8 WAYS TO INCREASE YOUR ODDS OF SUCCESS
It’s no secret that the real estate market is crazy right now. We have an unprecedented inventory shortage and demand is through the roof. Many listings are receiving multiple offers over asking price within 24 hours and buyers their agents are pulling out all the stops to make their offers stand out.
So what do you do if you need to buy a house when it seems like it’s never been tougher to buy a house?
The first thing you do is try not to be discouraged. Homes sell everyday and there are plenty of proven strategies to increase your odds of success in markets that favor the seller. Here are 8 tips that have worked well for me.
For an in-depth guide to buying a new home, check out my e-book, The Homebuyer's Guide to Success.
Without a doubt, the most important thing a buyer can do to prepare for their next home purchase is a thorough self-analysis. In any market, but especially a seller’s market, the buyer who knows what they want and why they want it has an enormous advantage over an indecisive competitor. When an opportunity arises, they can move quickly, confidently, and aggressively, and they are less likely to make the sort of purchasing mistakes that can lead to regret or financial stress.
Before you start shopping, ask yourself the following questions:
Why am I moving?
How will my/our new home change my/our lives?
What would happen if I stayed where I’m at?
When do I want to move into my new home?
What are my needs?
To be clear, these are items or attributes you cannot live without. Think bedrooms, bathrooms, square footage, yard size, basement, school district, etc. If a home does not have all of the items on your needs list, it is disqualified from your search.
What are my wants?
These are things that make a home more appealing, but aren’t necessary. Think of your ‘wants’ list as the icing on the cake that might sway you towards one home over another.
For the sake of time, I’m not going to get into budget calculation, loan programs or the methods lenders use to qualify borrowers. *You can find all of that here. I’m just going to tell you that it is absolutely critical that you know your own personal budget and stick to it. Don’t let friends, family, real estate agents or your own emotions persuade you to do anything that isn’t in your best long-term financial interest. It’s better to sleep comfortably in a home that you can afford than to lie awake in one you can’t.
Residential real estate is a hyper-local business, and your agent is your personal connection to your market. They’re your best source of insight into local neighborhoods and subdivisions, market trends, builders, contractors, lenders, title companies, and other agents. They (should) understand real estate law and how to avoid liability. They know how to craft an offer and negotiate in a competitive market, and once you’re under contract, they coordinate the escrow process so that your home closes on time.
Write an outstanding offer
Crafting a winning offer is as much art as it is science. An entire host of factors need to be taken into consideration when deciding how much to offer and what terms to ask for. Things like market conditions, area, condition of the house, time on market, competing offers, the seller’s temperament and whether or not the buyer needs help (from the seller) with closing costs will all play a role in how your offer is written. This is where your earlier preparation and your agent’s experience comes into play.
Earnest money is a good faith deposit that is paid by the buyer to prove that they are serious (or earnest) in their intent to purchase the home. The typical amount varies based on market conditions and area, but most earnest money deposits range from .5%-2% of the home’s price.
Once a home goes under contract, the earnest money is held in escrow by a third-party (usually the title company) until closing, when it is applied towards your down payment or closing costs. Your agent should be able to advise you on how much you should offer, but a larger earnest money deposit indicates to the seller that you’re committed to purchasing the house.
An appraisal is an opinion of value that is used by lenders to determine how much they’re willing to lend on a particular property. It's based off of the sold prices of comparable properties, but in a market where values are rising very quickly, there may not be enough (or any) comparable properties to justify the sale price that you and the seller agreed on. If that happens, the sale contract allows you to request that the price be reduced to the appraised value. If the seller doesn’t agree to lower the price, you can back out of the deal and recover your earnest money deposit.
However, if you can pay cash or put down more than twenty percent (some lenders may require more), you have the option to waive the appraisal contingency up-front. I almost never recommend that a buyer waive their appraisal contingency, but in a very competitive market where home values are increasing rapidly, an appraisal waiver may the only way for a well-qualified buyer to succeed. That is an unfortunate reality, but you play the hand your dealt.
Or, if you don't have the option to waive the appraisal contingency because of your loan terms, you can offer an appraisal bridge.
For example, let's say you're writing an offer on a house listed at $275k. You're pre-approved up to $315k. Your offer is $300k and you're putting 10% down. You don't have enough cash to waive your appraisal contingency, but you've got enough to offer a $10k bridge, so if the home appraises for $290k, you can cover the difference out of pocket.
Because listing agents cannot (or at least aren’t supposed to) disclose the price of competing offers, it makes it difficult to know exactly how much to offer in a multiple-offer scenario. For this reason, it may be in your best interest to include an escalation clause in your offer.
An escalation clause basically says that you will pay x amount over any other offers up to y amount.
For example: If you’re making an offer on a home with a $250,000 asking price, you may offer $250,000 with an escalation clause saying you will pay $1000 dollars over any other offer up to $275,000.
In order to activate the terms of an escalation clause, the seller must provide the buyer with the competing offer that justified the price increase. In other words, a seller can’t just raise the sale price to the maximum ceiling of $275,000 (using the above example) without showing the buyer the competing contract for $274,000.
Or, for the most ardent hearted buyers, you can write an unlimited escalation clause, which says that you will pay x amount over any other offer. Over any other offer. I just heard about a case where a buyer wrote an offer with an unlimited escalation clause and the next highest offer was $100k over asking. Spoiler alert: he backed out of the deal faster than you can say 'buyer's remorse.'
No house is perfect, not even new construction. You can and should (always!) have a home inspection performed, but have your agent convey to the seller that you won’t make a lot of small, annoying repair or replacement requests. Limit your priorities to major items that may come up on the report. Think roof, foundation, plumbing, electrical, HVAC.
You can even write your inspection terms into your offer. For example, you might tell the seller that you won’t ask them to make or pay for any repair items under $2000. Or, if your financial situation allows, you can write into the contract that you will purchase the home as-is with no inspection requests whatsoever.
A word of caution: Even if you have no intentions of asking the seller for repairs, you should always have an inspection done by a qualified, reputable inspector. Always, always, always, always.
One of the best ways to get on a seller’s good side is by accommodating their timeline. You can do this by letting them choose the closing date, or, if they need extra time to move into their next house, you can offer to lease the home you’re buying back to the seller for a short period of time.
Buying in a seller’s market may be difficult, but it’s not impossible. Using any or all of the recommended tips from above, you’ll likely still have to write several offers before you get a home under contract. It may take longer than you expected, it may be frustrating, you may have to make unanticipated and unpleasant sacrifices, but if you do your homework and come into the process with realistic expectations, you can be successful.