Buying real estate in a hot market can be challenging even for those with plenty of experience. Everyone (even your unemployed cousin) offers advice on how to “win the deal.” There is not one guaranteed formula for getting your offer accepted but an experience Realtor® who knows the market can provide tips to increase your odds.
These are my “Top 7” Tips for buyers in a hot real estate market. Note: I define HOT as more buyers than sellers and multiple offers on properties.
TIP 1: OFFER THE MOST MONEY YOU ARE WILLING/ABLE TO PAY
Pros: By offering the most you are willing/able to pay you increase your chances of not missing out in case the seller does not want to counter offer. Some buyers want to offer a little less than their max so they have room if there is a seller counter offer. This can be a good strategy but can also back-fire. One of my clients held back $10k on a recent offer and the seller accepted one of 7 other offers because he did not want to deal with counter offers.
Cons: By offering the most you are willing/able to pay you may not be able to increase your offer if the Seller sends a counter-offer. This being said, sometimes other buyers back out during a counter-offer process since they do not want to get in a “bidding war.” There is no rule that says you cannot come back with the same offer as you did initially and possibly still be the best offer.
TIP 2: PROVIDE A PRE-APPROVAL LETTER FROM YOUR LENDER
Pros: The seller will feel more comfortable with your financing if you provide lender pre-APPROVAL letter instead of a pre-QUALIFICATION letter. Pre-qualification estimates how much you may be able to borrow, based on a mostly informal evaluation of your finances. Pre-approval carries more weight and requires documentation (including credit reports).
Cons: This requires more work up-front for you and your lender. A pre-qualification letter can generally be delivered by your lender in hours where a pre-approval letter can take up to two-weeks.
TIP 3: OFFER TO PAY A SHORT APPRAISAL GAP
Pros: By offering to pay an appraisal gap, you are giving the seller a sense of security they will have a chance to get paid more than the appraisal if it came back lower than the agreed upon price. This is good insurance with your offer and often what separates the winning offers from the runner-up offers because it guarantees the seller a higher net price if the appraisal value is a concern.
Cons: When you offer to cover an appraisal gap, you have to bring more money to closing than you may have originally anticipated. The percentage down payment is calculated off of the appraised value so anything in the gap coverage is on top of the down payment. You also need to make sure your lender approves of this option.
TIP 4: OFFER TO PAY SOME OF SELLERS CLOSING COSTS
Pros: Paying some of the sellers closing costs is an obvious benefit to the seller as their burden of cost is lowered. This is a good way to hide extra money in the deal that maybe might have trouble hitting the appraisal numbers. This can be very appealing when mixed together with the above two options. This option is like cash in their pocket!
Cons: Your overall costs go up at the time of closing. This is not a fee that you can wrap into your mortgage so it would be additional cash you would need to bring to closing on top of your down payment and all closing fees. Be sure you have discussed this situation with your lender so you are certain you have the funds to cover this type of offer.
TIP 5: OFFER A NON-REFUNDABLE EARNEST MONEY DEPOSIT
Pros: By offering this type of deposit with the seller, they know they are guaranteed an amount of money if you do back out of the contract for any reason. The contract protects the buyer with regards to getting your earnest money back, so this type of offer is a guarantee and shows that you are a very serious buyer.
Cons: If you choose this option, be sure it is an amount that will not impact your ability to buy a house if this deal did fall through. In the event that you would find something major during the home inspection, you would still lose this non-refundable deposit so the risk is there, but can be something that a lot of sellers really are interested in.
TIP 6: INCLUDE AN ESCALATION CLAUSE
Pros: The escalation clause will allow your offer to “escalate” (beat the highest offer) up to a certain amount. A seller will benefit from this type of offer because it can continue to increase the price that they will get for their house. At the same time, for a buyer, it is a benefit because it will prevent you from possibly reaching the maximum number that you were willing to pay for the house if other offers do not force the price up to the maximum limit you offered.
Cons: Some sellers (and agents) find this type of clause confusing and unclear. As a buyer, you are showing them your poker hand that you are willing to pay this top number, so it is possible the seller may counter offer you at that top price since they know you were ok paying that price if it escalated that high. This is increasingly being asked to be removed from many offers right now due to the complexity that each one can be to understand.
TIP 7: WAIVE THE INSPECTION CONTINGENCY
Pros: Waiving the inspection contingency gives the Seller a relieved sense that this is one less thing that will make the deal stressful. Waiving the inspection gives them an enormous sense of relief knowing that you will not be requesting any repairs or cancelling if something is discovered during your inspection.
Cons: By waiving the inspection contingency, you still get to do a home inspection, but do not get to ask the seller to fix anything if the inspector should find anything. Also, you will not be able to cancel without possibly risking your deposit based on the inspection findings.