Winning with Competitive Contracts as Buyer in a Seller’s Market

    Winning with competitive contracts as a buyer in a seller’s market takes understanding seller’s and maximizing what you can offer. The key is to appeal to the seller’s concerns and bottom line.  The seller wants the most money as predictably as possible. Here is how you meet the seller’s needs and win in competitive bidding.

    Escalation Clauses

    Appropriately priced homes in our current market will receive multiple offers. Each of these offers may offer to pay more than the other offers by way of an Escalation Clause. By adding an escalation clause to a contract you are telling the seller you will pay $300,000 and are willing to pay let us say $2,000 over any other verified competing offer up to a ceiling $325,000. If there are just two offers, and the other offer is willing to pay $310,000, the seller can expect you to pay $312,000.  Not every agent and not every seller likes these clauses. Overall, you are showing an intention to at least negotiate.

    Appraisal

    Homes purchased with a loan require an appraisal so the bank and consumer are confident of the value. More than the word confidence, the bank wants to make sure they are not over paying for the home. If the above home listed for $300,000, the seller accepted $312,000 as an offer, and the appraised value was $305,000, there would be a $7,000 gap between contract price and appraised price. The loan can go forward as long as the buyer is willing to bring the extra $7,000 to the closing table.  Many buyers cannot or do not want to pay significantly over appraised value. One way to handle this in an offer is to define how much you would pay over appraised value. This helps you limit your extra cash out of pocket and may beat another offer that cannot or chose not to offer the same guarantee. Additional contract language for this issue may read as follows:

    “If home appraises under the Purchase Price, Buyer will pay up to $3,000 over appraisal value up to a maxim price of the Purchase Price.”

    If the seller has multiple offers over asking, and suspects the offers are all greater than the appraised value, the above clause guarantees the seller extra cash that can set your offer apart from the other offers. In some cases, buyers are paying entirely with cash and will waive the appraisal condition. That means, if they offer $312,000, they are paying $312,000 independent of any appraised value.

    As-Is (inspection) 

    Tell the seller you are not going to pick the home apart during the inspection.  There are a few different ways to present this position.

    1. Offer to purchase the home as-is and retain the right to inspect the home.

    2. Offer to inspect but not object to any items unless the repair cost exceeds $2,000.

    3. Offer to waive your inspection entirely. This is never recommended and is only a good option to a handful of qualified buyers.

    With any of the above options, you are helping to define the seller’s bottom line during the negotiation process.  Buying a home warranty can be a good option with any of these three options.

    Offer to Pay the Seller’s Title Insurance.

    One of the seller’s larger line item expenses is title insurance. That fee can be $1,600 for a $400,000 sale. To see rates for other price points, click the link to Canyon Title’s rate sheet below as an example of your potential cost.

    http://canyontitle.com/wp-content/uploads/2014/04/04-03-14-Purchase-Rate.pdf

    Within the offer, the buyer can select to pay the seller’s title insurance. This also allows the buyer to select the title company. Before you offer this option, understand the increase in your closing costs and make sure it makes sense for you. I see this option used less than the other options above but it is a true cost to the seller and valuable if there are multiple offers above a likely appraised value.

    Post Occupancy Agreement with Free Rent

    Most sellers are buying another home and facing the same challenges as a buyer in a seller’s market. If you are flexible with your move in date and feeling generous, let the seller stay in the home up to 30 days after closing at a reduced or free rental rate.  This may provide a great deal of comfort to the seller and help them avoid moving twice.

    Ask the Seller what they want

    This seems too simple to be true. There may be a hot button issue that is listed above or not listed above that is a crucial issue to the seller. Have your Buyer’s agent to ask what the seller is looking for in an offer then tailor your offer as best you can to those terms and conditions.

    Other Tricks

    Here are some other non financial tricks that will give the seller a feeling that you are a predictable completed sale.

    1. Write a note, record a short video or have your agent communicate the main reasons you like the home and the area. It helps the seller visualize that the home is a good fit for you. It also humanized your offer.

    2. Have your agent send past agent reviews and experience level.

    3. Ask your lender to contact the listing agent to further cement an opinion that you are working with a good lender and you are qualified.

    *Important Disclaimer*

    All the above ideas for Winning with Competitive Contracts should be used with serious caution and with real estate agent that is your true advocate.  Most buyers  are not in a position to use every tool above and they could wind up over their heads with a contract that does suit them. In addition, each option above should be evaluated for each individual house and buyer.