Competing with multiple offers? Price matters, but so do terms
Low inventory of homes for sale can cause major frustration for home shoppers facing fierce competition in a seller’s market. Winning among multiple bidders may be challenging these days but not impossible. In a multiple-offer situation there are several moves buyers can make to come out on top. Money matters, but favorable terms do to. Consider the following when preparing your offer:
1. Price
The first and most obvious move for most people is increasing their offer price. The highest priced offer will definitely catch a home seller's attention.
If you're financing however, be aware of how much might be too much. Your bank will later appraise the property to determine its value before agreeing to make the loan. If their appraisal is lower than what you've offered to pay it could become a problem. Keep in mind what you're both willing and able to pay.
2. Financing Terms
Paying with all cash will most likely put you ahead of other comparable offers. It eliminates the loan process, including the bank appraisal.
However, if you need to finance (most people do), putting more down on the loan can also put you ahead of others. And, a conventional loan can be more favorable than an FHA loan. (FHA appraisers may come back with a list of repairs needed prior to closing.)
Another way to strengthen your offer is to promise written documentation of your secured financing a week or two (or more) in advance of the closing date. Ask your agent and lender about this option.
3. Seller-paid Closing Costs
Closing costs are various fees paid by both buyers and sellers on the day of closing. Each side has a separate set of obligations requiring cash for title, bank and broker services performed throughout the transaction. For buyers, costs are typically around 3% of the sale price. For sellers it can be a bit more depending on the broker commission.
Often home buyers use the bulk of their cash reserves on the downpayment, leaving little to cover costs to close. One option for buyers in this position is to ask the seller to pay the their closing fees. But if you’re a buyer facing multiple offers and have access to cash, don’t ask the seller to pay your closing costs. Paying your own way could give you an advantage over other buyers who may be asking sellers to help out.
4. Inspection Contingency
Making an offer contingent on the results of a buyer’s inspection is typical and advised. I always recommend it and sellers will expect it. It is, however, optional. A seller will favor an offer without the inspection contingency. Omitting this contingency is not a common practice however — it puts you at risk for buying the unknown. Think carefully before making this move!
If you do ask for an inspection contingency, shortening the time in which you complete it is favorable to sellers. For example, asking for 7 days to complete inspections is better than asking for 10. The sooner this contingency is lifted the better (for the seller) — another way to sweeten your offer.
5. Closing Date
If you can be flexible with moving and closing dates make it known when submitting your offer. When your agent fills in the purchase agreement she or he will need to enter a specific closing date but can add wiggle room with words like "on or before". Having a flexible date may give you an advantage, especially if the sellers are also buying and trying to coordinate their own move with another set of sellers and buyers.
6. Letter to the Seller
Sometimes it's personal. Writing a heartfelt letter to the sellers and sharing a bit about yourself and all the reasons you love their home might work to your advantage. It can be especially powerful if the sellers share a similar sentiment and care about future ownership. Keep it short and sweet, a paragraph or two is fine.
7. Earnest Money
Earnest money is "good faith" money. It's cash you put down when you making an offer to show you’re serious and willing to take a risk. It's typically 1-2% of the offer price but can be any amount you choose, or none. If all goes well it will go toward the downpayment. If you cancel for reasons not outlined in your offer you could lose it altogether. Putting down more, if you have it, demonstrates your serious intent and financial capability.
When the offer is accepted, your earnest money will be put into a trust account within a few days, so make sure you’re prepared before committing.
Heidi Swanson is a Realtor® based in St. Paul, Minnesota. She writes a blog to share information on a variety of real estate related topics including buying and selling, market conditions, homeownership trends and more. Reach her at heidi@lyndenrealty.com or 651-503-1540.