Earlier this year we started to witness an increase in transaction velocity for homes across the county. This was a direct result of the Fed cutting rates, which ultimately provided Americans a chance to purchase a home at a historically low interest rate. When the pandemic swept the globe a short time later, analysis predicted that velocity would slow down as a result of two factors: 1) People fearing the impact of the virus, and 2) Uncertainty about both the economic future of themselves and the country. However, six months after the virus infiltrated the states, those predictions have proven to be false. Instead, as people transition their routines and adopt a work-from-home lifestyle, many are making the leap to new homes to accommodate the need for larger spaces. This has been especially true in the luxury home sector, where individuals have been seeking more remote, luxurious homes to make stay-at-home orders more comfortable.
As a result of this trend, there has been an overwhelming amount of competition for specific houses. This results in potential buyers being faced with the challenge of beating out their competition. For those who have been confronted with this problem, there are a few avenues through which you can take to improve your offer and ensure that you win the bid on your future home.
Offer Above the Asking Price
The most obvious way to make sure your offer is at the top of the competition is by offering above the asking price. This will place you as a lead contender. However, if you are going to take this route, be sure that the offer is validated by comps in the area, and that you are prepared to overpay. Ask your real estate agent to conduct a comp analysis to see what price would make the most sense. Remember too, that if you notice during inspections that the home is not worth the value, you can always re-trade and ask for a lower price.
Make an All-Cash Offer
Lenders can make transactions more complicated due to the appraisal and inspection requirements.
In today’s market, many homes are being marketed above the appraised value, creating an appraisal gap – This means that the appraised value is below the market value, which can limit the amount a lender is willing to lend to a borrower. If a buyer is not financially prepared to cover the difference and provide a larger down-payment, this can cause them to re-trade on a deal. Along similar lines, if there are multiple inspection issues, the lender may renegotiate your loan. By making an all cash-offer you can remove these potential problems, which will entice the seller to accept your offer over other complicated and less guaranteed buyers.
Provide an Appraisal Guarantee
If you are going to utilize a loan, then you will want to make an offer that states that you as the buyer will cover the appraisal gap. This will require that you put more down, but can show the seller that you are a serious buyer prepared to pay market rates.
If You Need a Loan, Get Pre-Approved
Although it is best to be able to make an all cash offer, not every buyer can and many are still finding great homes using a lender. However, if you are using a loan, get pre-approved and have the pre-approval letter ready when you make an offer. This shows the seller that the lender has already vetted your application and that you will have a higher chance of closing.
Purchase the Home As-Is
Many buyers make offers and re-trade following the inspections. They use the reported problems with the home as a reason to lower their offer. However, if you are really motivated to acquire a specific home, then making an offer to purchase the home as-is will set you apart. This means that you are making your offer regardless of the issues with the inspection.
If you do make an offer as-is, you still want to include an inspection contingency. It may sound contradictory, but you will want to protect yourself if there is any major damage to the home – You will want to have the opportunity to exit a deal if there is something wrong such as structural damage. The as-is clause will relate more to the smaller problems with the home that can be tedious for the seller to deal with.
Shorten the Inspection Period
The inspection period in a purchase and sale agreement can vary depending on the buyer’s needs, but typically ranges from one to thirty days. This period of time is agreed upon during the initial negotiations. Often, buyers offer a seventeen to twenty one day contingency period to allow them plenty of time to conduct their due diligence on the home and back out of the deal if any issues arise. Therefore, shortening this timeframe can help you gain the attention of the seller; typically a ten-day inspection period provides you with ample time to complete the inspection.
Include a Larger Earnest Money Deposit
When you enter into escrow, you as the buyer are responsible for putting down an earnest money deposit, which is a specific amount of cash that is placed into escrow in the beginning of a transaction. It is essentially a deposit that the buyer makes on a home, and it can equal anywhere from one to ten percent (typically one to three percent in California) of the price of the home. The deposit, in the event that the buyer does not go through with the transaction after all contingencies had been removed, would likely get forfeited to the seller. So, when making an offer, it is best to offer a higher earnest money deposit of at least the recommended three percent. This will prove to the seller that you are a serious and motivated buyer because you are risking more if the deal does not close as per the contract.
Shorten the Closing Timeframe
Make the closing as soon as possible. Sellers are looking for buyers that are motivated and that are not intending to tie up the home while they vet out other potential opportunities. Therefore, to remove yourself from this assumption, you as a buyer will want to tighten up your timeframe for closing. This means you will try to remove contingencies as soon as possible and close escrow shortly thereafter. If the seller needs more time before closing, you will be allowing them to have control of the extended escrow period.
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