It is true that your home purchase may be the single most important—and expensive!—decision you will ever make in your lifetime. It is important that you use a professional agent with the proper knowledge and skills to help you navigate this process. Your agent can help you craft an offer that has the highest chance of success!
In a typical, “normal” real estate transaction, the buyer offers the seller a price that is agreed upon, with terms that make sense to both parties and a couple of standard (or normal) contingencies such as a home inspection, an ability to get a loan, an appraisal, and maybe a time period to review the condition of the title and the neighborhood.
In a competitive offer environment, you may find that you are not the only buyer who seeks to purchase this home. Oftentimes emotions run high, and frustrations could be the norm if you find yourself on the losing side of an offer on a home that you have your heart set on. Sometimes it is all about price, and you can only offer as much as you are willing to pay (and in some cases, as much as the bank is willing to loan on). It may be all about the price, but it’s very possible that the terms are equally as important. If all offers are similar in price, then your favorable terms (aka having fewer contingencies), could win the bid for you!
What, then, can you do to make your offer more appealing to the seller without losing those “standard” contingencies that may put your hard-earned savings at risk?
Arm yourself with information
The first thing that a professional agent should do is research not only the property, but also the seller (as much as possible). You can arm yourself with information, and asking the seller’s agent questions that will help you learn as much as possible about the seller—such as the seller’s desired timeframe for moving—can be helpful knowledge.
Furthermore, during your home tour process, the buyer and their agent should observe and note anything that may appear to be important to the seller that could help in the negotiation. This could be additional time needed to move, flexibility on your closing date, shortening up any inspection periods, a shorter financing period, offering a generous earnest money deposit, or agreeing to work with their favorite service provider. Perhaps you may agree (in advance) to take care of cleaning or repairs yourself after closing (especially if the home is vacant and they don’t want to have to come back!). Or perhaps you may allow the seller to harvest his precious vegetable bounty or fruit tree, take prized plants from the yard, or keep a special light fixture that you will not need. These are things that may appeal to the seller just as much as price and could set your offer apart from others, with a small cost but ultimately a large return or reward to you. The more things you ask for, the less appealing your offer will be. Likewise, the more you can appeal to the seller emotionally, the higher your chance of success.
Should you waive an inspection?
Besides the emotional aspect, competitive offers may also include other favorable terms to the seller that do not always equate to price. A buyer may choose to waive an inspection or shorten the time period for which to conduct the inspection. While it is always risky to waive an inspection and it is not recommended, a better way may be for the buyer to get permission to conduct a home inspection prior to writing the offer, thereby not needing the inspection contingency as part of the offer as it has already been satisfied.
A buyer needing to finance a home may shorten up the financing period if they are fully approved and underwritten in advance. This takes extra time upfront but will increase your chance of success. Typically, the only lender need would be a clear title report and an appraisal. Your lender should communicate this in a pre-approval letter and follow with a phone call to the seller’s agent providing additional confirmation.
What’s an Escalation Clause?
A buyer may also want to use an “Escalation Clause” to offer more money to the seller over a competing offer. These clauses are written with language enabling the buyer to set the highest limit of their offer, but not to exceed a set amount over a competing offer. For example, the buyer might agree to pay (or escalate their offer) $1,000 more than a competing offer with a maximum purchase price of $10,000 over list price. Your professional agent could help you craft such language into an offer to help you win. In this case, if the competing offer were $5,000 more than the list price, your offer would escalate to $6,000 over list price ($1,000 more than the competing offer).
If a buyer does choose to escalate an offer or perhaps pay more than what the home could potentially appraise for, then another competitive strategy may be to offer the seller an assurance that you have guaranteed funds in the form of an additional down payment. This means that you will agree in advance to pay additional funds if the appraisal comes in lower than the purchase price. While there are many layers to this scenario, it does in effect give the seller a form of additional protection that you are able to complete the purchase at the agreed upon price, even if the home does not appraise for it.
In some markets, buyers have escalated well over $100,000 over list price to the excitement of the seller, only to have the price reduced to a low appraisal because the buyer did not have the funds to cover the delta (or gap) between the sales price and the appraised price. Additionally, there is no guarantee that the seller will agree to then reduce the price. The contract could terminate, and the buyer may have to start over.
Lastly, in efforts to improve your chance at being the winning offer, your agent should communicate, cooperate, and consider the other agent and how they present you to the seller. Being collaborative with the agent, endorsing their efforts, and working toward the goal of both the buyer and seller in unison will go a long way in helping to set the stage on how smoothly the transaction will go. In a competing offer scenario, your goal should be to cause the seller to want to sell to you by presenting a win-win scenario.