Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a house or apartment. Additional questions welcomed to firstname.lastname@example.org. Today, real estate expert Christian Nossum explains how you can win a bidding war for a home.
In today's Seattle-area housing market, you can expect to be in a bidding war on any property in a prime location that's priced well. As an experienced Seattle area real estate broker, I've had a great string of success this year getting my buyers' offer accepted. Here are the top six tips that I've been sharing with my clients to set them apart from the crowd.
"Show Me The Money!"
The price you offer is generally the most important factor in a bidding war (Duh!). To determine what price you should offer, have your real estate agent run a search for comparable sales in the areas (a.k.a., comps). If you're like most buyers and have been looking online or in person for a while, you'll have a good feel for the market already. A fear that everyone has when making an offer is overpaying. No one ever wants to pay too much for anything, let alone real estate. One way to make your offer attractive, while protecting how much you're spending, is to add in something called an "Escalation Clause." The escalation clause increases your offer price by a set dollar amount ($1,500, for example), up to a specific dollar cap that you set. The offer only increases by $1,500 if there is another offer that bumps it up.
For example, let's say you offer $500,000 on a house, and add an escalation clause with a cap of $555,250. You'll beat any competing offer up to your cap of $550,000 by $1,500. If there is another offer with an escalation clause with a cap of $545,000, your new offer price is only $1,500 higher than this, so your offer is now just $546,500 ($545,000 + $1,500). Keep in mind that asking the seller to give you a credit to pay for your closing costs is basically decreasing the amount of your offer. The seller only cares about their net (your offer minus any closing cost credits = their net). So if your cap is $550,000, but you're asking for $10,000 in closing costs, your real cap is just $540,000, and in the above situation, you would have lost out of this house.
One last tip about escalation clauses - don't make your cap a round number. Just last week I got a client's offer accepted, and we beat out the next highest offer by just $750! My client had an escalation clause with a cap of $366,750, and the next highest offer had a cap of $366,000. By setting his cap higher than a round number (i.e, $25,000, $50,000, etc), he just barely beat of the competition.
An offer to buy a house is generally dependent on a number of factors, including a number of contingencies (like an inspection, appraisal, financing, etc). The more contingencies you remove from your offer, the more attractive your offer will look to the seller. Unfortunately, this also means that it's harder for you to get out of your offer if you needed to.
The most common contingency that people remove prior to making an offer is the inspection. A pre-inspection is where you pay the inspector $300-$500 out of pocket prior to making an offer. The home inspector will go through the property and tell you of any major and minor issues with the home. If he or she finds minor items, then generally I wouldn't recommend asking the seller to make any repairs. If there are major issues found, then you need to decide whether this is the right property for your or not. The big problem with pre-inspections is when you pay for one, and then lose out on your offer and have to do it all over again on another property. Paying $300-$500 over and over again can really add up over time. If you don't want to risk the money on a pre-inspection, you could also have a very short 1-3 day inspection period included with your offer. This isn't nearly as ideal as a pre-inspection for a seller, but if you've lost out on a few offers where you paid for a pre-inspection, you might not have much extra cash sitting around to spend on yet another one.
Having cash, and not having to get a loan to purchase the property, really makes your offer attractive since there are very minimal contingencies needed. One reason why is because cash is quick (you can close in 7-10 days, as opposed to 30 days when getting financing), and there is no appraisal. An appraisal is where the bank sends out an appraiser to ensure that the price you're paying for the property is fair based on comparable homes in the neighborhood. An appraisal is required when getting a loan.
Since not everyone has a half-million dollars sitting in their bank account, how do you compete with an all cash offer? The first way is to close as quickly as possible. I have a mortgage broker on hand that can close in as quick as 10 days. That means that we are almost as fast as an all-cash offer, and about twenty days faster than any offer with financing. This is a HUGE plus in this market, and part of the reason why my clients have been getting their offers accepted so often this year.
Another way to compete against cash offers is to waive your financing or appraisal contingency. I must warn you that doing this can be a risky move since the appraisal might come in lower than the price you're paying, and if that happens you will have to pay the difference between the price you're paying and the appraisal amount out of pocket at closing. This is also risky if you don't end up getting approved for your loan. If that happens, you could lose your earnest money.
Choose Your Team Wisely
Who you choose as your real estate agent and lender can be the difference between your offer getting accepted or not. For example, a couple weeks ago a client of mine made an offer, and guess what? There were multiple other offers. Her offer beat out the other six offers because of three reasons: 1) She had a local lender that the listing agent could easily get ahold of (even after normal bank hours).
2) We were able to close the fastest.
3) The listing agent had heard good things about me from another agent in their office who I had worked with in the past.
In this situation, we weren't even the highest-priced offer, but since her "team" was easy to work with, her offer was accepted over a Redfin buyer with a big bank as her lender. If you've ever read anything I've written here on Curbed over the last couple years, you know that I always try to keep it real and tell you how it really is out there in Seattle real estate land. So here's an inside scoop on how some real estate agents feel about working with buyers that are represented by a Redfin agent. This isn't the feeling of every real estate agent, but after hearing it over and over again, I'm going to guess that it must be a somewhat widely held thought. Because of this, if you're using Redfin to represent you, you might want to think twice if you're in love with particular property that has multiple offers. Just sayin'.
Sellers wants to know that you are serious and have the ability to close when you say you can. There are things you can include and exclude in your offer that tell the seller that this is the case: pay for and have a pre-inspection done prior to making your offer, the larger the down payment the better, the higher your earnest money deposit the better, use a local lender (lenders that process loans in-house are preferable because they're generally quicker and closing your loan, and you can usually get ahold of them easier), have a quick closing, use the preferred title and escrow company of seller, and consider waiving the appraisal or financing contingencies (but be sure to talk to your agent about the pitfalls of doing this because it can be a risky option at times). Doing these things don't necessarily cost you more money (other than the pre-inspection), but they definitely make your offer stronger and more appealing to the seller. Make Life Easy for the Seller
Quick closings, free or inexpensive seller rent-backs, and offers to buy any of the seller's unwanted furniture can go a long way in getting your offer accepted. The first two are pretty obvious, but buying the seller's furniture is a little trick that I often recommend that seals the deal for my clients. If you can spend a few hundred bucks purchasing a few of the sellers unwanted furniture, you save them the hassle of having to sell it on Criagslist or somewhere else. Doing this can set your offer apart from the crowd, even if you're not the highest-priced offer because you're saving the seller time and energy (which is something money can't buy, and something that is extremely valuable to the seller when moving). I recommend this even if you don't want or need the furniture you're offering to buy since you're only spending a few hundred bucks (and possibly saving thousands of dollars by not increasing your offer even higher). Make it Personal
Adding a pre-approval letter is always a necessity, but adding in a "love letter" is a little extra touch that adds the emotional aspect to the mix. The point of the love letter is to appeal to the seller's emotions, and make then realize that they want to sell to someone like you who will tale care of the house the same way that they have over the many years that they've owned it. Believe it or not, these letters have gotten my clients offers accepted, even when there are offers higher in price. There are a few key points to add to these letters, and i have some samples that I'm happy to share with you. If you want to see the, just email me and I'll send them over.
Although Seattle's real estate market is very competitive, there are little things you can do (that don't always cost you more money), that can make your offer stand out from the crowd. Having the highest offer is the easiest way to get your offer accepted, but removing contingencies, working with a great real estate agent and lender, having the strongest offer possible, making life easy for the seller, and creating a personal connection with the seller are all ways to make your offer stand out to the seller so they accept your offer instead of one of the may others that they have to choose from. If you ever want to chat about specifics on getting your offer accepted in today tight market, don't hesitate to reach out to me at AwesomeNossum.com. I'm happy to chat about your situation over a coffee or beer.
· All Curbed University coverage [Curbed Seattle]