Ten Ways to Come Out on Top in a Bidding War
If you’re buying a house in today’s heating up market – you’ll likely be competing with other buyers for the same narrow inventory of available properties. If you you want to actually be competitive, here are a few things to do in advance.
10. Be prepared to act quickly! Those who are able to act quickly to submit an offer have a substantial advantage. These buyers have likely already lost out on a couple of other properties because they hadn’t been prepared to compete and have used valuable time to learn their lesson. Do your home work up front and study the neighborhoods where you think you’d like to live. In many cases, you’ll have just a few hours to make a decision and that seems scary. Keep in mind that what you are trying to do with your offer is secure a position with the Seller that gives you ‘dibs’ on this property. The only way to do that is to present an offer the Seller will sign ahead of any others he/she has received. While you are thinking, someone else will be writing!
9. Be willing to provide a financial statement to the Seller. In a so so market it is fine to be coy with your Seller. I take the position that a lender letter is sufficient for the Seller’s needs to know that you are qualified to close on their property. Unfortunately, in a hot market, the Seller will be evaluating your offer – and ability to close – against other offers from equally qualified buyers. Now is the time to disclose your financial strength. The Seller is not interested in a beauty contest. They want top dollar for their listing from the strongest buyer they can get. Don’t be shy – disclose!
8. Decide on what your “walk away” number or condition is. As part of your ability to act quickly, you need to know what your absolute bottom line number is or what your absolute must-have features are. There many elements to a real estate purchase, but one important aspect is how much you genuinely like the property. Irrational exuberance has led many homeowners to buying houses they weren’t prepared to actually own. Work with your agent to come up with a list of must-haves. Work with your financial advisor to determine what your bottom line is so that if the numbers don’t work, you don’t let an emotional trigger determine whether you have over paid for a given home or not.
7. Get ready to leave a little money on the table… just not too much. In a competitive environment all bets are off. Historical values become merely reference points in an accelerating price range. Full price offers and over-asking offers have become far more common in the ultra-competitive price ranges. Sellers may not feel obligated to provide the kinds of concessions they’ve been providing for the past few years (e.g. closing costs, home warranties, etc). The cleaner the deal and the easier it is for the Seller to see you’re serious about buying the property, the greater the chance they’ll pick your offer.
6. Avoid unnecessary contingencies that make the Seller anxious. Typically these uncertainties are the Inspection contingency, and appraisal contingency. If the house is newer, consider waiving your inspection resolution and opt for a Home Warranty. Tighten up your deadlines so the Seller doesn’t have to wait more than a week for your home inspection to be completed. Many Sellers appreciate your taking the house on a General Inspection so that you will either move forward or cancel the contract – at your option – but you won’t be asking for a laundry list of items to be repaired or replaced. Some Buyers bring along their inspectors to the initial showing of a highly desirable property and do an impromptu inspection during the showing period. Lastly, don’t even think about contingency offers on the sale of another home you have to sell. Determine early on if you can swing a bridge loan or flat out qualify for your next home without having to sell your existing one.
5. Consider providing additional earnest money. In our market it is typical for earnest money to be approximately 2-3% of the purchase price. If a Seller sees a contract with double the earnest money or more, that tells them a)you’re serious about their property and b) you’ve got liquid funds available right away.
4. Consider putting additional money as down-payment. Even if you qualify for a low-down-payment type of loan but you’ve got 10 percent or more you could put down as cash at closing, not only will this help your bank feel better about you as a borrower, it will help the Seller see the value of your solvency and resolve to see the contract through to closing.
3. Speaking of banks, see a lender as early on in the process as you can – BEFORE you start to look for homes you think you can buy. Your negotiating power is directly related to how solid and confident your buying power is. If you don’t know for sure you can qualify for the loan it will take to buy the house of your dreams, then there’s no sense negotiating on a price only to find out after the fact that you cannot afford it. If the Seller has a preferred lender they’d like you to be pre-approved by – do it. It doesn’t cost you anything and it is a tremendous act of good faith.
2. Learn All About “Escalation Clauses” No, this isn’t the turbo button on Santa’s Sleigh. An escalation clause is a clever contract writing strategy that basically tells the Seller you’re willing to pay more than any other buyer by XXX number of dollars up to a purchase price of xxx number of dollars. Many real estate agents a) don’t know how this strategy works and/or b) don’t like to write them because it may diminish a buyer’s negotiating position. Regardless, you should know what these are because even if you don’t want to use one for yourself, you’ll very likely be competing against a buyer and and agent who will use it. HOWEVER – be prepared for the Seller who will not allow escalation clauses and asks for “best and final.” You might find yourself bidding against yourself in this instance – but you want the house, and the Seller gets to dictate the rules.
1. And the Number One Way to Prepare for Competitive Offers is… Trust your agent to do his or her job. If you’ve gone to the trouble of interviewing and hiring a respected, experienced agent, tell them everything. The more they know about your wants and dreams and lender pre-approval and “walk away” conditions are, the more your interests are protected. They will be the ones to remind you of these critical desires if and when you end up on the Buyer Emotional Roller Coaster. Your agent is your coach and is there to help you “get in the game” and compete at the highest levels.