Holy Smokes! It’s been a minute since I have updated my blog, I’ve been busy in this absolutely insane real estate market and thought it was appropriate to share with you how to compete (and win) in a multiple offer real estate market. Our current market has seen 32 consecutive months of multiple offers and shows no signs of slowing down. With historically low inventory (below 1 month supply in many areas), continued job and population growth in the Puget Sound region as well as a backlog of buyers for each home, it’s important to be well equipped going into the real estate market.
In the Seattle area market, you can expect a multiple offer situation on any property in a prime location that’s priced well. The following are some tips that I’ve been sharing with my clients to set them apart from the masses.
1. Price is the bottom line
The price you offer is generally the most important factor in a bidding war (Duh!). To determine what price you should offer, have your real estate agent run a search for comparable sales in the areas (a.k.a., comps). If you’re like most buyers and have been looking online or in person for a while, you’ll have a good feel for the market already.
A fear that everyone has when making an offer is overpaying. No one ever wants to pay too much for anything, let alone real estate. One way to make your offer attractive, while protecting how much you’re spending, is to add in something called an “Escalation Clause.” The escalation clause increases your offer price by a set dollar amount ($1,000, for example), up to a specific dollar cap that you set. The offer only increases by $1,000 if there is another offer that bumps it up.
For example, let’s say you offer $439,000 on a house, and add an escalation clause with a cap of $455,250. You’ll beat any competing offer up to your cap of $455,250 by $1,000. If there is another offer with an escalation clause with a cap of $450,000, your new offer price is only $1,000 higher than this, so your offer is now just $451,000 ($450,000 + $1,000). Keep in mind that asking the seller to give you a credit to pay for your closing costs is basically decreasing the amount of your offer. The seller only cares about their net (your offer minus any closing cost credits = their net). So if your cap is $455,250, but you’re asking for $10,000 in closing costs, your real cap is just $445,250, and in the above situation, you would have lost out of this house.
One last tip about escalation clauses – don’t make your cap a round number. An example of this is, let’s say I have a client with an escalation clause with a cap of $466,750, and the next highest offer had a cap of $466,000. By setting his cap higher than a round number (i.e, $25,000, $50,000, etc), we just barely beat of the competition.
2. Remove as many contingencies as possible
An offer to buy a house is generally dependent on a number of factors, including a number of contingencies (like an inspection, appraisal, financing, etc). The more contingencies you remove from your offer, the more attractive your offer will look to the seller. Unfortunately, this also means that it’s harder for you to get out of your offer if you needed to. The most common contingency that people remove prior to making an offer is the inspection. A pre-inspection is where you pay the inspector $300-$500 out of pocket prior to making an offer. The home inspector will go through the property and tell you of any major and minor issues with the home. If he or she finds minor items, then generally I wouldn’t recommend asking the seller to make any repairs. If there are major issues found, then you need to decide whether this is the right property for your or not. The big problem with pre-inspections is when you pay for one, and then lose out on your offer and have to do it all over again on another property. If you don’t want to pay $300-$500 for a preinspection over and over, another option is to have a short inspection contingency window (1-3 days). Although this is not ideal in a sellers market, it’s an alternative to paying out of pocket for an inspection at the risk of not getting the home.
Having cash, and not having to get a loan to purchase the property, really makes your offer attractive since there are very minimal contingencies needed. One reason why is because cash is quick (you can close in 7-10 days, as opposed to 30 days when getting financing), and there is no appraisal. An appraisal is where the bank sends out an appraiser to ensure that the price you’re paying for the property is fair based on comparable homes in the neighborhood. An appraisal is required when getting a loan.
Since not everyone has a half-million dollars sitting in their bank account, how do you compete with an all cash offer? The first way is to close as quickly as possible. I have a mortgage broker on hand that can close in as quick as 14 days. That means that we are almost as fast as an all-cash offer, and about twenty days faster than any offer with financing. This is a HUGE plus in this market, making sure you have a lender working with you to get things closed quickly is imperative in this market.
Another way to compete against cash offers is to waive your financing or appraisal contingency. I must warn you that doing this can be a risky move since the appraisal might come in lower than the price you’re paying, and if that happens you will have to pay the difference between the price you’re paying and the appraisal amount out of pocket at closing. This is also risky if you don’t end up getting approved for your loan. If that happens, you could lose your earnest money.
3. Come In Strong!
Sellers wants to know that you are serious and have the ability to close when you say you can. There are things you can structure within your offer to communicate your position to the seller, such as: pay for and have a pre-inspection done prior to making your offer, the larger the down payment the better, the higher your earnest money deposit the better, use a local lender (lenders that process loans in-house are preferable because they’re generally quicker and closing your loan, and you can usually get in touch with them easier), have a quick closing, use the preferred title and escrow company of seller, and consider waiving the appraisal or financing contingencies (but be sure to talk to your agent about the pitfalls of doing this because it can be a risky option at times). Doing these things don’t necessarily cost you more money (other than the pre-inspection), but they definitely make your offer stronger and more appealing to the seller.
4. Discover The Sellers Motivation
Quick closings, free or inexpensive seller rent-backs are appealing to most sellers depending on their goals. It’s worth taking it one step further to find out what else they are looking for…do they need to get rid of their furniture? Offer to buy it, even a few hundred dollars. If you can spend a few hundred bucks purchasing a few of the sellers unwanted furniture items, you save them the hassle of having to sell it on Craigslist or somewhere else. Doing this can set your offer apart from the crowd, even if you’re not the highest-priced offer because you’re saving the seller time and energy (which is something money can’t buy, and something that is extremely valuable to the seller when moving). This is one way to make a more creative offer, even if you don’t want or need the furniture you’re offering to buy since you’re only spending a few hundred bucks (and possibly saving thousands of dollars by not increasing your offer even higher). You want to stand out, find out how you can set yourself apart.
5. Make it Personal
Adding a pre-approval letter is always a necessity, but adding in a love letter is a little extra touch that adds the emotional aspect to the mix. The point of the love letter is to appeal to the seller’s emotions, and make then realize that they want to sell to someone like you who will tale care of the house the same way that they have over the many years that they’ve owned it. Believe it or not, these letters have gotten my clients offers accepted, even when there are offers higher in price. There are a few key points to add to these letters, and I have some samples that I’m happy to share with you. Shoot me an email at firstname.lastname@example.org if you would like some examples. My favorite letter recently, included a couple photos of my clients from their wedding and a more personal photo of them hiking in the mountains. The feedback from the seller was that she really enjoyed reading their letters, and felt connected personally to their photos. It was a really neat touch!