In my 22 years of selling residential, I’ve never seen a more difficult time to buy a home. Buyers and their agents are submitting what they think are great offers above the listed price then finding out after the home closes they were never in the game. Their offer might have been $100K, $200K, $300,000 or more under the winning offer.
The biggest challenge today for both buyers and buyer agents trying to make a deal in a tight market with very low inventory is knowing where to make the offer. It’s literally a guessing game or throwing darts. What’s too high? What’s too low? How do you “comp” a home when there are no sale comparables to work with? Even if your offer is accepted, how do you know if you’re overpaying? What does “overpaying” even mean in a market like this?
We’re in uncharted waters and every home is different so there are no easy answers to those questions. But if you aren’t ready to get into the mix and submit a strong offer on a home you like, you’re probably just wasting your time. Someone else will buy it.
At some point in time, inventory will increase, but I’m starting to believe the demand isn’t going away in this area of north Texas for awhile anyway. If that’s the case, it will be some time before prices start coming down. Some “experts” are predicting another nationwide increase in prices of 16% next year over this year.
For now, here are some tips you need to know if you’re serious about buying a home in a high demand area knowing there will probably be multiple offers. I’m speaking as a listing agent who has handled many multiple offer situations.
- Work with a buyer agent who knows what they’re doing. I’m not saying this to convince you to use our buyer agents, although I hope you do, I’m saying it because working with the right buyer agent can sometimes make or break the deal for you. The first thing we do when we receive an offer is review the terms of the buyer’s offer and their ability to close on the home. The second thing is find out who is representing the buyer so we’ll know who we’ll be working with if that offer is accepted. Our seller is relying on us to help them make the right decision as to which offer to work. Qualifying the buyer agent’s experience, reputation, and proven ability to get the home closed is part of the process.
- Listen to your agent. A buyer agent’s job is not only to protect their client from overpaying, it’s also to give their client some guidance on where the offer should be made. Listen to what your agent has to say, then decide for yourself where to make your offer. If you ever find out where the other offers were made, you might think you overpaid, but you can’t look at it like that. First of all, you got the home you wanted and the other buyers didn’t. More than that, the market is going to eventually catch up to the price you paid if you remain in the home long enough, so who cares? If your buyer agent suggests you make a higher offer than you’re comfortable with and someone else buys the home, that’s OK too. Just don’t lay blame on your agent.
- Forget trying to find the perfect home. Even in the best of times when there are lots of homes to look at, you’ll never find the perfect home, so it stands to reason when you only have a few homes to choose from, you’re not going to find it either. And if you like, you can be sure lots of other people will like it. If you go in with the attitude “I’m paying more than I ever thought I would, therefore I’m going to get my perfect home”, you’re going to be disappointed. Decide which home has most of the priorities you’re looking for, then focus on buying that home. Be prepared to spend more than you anticipated because that’s probably what it’s going to take. There are no “steals” out there. Lots of people are looking for exactly what you want and have been for a long time. Depending on their motivations and financial position, they’ll make it very difficult for you to buy the home you want unless you come in with a strong offer.
- Forget about basing your offer on “the market”. Two things are happening now that weren’t happening in years prior. First, we hardly have any sale comparables to work with, so it’s becoming increasingly difficult to “comp” a home. In addition, we’re seeing more cash buyers than ever. Sellers are just bypassing the buyers who require financing and the appraisals that will go with the process. The cash buyer doesn’t care where the home appraises. It’s what they want and compared to where they’re coming from, it’s still a great deal. Buyers are coming into north Texas in droves from out of state, especially California cashing out on their homes so they can pay cash for a home here.
- “Sight unseen” offers are probably not going to be accepted. It’s easy to sit in the comfort of your home and have your agent submit high offers on every home that hits the market until a seller bites. So one of the first questions we ask the buyer agent when they submit an offer is whether their client has actually walked the home. If not, we recommend our sellers not consider those offers. If the buyer can’t spare the time to walk through a home they’re really interested in, there’s a good chance they’re just fishing and not serious.
- Make sure your buyer agent submits a complete and clean offer. Every single sentence, every box, and every blank on a contract means something. If something is missed, the listing agent can’t read your mind and decide what you meant to offer. Nor can they relay to their seller what your intentions are. If they’re looking at 20 offers and 19 are thorough, well constructed and complete without mistakes, they aren’t going to waste time on yours. A poorly written offer also sends the signal you’re just throwing out offers without much thought. Chances are, it will be moved to the bottom of the pile.
- Find out what the seller’s “hot buttons” are. Many times, the highest priced offer isn’t really the one that appeals the most to the seller. It might be something else, like an extended closing, a quick closing, an extended seller leaseback, an all cash offer, removing most or all of the contingencies, etc. The listing agent will probably know what’s most important to the seller and should be able to give your agent some guidance on that.
- Love letters probably aren’t going to get you the home. Love letters are written by the buyer or their agent in an attempt to pull at the seller’s heartstrings so their offer will be accepted. However, if a buyer perceives they were prejudiced against and their offer not accepted because of something in another buyer’s love letter (or maybe their own), do they have the right to go after the seller and or their listing agent? In some states, like Oregon, love letters are illegal, but so far in Texas, they’re allowed. I sure don’t want to be in a position I have to defend why my seller chose any offer. For now, we’re passing them on to our sellers along with the buyer’s offer, but I can’t say how long that will last. My suggestion is don’t waste your time on them, just make a good offer right out of the box.
- Come in strong with your first offer. I can’t tell you how other listing agents handle multiple offer situations but I can promise our listing agents treat all of the buyers and their agents fairly. They show all offers to the seller and give everyone an equal shot at buying the home. At the same time, when we have 20 offers over the listing price and someone makes an offer under the listing price, the seller probably isn’t going to waste time with that buyer or their agent. It’s just the way it is. Coming in strong may not win the home outright for you, but if there’s no clear-cut winner, the seller will probably want to invite those with the best offers to submit a “best and final”. You might win the home there, especially if you increase your offer.
- Sellers don’t like contingency offers in a market like this. A contingency offer means the seller is giving the buyer time to sell their home so they can use those funds to buy their new home. By doing so, they’re effectively taking their home off the market when someone else could buy it. Sure, there are workarounds to contingency offers, but in a market like we’re seeing, not many sellers are going to accept a contingency offer.
If you Really, Really Want the Home
- Waive the option period. The option period gives the buyer time to do their inspections. If they find something they don’t like they can terminate their offer and get all their earnest money back. Waiving the option period is risky because the buyer is basically taking the home “as is” without knowing if there are any issues. As a buyer agent, I wouldn’t recommend my clients do it, but like I said, if you really, really want the home, that will really, really appeal to the seller. The seller knows you won’t be coming back to them for a request for repairs. You can still do an inspection on the home at any time, but by then, it’s yours and there will be no repair negotiations. You can see why sellers like that.
- Waive your financing contingencies. If you’re buying the home through a lender, agree to waive the financing contingency. If you do, you’ve lost your right to terminate the contract and get your earnest money back because you couldn’t get your loan. Just make sure you can get the loan.
- Waive the right to terminate the offer if the home does not appraise and therefore does not meet lender requirements. Appraisers have no more insight into the value of a home than agents and we all share the same MLS information. If you trust an appraiser to tell you the value of a home you’re interested in, just keep in mind, they’re guessing too. Until we start to see more sales that will help us all arrive at a fairly acceptable price, that’s not going to change.
- Put down substantial earnest money. We normally like to see a minimum of 1% of the contract price as earnest money, but to show the seller you’re serious, consider putting down 3%. If you close on the home, it’s applied to the purchase price and it’s a moot point. But keep in mind if you default on the contract, it will be painful because that money is probably going to the seller.
- If you’re financing the home, have a strong prequalification letter. A preapproval letter is even better because it sends a stronger message, but in either case, make sure the letter is at least at the price you’ve make the offer. You might even submit a letter for a higher price than your offer to show the seller you’re qualified for more. That might keep you in the running if there’s no clear cut winning offer.
- Offer to pay title policy. This is typically a seller expense but consider agreeing to pay for it.
- Offer to pay for the survey. This is another item which is negotiable as to who is responsible for paying for it. Consider agreeing to pay for the survey too.
- Don’t ask for a home warranty. The default language in our Texas contracts is the seller pays for a home warranty, but a warranty is not required. Consider not asking for one.
- Offer the seller a leaseback after the home closes that meets their needs. Sometimes sellers have no idea where they’re moving to. In cases like that, they usually appreciate a leaseback whereby they’re allowed to remain in the home for a period of time after it closes. They become tenants and the buyers are their landlords. Every day the buyer owns the home and the seller is occupying, it’s costing the buyer money in taxes, insurance, maintenance, etc. The buyer and seller agree to a daily lease rate, but offering a lease back at no cost for a period of time and without a security deposit can appeal to some sellers. Seller leasebacks can be a very powerful negotiating tool and might give you leverage if you’re in close competition with another buyer. We recently saw a deal fall apart over the seller leaseback after everything else had been agreed to.
- Before you add an escalation clause. An escalation clause states the buyer will pay an amount over the best offer that comes in. It’s perceived as a way for a buyer to make sure they’ve got the winning bid. On the surfaces, it sounds like a good idea, but we advise our sellers not to respond to offers with an escalation clause in them. You can learn why in this article.
- If your offer isn’t accepted, submit a backup offer. Many times the first offer falls out for one reason or another. The buyer might change their mind, find a home they like better, get cold fee, there might be a job loss, divorce, medical situation. Believe me, anything can happen on a transaction so submitting a backup offer is always smart. You still might not get the home, but it doesn’t hurt to be first in line if the first buyer falls out.
Admittedly, this is a very tall order and listing agents don’t normally expect to see all of those things in an offer. But if I saw an offer come in like this on one of my listings, that would tell me this is probably going to be the buyer of the home.
If you don’t feel comfortable using all of these tips, incorporate as many as you can into your offer to “sweeten the deal” for the seller. You’re showing them you mean business and willing to do what it takes to buy their home.