prices, many homebuyers are feeling a bit discouraged. And now, with interest rates climbing, many of them are also feeling desperate to lock in a mortgage—which has only added fuel to the fire.1
Fortunately, if you’re a buyer struggling to find a home, I have some good news. While it’s true that higher mortgage rates can decrease your purchasing budget, there are additional ways to compete in a hot market.
Yes, a high offer price gets attention, but if you’re in the same ballpark price-wise with other buyers, then sellers and their agents will be evaluating several other factors beyond just price.
In this article, I’m sharing some of those secrets of the trade! These five tips can sweeten your offer and outshine your competition. Prior to making any offer, be sure to have the conversation with your agent to help you weigh the risks and benefits of each tactic so you can craft a compelling offer designed to get you your dream home—without giving away the farm!
1. Demonstrate Solid Financing
The reality is, no one gets paid if a home sale falls through. That’s why sellers (and their listing agents) favor offers with a high probability of closing.
Sellers particularly love all-cash offers because there’s no chance of financing issues cropping up at the last moment. But don’t despair if you can’t pay cash for your home. According to the National Association of Realtors, only about 1 in 4 home purchases are all-cash deals, which means the vast majority are financed with a mortgage.2
If sellers are assured that financing will come through, buying with a mortgage doesn’t have to be a big disadvantage. The most important step you can take as a buyer is to get preapproved before you start looking for homes. A preapproval letter shows sellers that you are serious about buying and that you will be able to make good on your offer. Even better is to take the extra step with your lender to get fully underwritten or credit approved. This means the lender has taken the time to fully research and validate your assets, employment, income and debts so that all that’s needed when you “win” the home is the lender’s final due diligence on the home. This extra level of preapproval can also shorten the escrow period (underwriting has already done most of their work) which can be even more enticing to a seller, knowing they get their money faster and with less risk!
It’s also important to consider the reputation of your lender. While sellers may not know or care about a lender’s reputation, their agents will! Some lenders are much easier to work with than others, are more accessible to reach should there be questions or issues, and have a track record for closing loans on time. This becomes especially important if you are pursuing certain types of mortgages like FHA or VA loans.3 If so, you’ll want a lender who specializes in these types of mortgages. If you’re unsure who to choose, I’m happy to refer you to reputable local lenders known for their ease of doing business.
2. Put Down a Sizeable Down Payment
Buyers can show sellers that they’re serious about their offer and have “skin in the game” by putting down a large down payment. A large down payment means higher than 20% of the purchase price. A 20% down payment is pretty standard when getting a mortgage, and many lenders can go as low as 5% down, but less than 20% carries more risk to the lender and lenders will typically require the buyer to have private mortgage insurance (PMI). And the higher the risk to a lender, the higher the risk to the seller.
The goal in getting your offer accepted is to show how your offer gives the seller high confidence that you’ll get your loan and that you’ll close escrow on time without incident. So the greater the down payment, the less risk to the lender and seller. In addition, with a higher down payment, there’s less worry regarding the lender’s appraisal. Buyers with large down payments often have more options for differing types of loans if the appraisal comes in under the price you offered the seller. In some cases, a low appraisal will prompt a negotiation with the seller, but in a highly competitive offer scenario, and if the buyer has put in an offer with no contingencies for the appraisal, this large down payment offers more cushion for the buyer and less likelihood of the buyer to back out of the transaction.
Having a clear, up-front strategy and understanding of your options for loans and down payment is a key element in successfully “winning” a competitive bid. This is a highly collaborative process and one you’ll want to be certain is developed with your agent and lender, based on your specific circumstances.
3. Ask for Few (or No) Contingencies
Most real estate offers in Silicon Valley include few to no contingencies. Contingencies are clauses that allow one or both parties to back out of the agreement if certain conditions are not met. These contingencies appear in the purchase agreement and must be accepted by both the buyer and seller to be legally binding.5
Common contingencies include:
- Financing: A financing contingency gives the buyer a window of time in which to secure a mortgage. If they are unable to do so, they can withdraw from the purchase and cancel the contract without penalty, and the seller can move on to other buyers.
- Property: A property contingency gives the buyer a window of time to learn more about the condition of the home by having it professionally inspected. Typically, the sellers in Silicon Valley have already paid to have home, roof, and termite inspections completed and these reports are included in the property’s disclosure package. In this way, a buyer has full disclosure of the potential repairs or issues that exist in the home and can make the decision to accept the condition as-is and offer a price commensurate with both condition and competition, or add a property contingency to investigate further. If the investigation shows something the buyer is unwilling to live with, and they’ve included a property contingency, they can either try to negotiate with the seller or withdraw from the contract without penalty.
- Appraisal: An appraisal contingency gives the buyer a window of time to have their potential home be appraised professionally to validate the sales price. If the appraisal report shows that the home value is less than the contracted sales price, this contingency allows a buyer to cancel the contract without penalty. Lenders require an independent appraiser to assess the home’s market value as part of their loan process to determine if the price you’ve contracted with the seller is a true market price or if you’ve offered too much in their professional opinion.
- Sale of a prior home: Some buyers cannot afford to purchase a new home until they sell their previous one. Adding this contingency says the buyer can cancel the purchase without penalty if the buyer is unable to sell their current home within a specified window of time.
Since contingencies reduce the likelihood that a sale will go through, they generally make an offer less desirable to the seller. The more contingencies that are included, the weaker the offer becomes. Therefore, buyers in a competitive market often volunteer to waive most if not all contingencies.
However, it’s very important to make this decision carefully and recognize the risks of doing so. For example, a buyer who waives the loan contingency may risk their mortgage falling through. If you back out of a home purchase without the protection of a contingency, you could lose your earnest money deposit.6 This is where you and your agent need to take the time to discuss all the risks and benefits involved so you are fully informed and comfortable with your decision.
4. Offer a Flexible Closing Date and/or Rent-back Option
When it comes to selling a house, money isn’t everything. People sell their homes for a wide variety of reasons, and flexible terms that work with a seller’s personal situation can sometimes make all the difference. For example, if a seller is in the process of planning a significant move, they may prefer a longer closing timeline that gives them time to pack up all their belongings and find housing in their new location.
Similarly, short-term rent-back options in which the sale is completed and escrow is closed, but the seller retains the right to rent the home back from the buyer for a specified period of time (typically 30-60 days), can be compelling.7 These arrangements can be helpful if the seller needs the money from the sale of their home to purchase their next house (i.e. for the down payment) but then needs time to find their next home. A rent-back agreement makes it possible for them to search and close on their next home without having to leave their current home when escrow closes, thus avoiding the extra move into a temporary place (i.e. they won’t have to move twice!).
Flexible closing dates and rent-back options can provide a powerful advantage for homebuyers. Of course, the value of these terms depends on the seller’s situation. That’s where your realtor comes in! Understanding the seller’s unique situation through ongoing dialog with the listing agent can be a pivotal factor in writing a compelling offer that works for both parties.
5. Work with a Skilled Buyer’s Agent
In this ultra-competitive real estate market, one of the greatest advantages you can give yourself is to work with a skilled and trustworthy real estate professional. Interview your agent to understand if they will take the time to fully educate you on the process, if they have the time to answer all your questions, and what they’re willing to do to get your offer accepted.
If you work with me, I will make sure you fully understand the process and help you submit an appealing offer without you taking on too much risk.
Plus, I know how to write offers that are designed to win over both the seller and their listing agent. The truth is, listing agents play a huge role in helping sellers evaluate offers, and they want to work with skilled buyer’s agents who are professional, communicative, and courteous.
Once your offer is accepted, I’ll also handle any further negotiations and coordinate all the paperwork and other details involved in your home purchase. The best part is, you’ll have a knowledgeable, licensed advocate on your side who is watching out for your best interests every step of the way.
Helping You Get to the Right Offer
In many cases, a competitive offer doesn’t need to be all-cash, contingency-free, or significantly above asking price. So if you’re serious about buying a home in today’s market, it’s important to consider what you can do to sweeten the deal.
If you’re a buyer, I can help you compete in today’s market without getting steamrolled. And if you’re a seller, I can help you evaluate offers by taking all the relevant factors into account. Contact me today to schedule a free consultation.
Sources:
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- National Association of Realtors – https://www.nar.realtor/newsroom/pending-home-sales-dwindle-4-1-in-february
- National Association of Realtors – https://www.nar.realtor/newsroom/existing-home-sales-fade-7-2-in-february
- Forbes – https://www.forbes.com/advisor/mortgages/housing-crisis-tips/
- Realtor.com – https://www.realtor.com/advice/finance/earnest-money-deposit-mistakes-buyers-make/
- Bankrate – https://www.bankrate.com/real-estate/contingency-clause/
- Home Buying Institute – http://www.homebuyinginstitute.com/mortgage/risks-of-waiving-a-contingency/
- Realtor.com –https://www.realtor.com/advice/sell/what-is-a-rent-back-agreement
