I work with a LOT of Buyers. And…it’s a “Seller’s Market” in Colorado right now. I am often asked “How much should I offer?” That’s a decision that YOU have to make, working with your lender. But when you come up with a number you’re comfortable with, there are some additional steps you can take to help get your offer accepted.
Because of our crazy market, you will be working FAST, and there may be many terms flying about that you are unfamiliar with.
Here’s a quick rundown of strategies and terms that successful Realtors are using to get their buyers under contract. And remember, if you don’t understand something, or if you’re uncomfortable with something…PUT ON THE BRAKES AND ASK QUESTIONS! Your Realtor will be happy to make sure you understand every element of your offer.
Many of these strategies involve creative ways of using your available cash. Where you place your cash “on the game board” can have a huge impact on the success of your offer.
Above all, remember that Sellers and their agents are looking at three key factors:
• Offers that provide the highest guaranteed price
• Offers that have the best chance to make it to the closing table with no hiccups
• Offers that best meet the Seller’s individual needs
The Escalation Clause can be a great tool when there are many “over asking price” offers on a property. Unless you have a crystal ball, it can be difficult to know the magic number required for a successful offer, and the Escalation Clause takes some of that guesswork away.
Sit down with your Realtor to discuss the maximum amount you would be willing to pay for the property.
Let’s say a home is listed at $200,000. You love it. You want it. Your financing is in place for you to pay up to $220,000 for a home.
With an Escalation Clause, your Realtor can write the offer for a bit over asking (say $205,000), with a special provision that states “buyer will pay $1000 over any other bona fide offer, up to $220,000.”
If someone else offers $210,000, your offer would then be $211,000 (provided the listing agent provides your team with a copy of that $210,000 offer).
“But if you’re approved for $220,000, why not just write your offer for that amount?” Of course, you can always offer the maximum. AND some listing agents won’t accept escalation clauses, so maximum may be your only solution. BUT…if the highest offer they receive is only $210,000, and you win with an Escalation Clause that increases your offer $211,000, you just saved $9k!
Appraisal Bridge (Also known as Appraisal Condition):
With offers creeping so high, it’s no surprise that some properties don’t appraise for the amount of the final offer.
Let’s go back to our winning $211,000 offer. Yes, you are qualified for this loan. However, your lender must make sure the property is WORTH the amount they are loaning for it. They send their appraiser out to look at the property, and other comparable sales in the area, to determine its worth.
In this scenario, the appraiser comes back with a value on the home of $207,000. But your offer is $211,000! Now what?
Back in ye olden days, Seller and Buyer would come back to the table and negotiate if a property “didn’t appraise.” Generally, each side would make some concessions and end up at a happy place in the middle.
In today’s competitive market, the Seller’s Agent can usually guarantee they get exactly what’s in that offer with no appraisal negotiating. How?
The Appraisal Bridge is a clause in your offer that basically states “in the event the property doesn’t appraise for our offer price, we will bring extra cash to the table to make up the difference.” Sellers LOVE this, because they don’t have to sweat the appraisal. They know, no matter what, they will get their $211,000.
What does that mean to you? It means you have to bring an extra $4000 of your own personal cash to the closing table (because the bank is only going to loan you the appraised amount of $207,000).
Obviously, your team (you, your Realtor and your Lender) will need to have some frank discussions before submitting an Appraisal Bridge, particularly regarding your available cash. You may want to consider different loan scenarios (requiring a smaller down payment) in order to free up your cash for creative offer tactics like an Appraisal Bridge.
Also, your Appraisal Bridge doesn’t have to be for the full amount of the difference. You can always specify the exact amount of cash you are willing to pledge for an appraisal deficiency. Even if it’s only a few thousand dollars, it provides the Seller with a bit of a guarantee.
Increased Earnest Money:
In every listing, the Seller’s Agent specifies the amount that will be necessary for your Earnest Money (EM) deposit. A general rule of thumb is about 1% of the listing price. Our $200,000 home probably had an EM requirement of $2,000.
Consider increasing this amount in your offer. Make it $3,000…or more. This strategy will not make or break any offer, but it sends a very strong message to the Seller:
“We are serious about closing this deal.”
When the Seller is reviewing all the offers, this is just one more item in your “plus” column, and is another great, creative way to utilize your available cash to make your offer stand out.
Waiving Inspection Issues:
Let the record state that I would NEVER advise a client to forego a property inspection. Inspections are critical to determine that status of all the systems, equipment and soundness of the home.
However, if you are serious about submitting a winning offer, consider “waiving cosmetic inspection issues.” Your Realtor can write a clause that states that you will only raise inspection issues that directly affect health, safety, structural integrity and the working functions of equipment necessary for daily use of the home.
“Well, isn’t that everything?” Yes. Pretty much everything that is important (and expensive). So what’s the point? Much like our increased Earnest Money, it sends a strong message to the Seller:
“We are not going to nickel and dime you to death over carpet and paint.”
If something critical is wrong with the home, we are going to talk about it, but we won’t use cosmetic issues to whittle down the price of the home (as many do, going in with a battle cry of “don’t worry – we’ll get some money back with inspection issues”).
Post-Closing Occupancy Agreement:
You might not have noticed this, but it’s really tough to buy a house these days! The Sellers of the home you love might be in the same boat as you…struggling to get an offer accepted on a replacement property.
Often, the need to find a replacement home is clearly stated in the Broker’s Comments that your Realtor can see on the listing. Even if they aren’t, your Realtor should have already had a conversation with the Seller’s Agent, finding out if they have any special needs that you can accommodate with your offer.
Perhaps the Sellers are moving into a new build, and they’re a bit nervous that the house won’t be finished by the closing date of our offer. Perhaps they’re unable to start their next property search until this house is under contract (a very common occurrence).
We want to send another message: “We Understand, and We Will Work With You.”
Often this is accomplished with a Post-Closing Occupancy Agreement clause in your contract. A big phrase that just means “they can keep living in their house for a specified time, even after we’ve closed.”
This can really take some pressure off the Seller and make your offer shine. Your Realtor will make sure this agreement covers your risk. It generally requires the Sellers to provide you with a damage deposit while maintaining insurance coverage on the home. Colorado rules state that this Agreement can only extend for 30 days past closing.
Some folks like to ask for a rental fee ($X/day) during this time. In today’s market, I rarely recommend this. They are trying to purchase a new home – they need their monies. And, your first mortgage payment won’t be due until after the post-closing agreement so you’re not going to be out-of-pocket for any funds.
This is a great way to meet the Seller’s needs and add one more thing to your offer’s “plus” column without having to go into your pocket.
It’s not easy to buy a home right now, but working with your Realtor and using some of these tactics can increase your chances for success. Happy Hunting!