Despite the fact that we are officially in a recession, many US housing markets remain red hot. Some are even hotter than ever!
the reason? A small number of properties are being listed for sale, while a large number of homebuyers are looking to buy – especially in light of historically low interest rates. And more buyers means more sellers getting multiple offers for their properties.
My market in Grand Rapids, Michigan had a property for sale that was listed for $180K, received over 30 offers in two days, and went for $40K over the asking price. Crazy, isn’t it?
So, how do you make your offer stand out and get accepted in the event of multiple offers? Here are several tips to help you write a competitive proposal and win the bidding war:
- Provide assessment gap coverage
- Earnest Money Deposit Increase
- reduce your observation period
- cover your own closing costs
- include growth clause
- provide domicile
- waive your commission
Let’s define these strategies in a little more detail and go over them so that you can use one (or a combination of several) when writing your next proposal.
Connected: 5 signs you shouldn’t buy that house
-
Provide assessment gap coverage
To accept an offer, you may have to go over the asking price. But when an offer is made on a property above the asking price, there’s a chance it could exceed the price the bank appraised the home for.
Here’s an example. Let’s say a house is listed for $100K, you go under contract on this house for $110K, but the appraisal only comes in at $105K. In this scenario, you must either pay an additional $5K in cash to close the deal, persuade the seller to accept the new purchase price of $105K, or walk away from the deal.
Sellers fear the latter option, so they prefer 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 be lower.
This is what we call appraisal gap coverage. This is insurance for 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 purchase price.
To modify our previous example, let’s say the home 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 begins, you bring in $1,000 cash, and the new purchase price is $106K.
If a seller is looking at two identical offers and one offer has appraisal gap coverage but the other does not, they are going to go with the offer with appraisal gap coverage.
Plus, in this scenario, you get the home for less than you planned to buy, win-win!
Connected: psychology of proposition
-
Top up your Earnest Money Deposit
Earnest deposit is used to show that you have skin in the game when making an offer to buy a property. The amount of money you put up as earnest money varies from market to market but is usually 1-2% of the purchase price. Although this 1-2% is not a hard and fast rule. You can increase your earnest deposit by as much as 1-2% – maybe 3% or more – to show that you really want a home. You have even more skin in the game.
If you have to back out of the contract due to inspection, financing, or other issues, the earnest money deposit is now refundable. The earnest money deposit also comes from your down payment, so it’s not money you’re paying now.
You can get your offer accepted as compared to other offers due to the offer having bigger earnest money deposit.
Bonus Tip: If you are really serious about the property then you can make your Earnest Money Deposit non-refundable. Proceed with caution though.
-
reduce your observation period
The inspection period is where you get a licensed inspector and contractor to walk through the home and do a thorough evaluation on the structure and systems, such as the furnace and AC. This is often a time when homes are put out of contract due to poor inspections.
If you offer a shorter period for inspection, such as a 3-5-day inspection period as compared to 10-days, a seller may be more likely to accept your offer than others. They know that if the inspection turns up anything bad, they can sooner or later go back to the market.
If you go with a shorter inspection window, though, be sure you have your contractors and inspectors lined up and ready to relocate so you can do your due diligence.
Bonus Tip: Some serious and experienced investors will even skip inspections on properties they know are going to undergo a rehab.
-
cover your own closing costs
Many first-time home buyers put together just enough money for a down payment for a home—they don’t have enough to cover the lender and prepaid expenses for funding the escrow account. One way for property buyers to cover this cost is to ask 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 binding on the seller. Basically $95K. If another buyer comes along and makes an offer of $100K without the closing costs covered by the seller, you lose that bid!
Do your best to cover your own closing costs when writing an offer in a competitive market.
Connected: How to Make an Offer on a Property Not Listed on the MLS
-
include growth clause
Escalation clauses can be a very powerful tool when making an offer on a property. Escalation clauses generally state that you will beat any other offer from the seller by $1,000, up to a certain purchase price.
Here’s an example of an offer with an escalation clause: $100K with escalation up to $115K. If the seller has another offer of $110K, the escalation clause in your offer will be exercised and you will beat the other offer by $1,000, bringing your purchase price to $111K.
In this scenario, you saved $4,000 and got the house. In situations where there may be 2-5 offers in total, escalation clauses are a great tool to use.
However, when there are a large number of offers on the same property, the escalation clause can make your offer confusing and complicated for sellers. This may move it to the bottom of the heap. If you know you’re making an offer on a property that has multiple offers, your best bet is to send a clean and simple offer at your highest and best price. The easier your offer is to understand and compare with other offers in the mix, the better your chances of getting your offer considered and accepted.
-
provide domicile
It’s quite simple: If a seller needs time to pack up and move or buy another home after closing, give it to them! At times, a seller may ask for 10 days or as many as 60 days in a row to get their ducks in and 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 be accepted.
Plus, in many cases—depending on the length of time the seller is needed—you can also charge the sellers rent or collect a fee for the days they stay in the home after the agreed-upon occupancy period. Boom! You now have a short-term tenant while you look for other long-term tenants. Seems like a big win to me!
-
waive your commission
This tip is for all property buyers who also have a real estate license. In the typical transaction, the seller pays a percentage of the purchase price as a fee for using an agent, and the buyer’s agent and the selling agent split that commission 50/50. As an example, let’s say a seller is selling their home for $100K. Agents must pay a 6% fee, or $6,000 ($3,000 for each agent).
By representing yourself in a buying scenario as a real estate agent, you can waive your right to half the commission, meaning the seller now only has to pay the seller’s agent $3,000. That’s more money in the seller’s pocket, which makes your offer that much stronger!
I used this strategy on a previous house I bought and I beat out over five offers! My purchase price was $225K, but waiving my right to the $6,750 buyers’ commission, my offer looked like $231,750 because I save the seller $6,750 in commission they would have to pay. My offer was more competitive than the offer that was $6,000 more than my purchase price.
As an agent, waiving your commission is an extremely powerful tool in your toolbox.
One last bonus tip: Find an experienced real estate agent like me who knows about all these different strategies and has the experience to write them into your offers!
wrapping up
I hope you enjoyed this article and learned some 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? notes? Other advice?
Join the discussion in the comments section below.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
