Amid the imbalance between supply and demand in the U.S., buyers need to get an upper hand as they compete with multiple offers.
When Paul Warrin, a real estate agent with Golden Gate Sotheby’s International Realty in San Francisco, suggests that his buyer clients write a love letter about the house they’re competing for, he knows just how well this tactic can work.
“Recently, a seller chose my clients’ offer, which was $50,000 less than a competing offer, just because he was so moved by the couple’s story,” Mr. Warrin said. “The seller had raised his family in the house and fell in love with the buyers’ letter and the idea of them living in his house.”
While personal letters don’t always win a bidding war, they’re among several strategies that can raise an offer to the top.
The housing market paused briefly when Covid-19 struck the U.S. in February, but buyers came back quickly in search of a possible bargain and to take advantage of low mortgage rates. Sellers were slower to return to the market, which resulted in a deepening imbalance with demand higher than supply in many locations.
With a limited number of homes for sale and buyer demand increased by low mortgage rates, bidding wars are now common in many markets this summer. A recent report by Redfin showed that more than half (54%) of offers by Redfin clients faced competition in July, the third month in a row with more than half of buyers in bidding wars. Salt Lake City had the highest percentage of buyers encountering competition (75%), with San Francisco and San Jose at 67%, Washington, D.C., at 62%, Boston at 61%, Los Angeles at 58% and New York City at 53%.
Money Talks Loudest-
While sentimental letters sometimes tip the scale for a buyer, first and foremost is to either have cash or a fully underwritten pre-approval that allows you to eliminate a financing contingency in your offer, said Steve Wydler, a real estate agent with Compass real estate brokerage in McLean, Virginia.
“In the luxury market, cash is king, but most luxury buyers are well-qualified and work with a reputable lender,” Mr. Wydler said. “If they offer a high enough price, a financed offer will likely be accepted.”
Sellers are more comfortable when the financing comes from a well-known local lender who knows how to help close a deal, Mr. Warrin said.
Speed Helps-
Getting educated about the price range and neighborhood you want is important so you can be mentally, emotionally and financially ready to make an immediate offer, Mr. Wydler said.
“If you saw a house that sold for $50,000 more than the list price of a house you think is better, then you may be willing to offer $100,000 more to get the one you want,” he said.
For example, if you compare two houses in the same area and see that one sold for $1.2 million and one you like better is listed at $1.15 million, you might be more willing to offer as much as $100,000 more for the one you want since you understand its value, Mr. Wydler said.
When a house you like comes on the market, it’s essential to view it immediately, said Mary Gillach, principal with the Gillach Group at William Raveis Real Estate in Boston.
“Sometimes you can get an offer accepted before the open house, but at the very least you can get a pre-offer home inspection done before other offers are made,” Ms. Gillach said. “Make sure you’re available to talk to your broker and that your broker is on top of what’s happening and calling the listing broker.”
Many buyers in Boston put down $1,000 as an earnest money deposit and promise to make a 5% or larger deposit within 14 days after a home inspection, Ms. Gillach said.
“If you have the pre-offer home inspection, you can tell the seller they’ll have that 5% in the bank within two days,” Ms. Gillach said.
Terms and Conditions Apply-
Once buyers have either cash or an underwritten loan pre-approval, the next strategy to employ is to make an offer that simplifies the process for sellers and gives them confidence that the sale will be finalized on their timeline.
“Winning a bidding war isn’t all about price, it’s about allocating risk,” Mr. Wydler said. “An offer with the fewest contingencies is always a better offer.”
Even if an offer is $50,000 less than a competitor’s offer, if yours doesn’t have a financing contingency or a home inspection contingency and theirs does, you could win, said David Ayerdi, a real estate agent with Sotheby’s International Realty in San Francisco.
In addition, Ayerdi recommends that your buyer’s agent ask the listing agent about the sellers’ timeline for closing and moving.
“Buyers can offer free post-closing occupancy for 30 or 60 days or ask the sellers to pay the equivalent of their principal and interest on the new loan to stay in the property for a few months,” Mr. Ayerdi said
Letting someone live rent-free for two months in a $3 million house with carrying costs of $30,000 per month is like offering them an extra $60,000 without having to provide the cash, Ms. Gillach said.
Sellers sometimes want to stay in their property longer while they find a home to buy or to allow their children to complete a semester of school.
A shorter closing timeline, such as 17 to 21 days, can be another way to increase the attractiveness of your bid, said James Harris, a real estate agent with The Agency in Los Angeles.
“Buyers need to really understand what the seller’s situation is and what will make a deal happen,” said June Gottlieb, a real estate broker with Warburg Realty in New York City. “A warm and fuzzy letter might work if the sellers owned the property for decades, but not for sellers who are looking to use the sale as their nest egg and want every last cent they can get.”
Gottlieb recommends eliminating the financing contingency if possible.
“Sellers are scared, especially now, that the buyers can walk away if they don’t get their financing,” Ms. Gottlieb said.
Escalation Clauses Not Always Welcome-
While not all brokerages in Boston accept them, Ms. Gillach sometimes has her buyers include escalation clauses, such as an agreement to pay $10,000 above the highest competing offer. Escalation clauses typically promise to add a specific sum or a percentage above the highest bid to eliminate the seller’s need to negotiate with multiple bidders. The clause is part of a buyer’s offer and sellers can choose to accept it or continue to negotiate if they prefer.
“You have to flesh out the explanation to the listing broker about every part of an offer, including an escalation clause, so they know why the sellers should care about it,” Ms. Gillach said. “Sometimes sellers feel as if the offer would have been even higher without an escalation clause, so it’s important to make the amount substantial.”
Missteps That Buyers Make-
Covering all the bases with strong financing, a personal letter and limited contingencies can easily be derailed by buyers, particularly if they get negative.
“I had a friend who was writing an offer on a house and trashing the listing agent and being suspicious about everything,” Mr. Wydler said. “I suggested that he was going down the wrong path, that it was better to be positive about everything and he ended up getting the house.”
Rather than pointing out the flaws in a house, it’s best to stay positive.
“One of the biggest mistakes buyers make is looking too hard for a deal and getting caught in the weeds instead of the big picture,” Ms. Gottlieb said. “If you really want a place, you need to offer enough so you’ll get it.”
A common mistake some buyers make is choosing a bank that won’t manage to complete the loan on time, Ms. Gillach said.
“A lot of brokers know which lenders come through and which won’t, so they’ll let the sellers know if there’s a concern about getting to the closing table,” Ms. Gillach said.
Getting overly emotional and paying too much for a property isn’t much of a danger, in Mr. Harris’ opinion.
“A house is worth what the buyer will pay for it, so there’s no such thing as ‘overpaying’,” he says.
BY MICHELE LERNER | ORIGINALLY PUBLISHED ON AUGUST 30, 2020 | MANSION GLOBAL
Tracy Bryant – Real Estate Agent in Lake Forest, CA
