Despite the fact we’re officially in a recession, a number of U.S. housing markets remain red hot. Some are even hotter than they have ever been before!
The reason? A low number of properties are being listed for sale while a high number of homebuyers are looking to buy—especially in light of historically low interest rates. And more buyers means more sellers are getting multiple offers for their properties.
There was a property for sale in my market of Grand Rapids, Michigan, that was listed for $180K, received over 30 offers in two days, and went for $40K over the asking price. Crazy, right?
So, how can you make your offer stand out and get accepted in a multiple offer situation? Here are several tactics to help you write a competitive offer and win the bidding war:
- Provide appraisal gap coverage
- Increase earnest money deposit
- Shorten your inspection period
- Cover your own closing costs
- Include escalation clauses
- Provide occupancy
- Waive your commission
Let’s define and go over these tactics in a little more detail so you can use one (or a combination of several) when writing your next offer.
Related: 5 Signs You Shouldn’t Buy That House
Provide appraisal gap coverage
In order to get an offer accepted, you may have to go over asking price. But when offering above the asking price on a property, there is a chance that it may be more than what the bank appraises the home for.
Here’s an example. Say a home is listed for $100K, you go under contract on this home for $110K, but the appraisal only comes in at $105K. In this scenario, you would have to either fork over an additional $5K cash to make the deal happen, convince the seller to accept a new purchase price of $105K, or walk away from the deal.
Sellers are afraid of the latter option, so they like to see a guarantee that when you make an offer over asking price that you are willing to come up with some money to cover the difference, if the appraisal were to come in short.
That is what we call appraisal gap coverage. It is insurance to the seller that you are willing to pay an additional amount over the appraised value of the home, if the appraisal is less than the agreed upon purchase price.
To modify our previous example, let’s say the house is listed at $100K, you offer $110K with $1,000 in appraisal gap coverage, and the home appraises for $105K. Your appraisal gap coverage now kicks in, you come up with $1,000 cash, and the new purchase price is $106K.
If a seller is looking at two equal offers and one offer has appraisal gap coverage but the other offer doesn’t, they are going to go with the offer with appraisal gap coverage.
Plus, in this scenario, you just got the house for less than you were initially planning on purchasing it for, Win-win!
Related: The Psychology of Making Offers
Increase your earnest money deposit
Earnest money deposits are used to show that you have skin in the game when making an offer to buy a property. The amount of money you put down as earnest money differs from market to market but is typically 1-2% of the purchase price. That 1-2% is not a hard and fast rule though. You can increase your earnest money deposit to more than 1-2%—maybe 3% or more—to show you really want a home. You have even more skin in the game.
Now, the earnest money deposit is refundable if you have to back out of the contract due to inspection, financing, or other issues. The earnest money deposit also comes out of your down payment, so it’s not money you are just giving away.
Offers with a larger earnest money deposit can lead to you getting your offer accepted over other offers.
Bonus tip: You can make your earnest money deposit non-refundable if you are REALLY serious about the property. Proceed with caution, though.
Shorten your inspection period
The inspection period is where you get a licensed inspector and contractors to walk through the home and do an in-depth assessment on the structure and systems, such as furnace and AC. This is often the time when homes fall out of contract due to a poor inspection.
If you offer a shorter window for inspection, such as a 3-5 day inspection period compared to a 10-day, a seller might accept your offer over others. They know that if something comes back bad from the inspection, they can go back to market sooner rather than later.
If you do go with a short inspection window, though, make sure you have your contractors and inspectors lined up and ready to move so you can do your proper due diligence.
Bonus tip: Some serious and seasoned investors will even waive inspections on properties they know they are going to do a gut rehab on.
Cover your own closing costs
Many first-time homebuyers scrape just enough money together to come up with the down payment for a home—they don’t have enough to cover the closing costs for the lender and the prepaid expenses for funding the escrow account. A way for property buyers to get this cost covered is by asking the seller to cover a certain amount of the buyer’s closing costs.
This can be effective in a buyer’s market, but in a hot seller’s market, if you offer $100K and ask for $5,000 in closing costs to be covered by the seller, your offer is essentially $95K to seller. If another buyer comes in and offers $100K without any closing costs to be covered by the seller, you are going to lose that bid!
Do your best to cover your own closing costs when writing an offer in a competitive market.
Related: How to Make an Offer on a Property Not Listed on the MLS
Include escalation clauses
The escalation clause can be a very powerful tool when making an offer on a property. Escalation clauses generally say that you will beat any other offer a seller has by $1,000 up to a certain purchase price.
Here’s an example of an offer with an escalation clause: $100K with an escalation up to $115K. If the seller has another offer of $110K, the escalation clause in your offer would be exercised and you would beat the other offer by $1,000, making your purchase price $111K.
In this scenario, you saved yourself $4,000 and got the house. In situations where there are maybe 2-5 total offers, escalation clauses are a great tool to use.
However, when there are a large number of offers on a single property, an escalation clause makes your offer confusing and complicated to the sellers. It may get it moved the bottom of the pile. If you know you are offering on a property that has a lot of offers, your best bet is to send in a clean and simple offer at your highest and best price. The easier it is to understand your offer and compare it to the other offers in the mix, the better your chances of getting your offer considered and accepted.
This is a pretty simple one: If a seller needs time after closing on the house to pack their things and move or buy another house, give it to them! Many times, a seller may ask for 10 days or as many as 60-plus days to get their ducks in a row and move out of a property. If you give the sellers the occupancy they need after closing and another buyer doesn’t provide occupancy, your offer is more likely to get accepted.
Plus, in many cases—depending on the length of occupancy the seller needs—you may even collect rent from sellers or collect a fee for days they stay in the home past the agreed upon occupancy period. Boom! Now you have a short-term tenant while you look for other long-term tenants. Sounds like a huge win to me!
Waive your commission
This tip is for all of the property buyers who also have their real estate license. In the typical transaction, the seller pays a percentage of the purchase price as a fee to use an agent, and the buyer’s agent and the selling agent split that commission 50/50. As an example, say a seller is selling their house for $100K. The would pay to the agents a 6% fee, or $6,000 ($3,000 for each agent).
As a real estate agent representing yourself in a buying scenario, you can waive your right to your half of the commission, meaning the seller now only has to pay $3,000 to the seller’s agent. This is more money in the seller’s pocket, making your offer very strong!
I used this tactic on the last home I purchased and I beat out more than five offers! My purchase price was $225K, but waiving my right to the $6,750 buyers commission, my offer looked more like $231,750 since I save the seller $6,750 in commissions they would have to pay. My offer was more competitive than an offer with a purchase price of $6,000-plus over my purchase price.
Waiving your commission is an extremely powerful tool in your toolbox as an agent.
One last bonus tip: Find an experienced real estate agent like myself who knows about all of these different tactics and has experience writing them in your offers!
I hope that you enjoyed this article and picked up a few new tricks to use when writing your next offer. And don’t forget to use multiple tactics whenever it makes sense.
Best of luck and happy real estate hunting!
Questions? Comments? Other advice?
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