How to Win a Bidding War in a Hot Market
Given low interest rates and an overall lack of inventory to choose from, many buyers are finding themselves in multiple offer situations and bidding wars to get the home of their dreams. This often times give a Seller more leverage in negotiations, leaving Buyers to find creative ways to make their offers more attractive. Let’s review some of the most important aspects of of the purchase agreement to get an offer accepted.
Price: Not always, but in most scenarios the strongest offer price is going to be accepted. This should be a generally accepted truth given that if one offer is reasonably higher than the next, why not move forward with the higher priced offer? There are some significant variables to take into consideration along with this, as the goal is to ultimately reach the finish line and the highest priced offer doesn’t always necessarily achieve that goal.
Close of Escrow: The vast majority of purchases close escrow in 30-45 days from the date of Acceptance. With the amount of loan volume and refinance activity that has been moving through lender pipelines, it can be challenging for a lender to fund a loan in 30 days. Many appraisers have more work than they can handle and underwriting “turn times”, meaning the number of days for an underwriter to review and sign off on borrower documentation, have increased. In most cases, a Seller will look for a reasonable close of escrow timeframe (30-45 days), which can vary depending on the Seller’s situation. When making an offer, take into account whether the property is vacant, whether the seller needs to locate a replacement property, whether the property is tenant occupied, etc and draft an offer accordingly.
Deposit: Within 3 business days after Acceptance of an offer, a Buyer is to send an “Earnest Money Deposit” into escrow, which will be held until closing and go toward the Buyer’s downpayment. On the Central Coast, the deposit amount generally ranges from 1-2% of the purchase price, meaning that at a $750,000 price point, a typical deposit would be in the $7,500-$15,000 range. If a Buyer backs out of a transaction prior to removing contingencies, the Buyer retains the deposit money. However, if a Buyer backs out after removing contingencies, the Seller has a claim on the Buyer’s deposit. By offering a larger deposit, the Buyer is less likely to walk away from a transaction after having removed their contingencies. Note that if a Buyer and Seller sign the liquidated damages clause, the maximum amount a Seller can retain as “damages” is 3% of the purchase price if a Buyer backs out late in the game [for 1-4 unit residential sales].
Financing: Many Sellers place a lot of importance on a Buyer’s financing. A Buyer who plans to obtain a conventional loan with 20% down might be seen as more attractive than a Buyer who is using FHA or VA financing or only has limited downpayment funds. Whether a Buyer has more money in the bank or is simply using a loan product that provides for higher leverage is worth vetting out prior to accepting an offer. But in general, a larger downpayment will be seen as more favorable by most Sellers. Separately, I am sometimes asked about cash offers and how much difference that makes to a Seller. The answer is that it really depends on a variety of factors, most importantly being the overall condition of the property. There may be risk of a property in very poor condition not qualifying for financing, in which case a cash offer becomes much more valuable. Meanwhile, there may not be much difference to a seller of a house in good condition, as they don’t have the same concerns regarding condition of the property. Either way, a cash offer eliminates some of the hurdles a borrower has to jump through to buy a home and is less risky to a Seller that that something could go wrong during the escrow process. In most cases, the “value differential” of a cash offer over a financed offer is between $5,000-$20,000, depending on variables.
Closing Costs: These costs are generally split per industry standard, such that a buyer primarily pays for costs of obtaining a loan (appraisal, underwriting fee, processing fee) and splits the cost of the escrow fee 50/50 with the seller. Meanwhile, a Seller generally pays for title insurance, real estate commissions, transfer taxes and in most scenarios, a home warranty.
Contingency Timeframes: In a standard purchase agreement, the default timeframe for the investigation and appraisal contingency is 17 days, while a Buyer has 21 days for their loan contingency. In today’s market, reducing the loan and appraisal contingency could be risky as those contingencies are unlikely to be approved in less time. However, shortening up the investigation contingency can be advantageous, as it is the most common cause of buyers backing out of a transaction. Some Buyers will remove their appraisal contingency completely, which can be risky. By doing so, a Buyer’s intent is to purchase the property even if the appraisal comes in less than the agreed upon contract price. Because a Buyer can only get a loan based on the appraised value, if the appraisal is low, the Buyer will be required to bring additional cash into the transaction to close escrow.
Ultimately, a Seller will want to move forward with the best price AND terms offered. Understanding some of the factors above can help determine how you can make an attractive offer that is not completely dictated by price.
In summary, when making an offer when there is more than one buyer interested, you might consider:
- Come in with the highest price you are comfortable paying and can afford.
- Structure the closing date to meet the needs/wishes of the Seller.
- Offer a larger earnest money deposit.
- Reduce the inspection contingency period from the standard 17 timeframe.
- Remove the appraisal contingency. *This can be risky; consult your Realtor.
- Make sure to include a loan pre-approval letter with your offer.
- Provide proof of downpayment and closing costs funds.
- Some buyers like to write a cover letter to the Seller.