In this housing market, you might need to get creative to have your offer taken seriously.
The real estate market is red hot and in some areas there aren’t enough properties available to keep up with demand. As a result, homes are being snapped up quickly in highly competitive bidding wars. Even if you have strong finances, good credit, lender preapproval and a large down payment, it may not be enough to get your offer accepted.
Some people say the best way to buy a house is to offer the most money, but that isn’t always financially possible. You might need to sweeten the deal in other ways. Here are four ways to make your home offer more attractive in lieu of rising your offer price.
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Before you put together your offer letter, you may want to figure out the seller’s needs. Every seller will likely have considerations for a buyer, but one thing is the same: They’re looking to get the best offer for their house.
Your best bet is getting ahead of those needs in your offer letter. For example, the seller may need to stay in the house for a period of time after closing or want to leave some furniture behind (for free or a price). If you’re open to modifications like that, say that in your offer letter.
For the best intel, have your agent call the listing agent before you make an offer. Learn what the buyer is looking for, then work on customizing your offer to make it as attractive as possible.
Here’s a deeper look at crafting the perfect offer letter
Putting in a high dollar offer isn’t the only way to flex your finances. There are other ways to show financial strength that don’t involve raising your offer price.
Put down a strong down payment
It’s a good idea to come to the table with a 20% down payment because it will significantly reduce the amount you’re borrowing. It will also help you avoid private mortgage insurance. If that’s not possible, try to come to the table with as much as you can.
“Having more cash for a down payment can help you to get your home offer accepted,” said Mitchell G. David, a real estate agent and founder of BeachLifeOceanCity.com. “Sellers are likely to choose a buyer with the most money accessible to increase their chances of closing the transaction.”
Put down a higher earnest money deposit
When you make an offer, you’ll likely need to put down an earnest money deposit in addition to a down payment. An earnest money deposit is like an early down payment, and it's a sign that you're serious about buying the house. This money is held by the title company and will go toward your closing costs unless you walk away from the transaction.
Earnest money deposits are generally 1% to 3% of the purchase price of the home, but you may want to go higher to show your commitment. Keep in mind that you can lose your earnest money deposit if you back out of the deal for certain reasons that aren’t covered by your offer contingencies (more on those in a minute), so there is some risk to this strategy.
Offer to pay some (or all) of the sellers’ closing costs and title insurance fees
When you buy a home, there are closing costs on both sides of the transaction. Sellers generally have to pay fees like agent commissions, transfer tax, title insurance, escrow and closing fees, attorney’s fees and more — this amounts to about 8% to 10% of the sale price of the home. If you have the cash, offering to pay some (or all) of the seller’s closing costs will help the seller’s bottom line.
One common tactic is for the buyer to pay the seller’s title insurance fees, which can protect buyers and lenders from litigation costs. Paying this cost will let the sellers know you’re serious about the property and are considering their financial needs in this process, said David.
Include a pre-approval letter
Including a pre-approval letter with your offer shows you’ve been vetted by a lender and your financing is likely to come through. This can give the seller confidence that you can follow through on your offer.
Pre-approval from the bank shows the lender has confidence that you are able to secure financing for the home you’re trying to buy. The letter will include the loan type, loan amount, the offer price, the interest rate, the date your offer expires and other information. The letter can state the amount you offered for the home, or it can state the full amount you’re qualified to borrow even if that amount is higher than the offer you’re making.
It’s important to note that a mortgage pre-approval letter isn’t mandatory, but many real estate agents may not work with you if you don’t have one. The argument for showing the full amount you can borrow is that it shows you are beyond qualified to make your offer, but the flip side is that it may indicate to the seller that they have wiggle room to negotiate. Talk to your agent about both options.
Contingencies are protections included in a home offer that allow you to back out of the sale for certain reasons, like finding an issue with the home’s condition or value. To get an offer accepted, some buyers take the risk of waiving common contingencies. While you can still back out of a contract without contingencies in place, it can cause you to lose your earnest money deposit.
Home inspection contingency
Arranging a home inspection is standard in the buying process for most homes. An inspection contingency gives you the right to walk away or request certain repairs from the seller if the inspection turns up something you don’t like.
Some buyers are waiving inspection contingencies altogether to make their offer more attractive. This is very risky for an obvious reason: If the inspection turns up something major like roof leaks, mold or foundation problems, you can’t easily back out or ask the seller to make repairs.
You could arrange an inspection for informational purposes, but you’ll need to specifically state that your offer won’t change based on the results. If you don’t want to write off inspection contingencies altogether, you can say you’ll overlook any repairs up to a certain cost. That will indicate to the seller that you won’t nickel and dime them over minor issues.
Most mortgage lenders require a home value appraisal because they don’t want to lend you more money than the house is worth. An appraisal contingency says you can walk away if the home you want to buy doesn’t appraise for at least the amount of the offer price. Some offers can include language around lowering an offer price to match an appraisal value.
Some buyers are waiving the appraisal contingency altogether to make an offer more attractive. If you waive this contingency, you’ll have to cover the appraisal difference. For example, if you offered $500,000 for a home but it appraised at $485,000, you’d be on the hook for $15,000 to complete the sale.
Waiving appraisal contingencies can be a costly strategy. Essentially, you’re agreeing up front to pay more than the home is worth, or lose your earnest money deposit if you walk away.
Financing contingencies state that your purchase of the home is contingent upon you securing financing within a set period of time. If you are paying cash, you can safely waive this contingency. With this contingency in place, you can back out of the deal if you can’t secure financing for any reason — for instance, if you lose your job during the home buying process.
If you waive the financing contingency and you can’t get a loan, you could end up forfeiting your earnest money if you back out of the sale or have to buy the house without financing. While it’s less risky when you have a 20% down payment, great credit and lender pre-approval, it’s important to remember that the unexpected can happen.
Home sale contingency
If you’re trying to sell your current home while looking for a new one, a common contingency is a home sale contingency. It states that a purchase of a new house can only move forward once you’ve sold your current one. But in this market, having a home sale contingency will probably put you way down the priority list for sellers.
Waiving a home sale contingency is risky if you haven’t sold your house yet. You could end up simultaneously paying two mortgages while your current house sits on the market. In this situation, it might be better to wait until you’ve sold your current home before you start making offers.
If you wait for your home to sell before making an offer on a house, you may need a place to stay while you wait to move into your new home.
Every home seller will have their own timeline. The more you can accommodate the sellers, the more attractive your offer will appear. Here are some of the ways you can be flexible on time:
Get an inspection quickly
Getting an inspection quickly after your offer is accepted will help speed along the closing process, if that is what the sellers are looking for. If you can get the home inspection within a week of your offer’s acceptance, the seller will have confidence that you’re moving quickly.
Close when the seller wants
The typical home closes in 30 to 45 days, but the sellers may want to move a closing date up or move it back depending on their timeline.
To close faster, you should communicate your timeline to your lender. The bank will need to move fast to get you through the underwriting process and schedule an appraisal. Before you commit to a quick closing in your offer letter, you’ll need to verify with your lender that they can make it happen. To smooth things along, bring your lender all of the documentation they need up front.
Your lender will give you a full list of necessary documentation, but here are some of the commonly required items you can start gathering ahead of time:
Proof of income including W2s, 1099s and any other income documentation
Pay statements from your employer or invoices if you’re self-employed
Bank statements, for all bank accounts you have, going back a specific period of time as dictated by the lender (e.g., the last three months)
Proof that you have homeowners insurance
Statements from other accounts you hold, like retirement accounts
On the other hand, the seller may want to take their time if they’re in no rush to close. If this is the case, you can push the closing date further out, buying you some extra time to get through the underwriting process and start packing boxes.
That’s why it’s so important to do your homework and have your agent call the seller up front and find out when they want to close and move out of the home. If you customize your offer to accommodate their timeline, you may gain the edge over buyers who don’t offer flexibility, even if their offer amount is slightly higher.
Give sellers the time they need to move out
There are many reasons that the sellers may need to stay in their home after closing. Maybe they need time to buy their next home, or maybe they can’t move into their new apartment until a certain date. If you can, accommodate them by staying in your current home or finding somewhere else to live so they don’t have to vacate until they’re ready.
You could let the sellers rent the home back from you after you purchase it. Set up a simple contract, with the option of having a security deposit, that says how long the sellers can stay in the home after closing. You will need to determine how much to charge them in rent — if you really need to sweeten the deal, let them stay in the home for free until they move.
This option is a good way for sellers to maximize their profits without having to immediately move, said David. “The buyer may choose to waive all security deposits or alternatively charge an amount that will cover the homebuyer’s mortgage in full” or provide extra income, he said.
In this housing market, you might need to get creative to have your offer taken seriously. While making the highest offer is still the best way to command a seller’s attention, it isn’t the only way to get noticed. By showing financial stability, waiving contingencies (when it’s worth the risk) and being flexible with your timeline, you can make an offer that stands out.
Image: Getty | 10'000 Hours
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