Now is a great time to buy. Rates are low, but headed up and all things point to higher home prices in the next year. But there is one major problem…low inventory. There are simply not enough homes on the market for all the buyers that want to buy a home. And that means you’ve got some fierce competition if you want to be one of the buyers who successfully secures a contract on a home in today’s low inventory, seller’s market.
So, how do you stand out? How do you get the attention of the seller so they want to accept YOUR offer? It comes down to understanding the motivations of the seller and after being in the mortgage and real estate industry for over 20 years I’ve got some tips to get your offer accepted in today’s low inventory real estate market.
Put Yourself in the Shoes of a Seller
What do sellers want? To answer this question we need to put ourselves in their shoes. If you were selling your home what would you want? Here is what I believe most sellers want:
- sell to someone who can, and will, close
- sell at the highest price possible
- close as soon as possible
- avoid any hassle along the way
This all makes sense, right?
Now we need to shift gears and put our buyer hat back on so we can appeal to those desires.
Be the Best Possible Buyer
With an understanding of what sellers want we now must become the buyer sellers want to sell their home to.
The best possible buyer in today’s hot seller’s real estate market is a cash buyer. Cash is king, as they say. If you can offer the highest price and you’ve got the cash to buy the home without the need for a mortgage then you will likely be the offer the seller will want to accept…but not always.
How to Compete with Cash Buyers
You can compete with cash buyers. I see it all the time – where buyers getting a mortgage beat out cash buyers. How do they do it? Here’s how.
Get Fully Pre-Approved
The only possible way to compete with cash is to be close to cash as you can be. This means you must have a pre-approval in place. Not a pre-qualification but a full pre-approval. This means you have completed an application, the lender has run your credit, you have provided all necessary documentation (such as pay check stubs, W2s, bank statements, etc.) and they have run your information through their Desktop Underwriting system. Or, maybe even a step further and actually have your loan reviewed by an underwriter.
Doing this allows you to prove to the seller that you are serious and can, and will, close. (the first thing sellers want)
Be Willing to Pay Top Dollar (or at least close)
Seller’s want the highest price possible. But that does not always mean the highest price offered. Let me explain…
Let’s say a buyer comes in and offers $5,000 more than anyone else. Good for the seller, right? Yes, but that same offer has a contingency which says the offer is only good if the buyer can sell their home. If you could offer a little less, but without the contingency then you may be in a better position to get your offer accepted over the buyer with the contingency to sell their home.
There is one big problem, though. You don’t get to see what other buyers are offering. So what do you do?
There are a couple of things you can do here:
- Add an escalation clause to your offer. I am not a real estate agent and can not advise you on how to structure this but as a mortgage lender I’ve seen this strategy work quite well. If you decide that this strategy is one you would like to utilize to get your offer accepted please consult with a licensed real estate professional to assist you. Basically your offer states that you will automatically increase the offer price by some increment over any other offers higher than yours, up to some specified limit. Basically, this results in you always being the highest offer (until you hit your max price).
- Add an appraisal gap. When you are using mortgage financing to buy a home the lender bases the amount they will lend off of the lower of the price or the appraised value of the home. For example, if you are putting 20% down on a $500,000 home, that would be a $100,000 down payment. But, if you want to offer $520,000 your down payment must increase to $120,000 to stay at the 20% down payment amount since the loan to value will be based on the value, not the price you offer. That means, anything over the value of the home must be paid for by you, in cash above and beyond your down payment amount, at closing. One way to avoid putting more money into the transaction would be to reduce your down payment percentage (from 20% to 15%, for example). In this example you would end up at $95,000 cash at close – $75,000 for 15% of $500,000 plus the $20,000 extra to overbid to $520,000. Sure, you might have MI but there may be some ways this can benefit you. (check out the video on this topic here)
Either, or both, of these could help you to offer more than other buyers you are competing with so you can offer the seller the highest price possible. (the second thing sellers want)
When you buy a home using a mortgage to finance that purchase there are two transactions going at once – the real estate transaction to buy the home and the mortgage transaction to finance it. Both of these must move along quickly to appeal to the seller who may want to close as soon as possible.
The real estate transaction normally moves faster than the mortgage transaction primarily due to appraisals. Appraisals take time to complete. Sometimes a few days but can take a couple of weeks depending upon the volume of appraisal orders and number of appraisers to take those orders.
This is pretty much out of your control so what should you do? Reduce the time of everything else associated with your mortgage approval. This means having a full pre-approval in place, responding to the lender with their documentation requests with urgency (same or next day). But it all starts with selecting the right lender.
Not all lenders work with urgency. Consider your pre-approval experience. Was the lender quick to respond or did you have to email several times or leave a couple of messages over a period of days to get a response? If you had to wait more than one business day for a response form your lender this is not a good sign if you want to close as quickly as possible. Consider this when selecting your lender.
What is your lender’s reputation in the market? If your lender has been in business for any length of time and does a decent amount of production they will have a reputation in the market – good or bad…or somewhere in between. This matters! If the lender you are working with is not known for closing on time or has a proven track record for deals falling through that is going to be a problem. Do your research – check reviews online, ask your real estate agent, and ask your lender how they can help you stand out and get your offer accepted. Hopefully they have a good response. And if they don’t let that be a sign to you.
Be prepared to move quickly so you can close as soon as possible. (the third thing sellers want)
Don’t Be a Pain in the Neck
Sellers want to avoid any issues which means you need to show the seller you are willing to work with them to get to closing with the least amount of hassle possible.
One of the best ways to do this is to avoid any conditions on your offer. This is not always possible, or advisable, but can help to eliminate the risk to the seller that they will have to renegotiate things once they accept your offer.
The most common example here is any inspection related conditions. Most buyers like to complete a home inspection to ensure the home they are buying is free of any defect, especially health or safety related items. Again, I am not a licensed real estate professional so I can not advise you on what to do here in terms of your own protection. With that said, it’s obvious that the fewer conditions you have on your offer the less potential hassle there will be for the seller.
You might want to consider waiving some, or all, inspection related conditions when submitting your offer to avoid any hassle along the way. (the fourth thing sellers want)
Getting Your Offer Accepted
There are more buyers than sellers right now. Competing with other buyers is just part of today’s real estate market. Even if you follow all the advice I’ve offered you may still not get your offer accepted. But your chances will greatly improve, I promise.
Good luck out there and if you are serious about buying a home it will happen. Markets shift and eventually an opportunity will open up for you.