In 2021, it was an all-out seller’s market, and chaotic real estate sales became the norm: offers before showings began, seller’s agents trying to facilitate crowded open houses like
How To Make A Strong Offer And Win That House!
Dated: February 1 2022
This is the fourth article in the Buyer’s Guide Series. The goal of this series is to walk you through the home-buying process so that you know what to expect and can make wise decisions. This series is beneficial whether you are a first-time home buyer or whether you’ve been through the process and need a refresher. Our final article is about the all-important offer.
You've gotten your pre-approval, and you've been house hunting. You're dreaming of your perfect place to finally call home. And then you find it.
So many times, when I show a client of mine a home they are serious about, they ask me, "what's the next step?" It is at this stage that I break down the elements of an offer. How much do you want to offer? What can you put down for a deposit? Do you want to have any inspections? Are you willing to pay over appraised value? With this information, I can construct an offer for my clients and advise them on winning strategies.
I want to empower you as the buyer by helping you understand the elements of an offer. I also want to give you the best chance of making a winning bid in any market. By creating a strategy ahead of time, you can act with speed and confidence when offer time comes.
1. The Offer Price
We're going to start with the first, most obvious part of the purchase offer: the sales price. There are a few bits of information your agent should gather before you narrow in on a price. Firstly, what kind of market are you in? Is this a buyer's market where housing inventory is high and buyers are scarce? Is this a seller's market where inventory is low and a flood of buyers creates high demand? Knowing the heat of the market will clue you in to how many other buyers you are bidding against.
Even in the hottest of seller's markets, there may be a property that lingers on the market for longer than normal. Typically, these homes fall in the "fixer-upper" category. If you're looking for a home you can go to work on, you may have little competition. However, your agent should still sniff out if there are any offers on the table.
Secondly, you will need your agent to determine a range for the fair market value of what you are wanting to buy. In any market, you don't want to overpay for a house if you don't have to. In neutral and buyers markets, you should use the estimated market value of the property to back your offer, especially if you get a counteroffer from the seller.
Now in seller's markets, competition is likely to create bidding wars, where the need to secure a home drives up the purchase price beyond market value. In these markets, you must be prepared to offer over asking price if you are serious about the property.
How much over ask is enough? This is where the expertise of your agent is incredibly valuable. Your agent should know the trends for your area, and they can determine what homes are selling for on average. You should use this average to understand what it's going to take for your own offer to be accepted. Are similar homes in your area selling for 15K over? If you are serious about the home, start there.
If you are willing to bid over asking price, it's stressful worrying about both overpaying and losing out. One strategy you may opt to use is an escalation clause. An escalation clause tells the seller that you will pay over the highest offer up to a certain amount. So if you are bidding on a $400,000 house, you may offer $410,000 and offer to pay $2,000 over any higher offer up to $430,000. So if the highest offer is $420,000, your offer is then escalated to $422,000.
There are certainly debates over escalation clauses, and some states do not allow them. Sometimes, sellers will ask for "highest and best," which is a way of discouraging escalation clauses in offers. I have experience with escalation clauses both on the buyer side and the seller side. Buyers feel more confident that they will win an offer without bidding over their limit. Sellers can see that the buyer is very serious about wanting the property and is willing to go beyond their base offer.
At the end of the day, what you want to pay for a house is up to you. Your agent can help you make a competitive offer, but you should not feel pressured into offering more than you would like.
We have talked at length about price, which is the obvious star of an offer. However, price is just one important element of an offer. You may bid the highest amount for a property, but you can still lose out if the other terms of your offer are not as strong as those of another buyer.
2. The Earnest Money Deposit
Part of your offer includes putting down a cash deposit to bind the offer. The larger your deposit, the more confident the seller will feel that you are a serious buyer and one less likely to back out at the last minute. Typically, the earnest money deposit is 2% of the purchase price, but if you have some competition, you want to put down more if you are able. Using my favorite example of a $400,000 house, a typical deposit would be $8,000. If I were your agent, I would recommend putting down at least $10,000 to make the offer more favorable.
What's the big deal about the deposit? Your offer will most likely contain contingencies, or contract cancellation rights. These are areas where you have the option to back out of the contract without penalty (ex: inspection results, inability to get financing). If you cancel the contract due to a stated contingency, you can walk away with your deposit. Canceling for any reason not covered in the contract means the seller gets to keep your deposit. This is why a large deposit is such a surety to the seller. Put yourself in their shoes: would you feel more confident about a buyer with a $2,000 deposit or a $10,000 deposit?
There are a variety of inspections you may want to have done on the property. These range from a general property inspection to specific inspections for radon, lead paint, pests, water quality, and septic quality.
As I have said in a previous article, the decision to undergo or waive an inspection is completely up to you as the buyer of the property. In balanced markets, a home inspection is typically expected by the seller. If the home is older, or if you notice something during your tour that concerns you, having an inspection makes sense.
In sellers’ markets where you are competing with multiple buyers, waiving the inspection could be the deciding factor in the seller choosing your offer. Home inspectors are also not infallible. Oliver and I opted for a home inspection when we were buyers and we still found issues with our home that the inspector did not catch.
If you request to perform those more specific tests, know that the strength of your offer will be impacted further and will tack on additional costs to the buying process.
If you are going to have any inspections, you need to have them done and request repairs within 7-10 days.
4. Due Diligence Period
The due diligence period is a window of time in which the buyer may further review certain details surrounding the property as deemed necessary. What are some of these details?
If you are moving into a neighborhood, you may want to research any restrictive covenants made by the developer when the neighborhood was first created. These are not always present.
If you are moving into a condo or mobile home park, you may want some time to look over the rules of the governing association.
When you look at the deed, if there is something in the deed that catches your (or your agent's) eye, you may decide to have the deed reviewed by an attorney so that you understand any easements or restrictions that come with the property.
Here is my advice on the due diligence period. Do as much of your due diligence as possible before you offer. Most listing agents provide condo/ park rules in the MLS that your agent can easily access or request. Ask your agent to find and send you the deed. The deed should clue you in to restrictive covenants, easements, and anything else that may taint the property. If you have real concern about anything on the deed, you may want to hire an attorney to look it over.
Besides having fewer contingencies in your offer, doing your due diligence beforehand sets the seller's mind at ease. You won't cancel the contract for something trivial, thereby giving you an easy out.
The financing contingency is pretty straightforward. If you are honestly denied a loan before the deadline, the contract is canceled, and your deposit is returned. The only real suggestion I have here is to put down as much as possible when you are competing against multiple buyers. For example, if you are using a conventional loan, put down as close to 20% as you can comfortably. Doing so will make you seem like a stronger buyer to sellers.
If you are in a neutral or buyer's market, and you aren't offering significantly over asking price, the property should appraise at or around the purchase price. Your REALTOR® can give you an approximate value of the home, which can help you determine its likelihood of appraising.
If you are buying in a highly competitive market, you may be offering thousands over the asking price to secure the deal. When this is the case, there is a good chance that the appraised value will come in lower than your offer. This is known as an appraisal gap. If you make your offer contingent on the home appraising for your inflated offer price, a seller is not likely to accept because of a likely gap.
Realistically, if you are offering significantly over the asking price, you will need to waive the appraisal contingency altogether or at least up to a certain amount. For example, if you are offering to pay $420,000 for a $400,000 house, you can offer to cover any appraisal gap. Or - if you are adamant on the home appraising for at least the asking price - you can offer to cover an appraisal gap up to $20,000.
Your REALTOR® can advise you on the most realistic and competitive course of action.
Other Winning Tidbits
- Closing date. If you can be flexible with the closing date, make sure your REALTOR® conveys that to the listing agent! This is important to some sellers for a variety of reasons. Your willingness to be flexible suggests that you are easy to work with.
- Closing location. Unless you have a strong preference, it can be a small favor to let the seller choose the closing company. While this may not seem as significant, it is just one more thing to tip the scale in your favor.
- Insurance. Your contract protects you against damage that could occur to the property during the closing period. The seller is required to maintain insurance on the property until the transfer of title. If damage occurs exceeding the dollar amount you determine, you have the option to walk away from the sale. The higher the amount you allow, the more competitive your offer.
The conditions of the housing market are going to shape what a "competitive" offer looks like.
In a buyer's market, your offer price should be based on the approximate market value and if you are bidding against any other buyers. Your earnest money deposit should be at least 2%. Request any relevant inspections, have your ideal financing in order, and complete your due diligence ahead of time. When deciding whether to include an appraisal contingency, consult your REALTOR® on the most practical decision.
In a seller's market, you should take into account 1) the competition for the property, 2) how much over ask homes in the area are selling for, and 3) if you are willing to employ an escalation clause. Put in a large deposit, and complete your due diligence before offering. Weigh the pros and cons of requesting an inspection, and make the decision that's right for you. Choose financing options that are right for you and portray you as a strong buyer. Be ready and willing to cover all or part of an appraisal gap. Consult your REALTOR® on other ways to strengthen your offer.
No matter the market conditions, having the right REALTOR® gives you the best chance of making a strong and wise offer. An agent who knows the demands of the market can tell you what it takes to win the home of your dreams.
I hope this article has been valuable in helping you think about your home offer strategy. If you have questions on offers or any part of the home buying process, please contact me. I am here to bring clarity to your real estate experience.
I first became interested in real estate after graduating college and buying my first house in Louisville. By the time I moved, I gained an appreciation for homeownership and the real estate process. ....