If you have spent more than a day or two looking to buy a home, it’s no surprise that your bargaining power has probably never been lower than it is now. The number one tip that you should be following is to be patient. Don’t expect to have an offer accepted on the first house you fall in love with and don’t get discouraged even if your fourth or fifth offer falls through. There may not be enough houses on the market right now, but more are coming on the market every day. The right house will come along, it always does. Think of your first few failed offers as a learning experience to better prepare you to make your next offer until you own the home that you want.
1. Your preapproval letter is only a beginning. First, know the difference between being prequalified and preapproved. Being prequalified is mostly for your own purpose and has little or nothing to do with making a purchase offer. Prequalifying is based on verbal information you provide to a lender. The lender uses this to give you an idea of the amount you will be approved for but there is no commitment on the part of the lender. The preapproval letter is based on the lender reviewing and confirming your W-2s, bank statements, credit score, and other relevant documentation. It’s the preapproval letter that tells the seller that you’re serious about buying their home and highly likely to close the deal.
2. Make your highest offer from the beginning. If you’re taking old-school advice, you’re probably being told to bid low to leave room to negotiate higher. There may be rare local circumstances where this will work but it should only be based on the advice of a trusted real estate agent. Before you write up your offer, have your agent contact the selling agent to learn if there are other offers on the house. You will not be told what the other offers are, but you should be told if there are other offers and how many there are. You might be told there are 2 other offers, or you might learn there are 15 other offers with 3 more expected before the end of the day. Your highest offer doesn’t always mean it is the most that you can spend. When the market demands it, your highest offer should be at the high end of the market analysis.
3. Include an escalation clause. In today’s market, a good strategy is looking at houses below the top end of your budget. That allows you to make a high opening offer and include an escalation clause. The key is that your budget must have room to go higher even if goes slightly above the current market analysis. An escalation clause says you’ll pay a certain dollar amount above any offer up to your budget limit. With a $250,000 first offer, the escalation clause might say that you’ll outbid any competing offers by $1,000 up to $260,000. But you should be prepared to pay that escalation in cash. If the appraisal doesn’t support the higher offer, you can probably still get the mortgage you are preapproved for, but you’ll need to pay cash for the difference between the appraised value and what you offered above the appraised value.
4. Minimal or no contingency clauses. Contingencies are specific conditions that must be met before the sale can be completed. For example, a contingency could be that the house value must meet or exceed your offered price when appraised. If you follow tip 3 above, you don’t need to include this contingency in your offer. You can include a contingency for almost anything but the more conditions that the seller must meet the less likely the seller is to accept your offer. One contingency that is almost always wise to include is a home inspection to be sure you aren’t buying a major problem that you aren’t aware of. The type of contingencies that you might want to skip is for the seller to pay part of your closing costs or for a home warranty.
5. Require a minimal home inspection. You should include a home inspection contingency, but you can make it minimal. You want to be able to get out of the deal if the inspection reveals major damage like dry rot or structural damage without nickel-and-diming the seller until they back out of the deal. Your inspection contingency could be limited to only damages and repairs exceeding a dollar amount of $2,000 or $2,500 (whatever you are comfortable with).
6. You may need to change your strategy. You might begin your search in one part of town or neighborhood, but after losing several bids, you can widen your search to other parts of town. Other strategy changes could be changing your expectations from a four-bedroom to a three-bedroom or foregoing a finished basement.
5. Offer to rent back to the seller. It’s not always the highest price that is accepted. In today’s hot market, sellers also have a fear of not being able to find the next home they will live in. The best offer in the eyes of the seller could be a competitive price combined with the ability to rent the house back for a few months until they can close on their next home.
6. Make yourself available and be prepared to act fast. Make sure the seller has all the information they need to get a hold of you to answer questions or get clarification as fast as possible. Along with responding to their inquiries quickly, you want to stay on the seller’s radar. Have your agent regularly check in with the listing agent to monitor the seller’s progress. If all else fails, at least you’ll know as soon as possible when it’s time to move on to the next house.
You don’t have as much control as you’d like in today’s hot market but these tips are things that you can still control.
Certainly, you have a ton of other tips to help buyers in today’s extreme sellers’ market. Please share by leaving a comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].