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Multiple offers strike fear, frustration and fury into the minds of just about any buyer who has fallen in love with the home they want to make theirs! Right now, with incredibly attractive interest rates and an extreme shortage of homes available for sale, sellers are in the driver’s seat as buyers seek to find their new home. In a hot seller’s market, buyers need to remain patient, persistent and calm in their search and just accept that multiple offers are currently a part of the process when looking for the best properties. But there are definite strategies to help improve your chances of winning! Let’s look at five strategies you can use today and we’ll finish up with five more strategies next week!
COMMUNICATE
While multiple offers can be frustrating for buyers, they can be equally frustrating and nerve-wracking for a seller… and their agents. There is no “set” way to handle a multiple offer situation as each seller is different. Their agents can guide, suggest and advise sellers how to handle a multiple offer situation but, ultimately, the seller decides how a situation will be handled. And keep in mind, a seller does NOT have to call for “highest and best” if they receive multiple offers! Common ways a multiple offer situation can be handled include:
1) Seller receives several offers and decides to just accept one – no one was ever made aware there were multiple offers! While rare, this does happen!
2) All offers are notified there are multiple offers and a “highest and best” deadline is set to submit your best offer. Offers are then reviewed shortly after the deadline usually with one of the following results:
a. Seller accepts one offer and rejects all others
b. Seller counters one offer and puts all others on hold pending negotiations
c. Seller counters one offer and rejects all others in hopes of successfully negotiating the one offer
d. Seller counters a couple, or all, of the offers with what they will accept and the first to respond… wins! While rare, but having been in this situation twice, it is high stress for everybody. Unfortunately, we lost both times as other parties were quicker to make their decisions.
Your buyer’s agent needs to actively COMMUNICATE with the seller’s agent regarding how the multiple offer situation is going to play out – be that texts, emails or old-fashioned phone calls! As a part of that communication, information gathering is critical to helping you construct your best offer. While a good seller’s agent is unlikely to answer some (or most!) of these questions, it doesn’t hurt to try:
1) How many offers are there?
2) Are there any cash offers?
3) Are you asking for highest and best offers? What is the deadline?
4) What is the highest offer you currently have?
5) Are there special terms the seller is looking for? Flexible possession or closing date?
Good COMMUNICATION might give you that information edge in constructing the most appealing offer! Patience is also key – Realtor ethics call for presenting all offers as soon as possible but realtors must also follow the directions of their sellers. Multiple offer situations can often drag on over the course of a few days.
GET PRE-APPROVED FROM a LENDER
While this may be obvious, a loan pre-approval is one of the biggest criteria for having your offer even considered in a multiple offer situation. A lender’s pre-approval letter indicates you are ready to BUY – not just look. PRE-APPROVED means your credit has been checked and confirmed, your income and assets have been verified and underwriting (automated or manual) has reviewed your information and approved the amount of money you will be allowed to borrow. On the other hand, a pre-qualification letter from the lender means that, based on the information that has been provided, but not confirmed, it looks like you might be able to purchase a home. If you haven’t spoken to a lender at all, in most cases, your offer is likely to be ignored particularly if there are other offers with pre-approval letters.
If you happen to be in the envious position of making an all-cash offer, you will need to provide “proof of cash” to the seller. This could be recent bank statements or asset statements evidencing the amount of funds available to you. To keep more confidentiality, consider having a bank officer write a specific letter stating you have the funds available in your accounts to purchase the specific property.
OFFER MORE MONEY!
Another obvious tactic but many buyers have the mind-set they shouldn’t have to offer more than what the seller is asking. While this may work in a few cases, the majority of time a well-priced, attractive home will fetch 5-10% (sometimes more) over its asking price. Ultimately, your offer price should not exceed the amount that keeps you within your monthly payment budget. Your offer price should be determined after a review of market activity in the immediate vicinity over the last few months including both currently active properties and recently sold properties. The accepted offer price will still need to meet an appraisal valuation by the buyer’s lender and the seller will be aware of this condition, too.
One colleague shared an interesting technique for his buyers – he encourages offering $5,000 more than list price multiplied by the number of offers. In my opinion, that might be too aggressive, particularly with a high number of offers, and could result in appraisal valuation issues. But, the colleague states a high level of success with this approach!
An escalation clause can offer some protection for those who don’t want to offer “too much”. Let’s say you are willing to purchase a $100,000 home up to $10,000 over the asking price. To bump your offer over another offer, your escalation clause could state your offer price shall increase $2,000 over any higher offer up to $110,000. This method can help you purchase the home at the lowest possible price and “save” you some money by not offering the full $110,000 as in the example. A drawback of an escalation clause is that is does give the seller full knowledge of how much you are willing to pay for the home. Also, some sellers and their agents get confused or intimidated by escalation clauses and refuse to consider them unless the offer is at a fixed amount.
OFFER A HIGHER EARNEST MONEY
Earnest money is “promise” money to the seller that you are very serious about your intent to buy the home. It is also “risk money” so it is a strategy you need to feel comfortable with – and have the cash resources available to pull it off. If your offer is accepted by the seller, you will be required to deposit the earnest money with the seller’s agent’s company within three business days of the acceptance of your offer. This earnest money is kept in a trust fund and then applied towards your down payment and closing costs when the closing of the purchase takes place – it DOES NOT go directly to the seller as many people believe! In multiple offers, a large earnest money deposit definitely makes you stand out from other offers. It is fairly common to see earnest money offered as 1% of the purchase price. If you can increase that to 3-5%, the seller will definitely notice! Earnest money can be refunded to you if you cancel the purchase agreement within allowed timeframes for contingencies but, if you cancel the purchase agreement outside those timeframes, you could possibly lose that earnest money to the sellers as damages for not completing the purchase.
A corollary strategy is to make your earnest money “non-refundable” at a certain point in the purchase process. This sometimes takes place after the inspection period is completed or it may occur after the appraisal valuation has been met. This is essentially acts as a commitment to buy as most buyers are reluctant to lose earnest money for any reason, especially if they have committed to a higher than normal earnest money deposit. If using this strategy and you wind up not closing for any reason, you WILL lose the earnest money deposit!
Earnest money strategies can be worthwhile tactics to explore as long as you are comfortable with the risk factors!
WRITE a “LOVE LETTER”!
Many sellers love reading about who is interested in their home and why they want to buy it!
Writing a sincere, heartfelt and handwritten note introducing yourself and why you want to purchase the home and what you like about it will almost always emotionally attract sellers to your offer. And because not all buyers do this, these letters have been directly responsible for sellers choosing to work with, and accepting, offers that are less than other buyers’ offers. If using this technique, it must be sincere and heartfelt! A “canned” love letter is pretty easily recognized and will not help your cause!
“Love letters” have become a bit more common in the last couple years as buyers compete to purchase a home. Sellers are supposed to objectively evaluate their offer without emotional influence and, as a result, these letters raise the possibility for a claim of a Fair Housing violation from a rejected buyer. Some sellers are now choosing to ignore these letters and will not review them. That said, it is your offer and this tool can be very effective.
So, don’t lose hope with a multiple offer situation! These first few basic strategies can definitely set you apart from the crowd! Check back next week for five more winning strategies in multiple offer situations!