Preparing for Battle: A Buyer’s Guide for Negotiating in a Sellers’ Market
Today’s real estate market can be a fickle beast often swinging from a Buyers’ to a Sellers’ Market at a quick pace. When purchasing in an area where demand exceeds the amount of readily available homes, competition is fierce, and the seller is king. Properties can be listed at a premium price, generating multiple offers without having to make extra concessions. Potential home buyers do not want to be caught off guard when entering a Sellers’ Market. Buyers must be nimble and ready to pull the trigger if they find a house that they want.
While a Sellers’ Market can be intimidating to many - especially first time home buyers – your best bet is to equip yourself for the bidding war ahead. Here are some helpful tips:
Hire a Professional
A savvy buyer should line up both their lender and real estate agent prior to starting their home search. It typically doesn’t cost you anything to hire an agent because the seller pays the full commission.
A seasoned agent can offer local knowledge and calculate the average Days on Market (DOM) to see if inventory is moving quickly. It can be difficult to buy the first home you decide to make an offer on, but your broker can help you negotiate each circumstance, provide reassurance, and help manage reasonable expectations throughout the process.
Bear in mind that your agent may have other buyer-clients interested in the same property as you. Discuss this possibility with them ahead of time, and ask how offers will be presented and negotiated if more than one client is bidding on the same listing.
Get a Preapproval Letter and Proof of Funds
Everyone knows the saying “cash is king,” but in real estate, a preapproval letter and proof of funds is the next best thing. Obtaining lender approval prior to making an offer tells a seller you’re serious about moving forward with the transaction. Many agents won’t even show homes in a Sellers’ Market without it; however, a lender can still decline your mortgage application despite a preapproval.
Strike While the Iron Is Hot
Accept the earliest available home showing although it might be inconvenient. Off-hour or weekday showings aren’t ideal but they may give you the advantage you need to submit your offer before anyone else. Remember that keeping a home in pristine condition for showings can be difficult for many sellers and their families. Don’t focus on little things that are not important or are easy to change such as a cluttered basement or the color of paint in the living room.
Don’t Lowball the Offer
Buyers in a hot market must be realistic. You should identify your financial capabilities and set hard limits on price ahead of time so you can comfortably raise an offer if necessary when time is of the essence. Offering less than the list price might cost you the seller’s consideration. Be prepared to offer at least list price and possibly even more than the amount the seller is asking.
Increase Your Earnest Money Deposit
The earnest money deposit (EMD) is a crucial component to the home buying process. It tells the seller you are a good faith buyer, committed to the purchase, and helps fund the down payment.
Defaulting on a contract may jeopardize your EMD and increase your chances of forfeiting those funds if you choose to walk away from the deal.
Most deposits will range from 1-2% of the purchase price, but in a high demand market, the seller may ask for a higher deposit. If you know you will be vying for a property you may want to include a larger deposit in your initial offer to increase your chances of winning the bid.
Tailor the Offer – Skip Low-Risk Concessions and Contingencies
Deal sweeteners such as a home warranty or asking the seller to pay for closing costs are concessions the buyer can ask the seller to pay for in the contract. However, most seller concessions are lost in a bidding war as the seller doesn’t have to entice the buyer. Plus, it’s not a good idea to ask for additional allowances in a market where houses are selling quickly.
Contingencies – such as appraisal value matching or exceeding purchase price, securing financing and passing inspections – must be met in order for the contract to become binding, otherwise it is considered null and void. Many contingency clauses protect the buyer’s ability to walk away from the contract with their earnest money deposit if the clause is not satisfied.
Consider removing any contingencies that pose minimal risk to the buyer. For example, if a buyer is confident in their ability to qualify for a mortgage, they might remove the financing contingency. However, it’s important to disclose that a loan is still needed despite the seller’s ability to keep the earnest money deposit if the home doesn’t close for another reason. Failure to disclose this necessity could land you in breach of contract, allowing the seller to sell the home to someone else and keep your earnest money deposit. Hiring an attorney to review, draft or remove any contingencies prior to submission can help protect you from opening yourself up to unnecessary risks.
Determine Seller Motivations
Ask the sellers what their needs are. In most cases sellers are price driven, but they may also be emotionally invested and looking for a buyer that will love and care for their home as they would.
In a multiple offer situation, penning a personal letter – often referred to as “love letters” – to the seller may give you an edge on the competition. These communications should highlight favorable aspects of the property the buyer feels are unique such as the location, architecture, history, décor, and neighborhood amenities. Avoid personal details that might unfairly sway a seller and even violate the Fair Housing Act such as race, age, religion or familial status.
Published on August 15, 2018.