Have you heard the insanity is back again? The housing market is back and is on fire!
I don’t know if the media is over-hyping it but every single real estate piece now says how difficult it is for home buyers to get a house. Homes are going well above asking price, homes are selling the day they go on the market, etc. It seriously feels like housing bubble 2.0. When we were house hunting, a lot of times I doubted whether it was a good time to buy a house. I did not want to end up buying an overpriced house, if we are indeed in a bubble. But we couldn’t have saved the down payment earlier, we couldn’t have been ready to buy a home earlier and we didn’t want to wait years to buy a home. So now is the time for us.
Once we decided to stick to looking in this market, I wanted to know how we could minimize the damage and get a good deal as a buyer?
What is a seller’s market?
Seller’s market is when you have more demand than supply. There are more people with money waiting to spend money on real estate. What this means for buyers is:
- Sellers will see multiple offers and often the buyers have to enter into a bidding situation.
- Prices go up and houses often sell for well above asking price.
- Houses will sell quickly, sometimes the houses go to pending sale the same day they hit the market.
As a buyer, how can you make your offer attractive to the seller in a seller’s market?
The first and foremost suggestion I heard was –
- Increase the offer price: This needs no elaboration. No matter what you do, the seller is interested in their bottom line; show them the money and more of it, to get the deal. But as I mentioned earlier, I do not want to overpay so I wanted to see if there is anything, anything at all, I could do to make myself more attractive.
How else to make an offer attractive in a seller’s market?
Let the money speak
- Cash is king: If you can afford to pay all cash, go for it. Yes interest rates are still low, but buyers going through a mortgage always involve some uncertainty. So if there are two (otherwise) equally qualified buyers and one offers all cash, naturally the seller will take the cash offer.
- Get pre-approved. Submit preapproval and proof of funds along with the offer: Getting a preapproval is essential for any market, buyer’s market or seller’s market. Having all the other ducks in a row – getting a preapproval letter with the offer amount, proof of down payment funds, talking to the lender about estimated time to close, etc. will most certainly help the case. Attach the per-approval and proof of funds along with your offer. Also if your pre-approval is from an unknown non-local broker, try to shop around and get pre-approval from a local lender or a known bank.
- Larger earnest money: Show that you mean business. Normally earnest money is about 1% but the higher the earnest money, the more you show the seller that you are really serious about buying that house. (Why will I be more serious if I am putting 3% vs. 1%, I am not sure. 1% itself is a huge amount for me to lose, but I was told larger earnest money conveys more seriousness.)
- Larger down payment: The seller will get their money either from the down payment or the lender, but as with larger down payments it shows you have solid financials and your mortgage will go through without any hiccups.
- Put your best foot forward: If you are serious about a house, do not low ball. Do not overpay, but do compare what other similar houses are going for (your real estate agent should be able to give you the “comps”. “Comps” is just a fancy word for comparable sales nearby.) Evaluate your needs and the sale prices of the nearby similar houses and come up with a good offer.
- Include an escalation clause: An escalation clause in an offer means you will automatically bid $x amount over the best bid up to $y. For example, if the asking price of a house is $252,500 and it goes to a bidding war. 3 people submit bids for $255,000, $259,000 and $260,000. If you are the person submitting the $255,000 offer, you can include an escalation clause that you will bid $2000 more than the best bid (in this case, $260,000) up to $265,000. So your bid will automatically be considered as $262,000 instead of $255,000. Make sure to request to see the second best offer (generally you won’t be able to see what the other offer is, but in the case of escalation clause, you can request to see the second best offer).
- Non-conventional loans (FHA, VA, etc.) need a more attractive offer: Conventional loans with a minimum of 20% down payment are the smoothest to get. FHA, VA and USDA loans could take longer and more paperwork. If the seller has two offers one with conventional and one with FHA, the conventional will be more attractive.
Make it easier for the seller
- Decrease the contingencies: An offer usually has a few contingencies, if failed the offer will fall through (like appraisal and inspection).The lesser the contingencies the higher chances the sale will go through. So sellers prefer minimum number to contingencies. I would have never skipped inspection (unless the buyer themselves are inspectors who can figure out the condition during the touring process itself), but if you have more cash in hand you could skip the appraisal contingency (if the appraisal came lower than the offer price, the loan will be sanctioned only up to the appraised value, the rest of the amount you have to pay out of your pocket. This is another reason cash offers are more attractive, as there is no need for appraisal in a cash offer).
- Do the inspection before the offer: Some people suggested we do the inspection even before the offer to remove that contingency from the offer. Again, this is something I wouldn’t have done myself as the inspection money will be down the drain if I don’t get the house. Also, I might be wrong in this (if I am please let me know) – wouldn’t the seller have to disclose everything if someone got an inspection done before hand? I would think that is a hassle I want to avoid if I am the seller. But this was one of the pieces of advice I got, so I have included it.
- Shorten inspection period: This is something I was planning to do. Normally you have 2-3 weeks to complete the inspection. If you arrange everything with your inspector and get them to come the day after you put in an offer, you can eliminate the contingency within 2-3 days of the offer. That will putt the seller’s mind at ease.
- Flexible closing date: How quickly can you close? Do you have all the funds ready to go? Will your lender be able to close with 3 weeks or sooner? Give the seller an option to close as soon as possible so that he can move on or as late as he wants.
- Delay buyer possession: Usually the seller has to be out of the house on closing. Offer them some time to move all their belongings. May be you could do a rent back option for a month, so that they can get some breathing room to move and clean. Flexibility with their moving date might be attractive to some sellers.
- Skip the favors: It used to be that buyers can request pretty much anything in the house in their offer – include the area rug, the couch in the basement, all the appliances, etc. Not anymore. You are bidding for the house and that is all you can expect, keep that in mind when you put in the offer.
Be the first in line
- Drive around the neighborhood and find “coming soon” properties: Don’t wait for the house to show up in all the websites. A lot of listing agents will prep the house and have the “coming soon” sign out. Drive around, get a list of these houses, ask your agent to talk to the listing agent, get all the information and be the first to offer when it comes to the market.
- Don’t rely on Zillow or Trulia, get in on the MLS: Zillow, Trulia and sites like that are great to go into details of the house, but that is not the fastest way or the most comprehensive way to get a listing. Ask your real estate agent to sign you up for MLS (Multiple listing services) alerts. Redfin is also a great site to sign up for alerts. They get their data from MLS, so it is much faster.
- Don’t wait until the evening or weekend to view the place: If you see a house that meets your needs do not wait for the weekend to go tour the house. Ask your agent to set up an appointment right away.
- Hire a responsive, assertive real estate agent who knows the market and networks well: A good agent can be a great asset in buying a house. He has to be responsive and very quick throughout the process. Starting from letting you know about a house as soon as it is on the market (even better, before it is on the market. Networking really helps) until organizing everything for the closing, the agent has to move fast.
- Know what the seller wants: Real estate is a word of mouth business. If your agent has worked with the listing agent and has a good working relationship, he/she could get some information on what is important to the seller. The listing agent of course cannot give any information that will sabotage the seller, but things like the seller is hoping to stay in the house a little longer or he would like to close as soon as possible will help write a better offer.
Do your due diligence
- Know what you really want: Have a clear list of your needs and wants. This might not be the time to think that you will just browse and when you see the place you like, you can think about it then. Have a checklist of all the items you want in a house and check if off as you tour. Instead of taking a lot of time to think about it, this will give you solid data – House A fulfills 90% of your needs and 60% of your wants vs. House B fulfills 75% of your needs and 75% of your wants.
Here is the pdf of the want/need sheet that I used. Personalize it and take it along with you on the tour/open house.
- Learn the process: Do not wait until you find the house you want to start learning about the home buying process. Know how the whole thing works and what you need to do as soon as you find the house. Collect all the documents required for the loan, ask for recommendations for home inspectors and check their schedule, etc.
- Make a decision quickly: If the house matches your needs and wants, prepare to offer quickly. There might not be much time to think about it.
- Know your weak and strong spots: Make a list of what makes you more attractive as a buyer and what makes you less attractive. If a FHA loan makes your offer less attractive, can you swing a larger earnest money or less contingencies to make it balanced?
- Be thorough: When there are multiple offers, incomplete offers will find their way to the garbage pile immediately. Make sure you have included everything in your offer; make it clean and easy to understand.
- Include a personal letter: When I first heard this suggestion I thought it was a joke. But apparently it works. Write a personal letter on why you would like this home and include a photo of your family. We went to a home buying class and the person teaching the class told us about one of her clients. This client apparently checked out the buyer on Facebook and found out she was really fond of cats. So along with the offer, this client took photos of her family with a few cats in different positions and sent it along. Her offer won. The kicker is the cats were borrowed from the client’s friend. They don’t have any pets!
- Know when to walk away: When the house you really want gets into a bidding war, it might be tempting to go just a little bit higher and then a bit more and then a bit more. There is no point in buying beyond your means and hating the house. Know what your limits are and know when to walk away.
- Don’t get discouraged. Keep up the process.
Luckily we didn’t have a long house hunting process. We were not too attached to any house to offer more than the asking or bend over backwards to get the house. Learning about the process and having all the financials in order helped us get our house built much faster than average. All I wanted was to not do something I will regret later – like offer more than I can afford or rush into a purchase when I am not happy about it.