In this aggressive seller’s market that we have seen in Denver over the last few years, homebuyers often find themselves competing for the home they want. Especially if you are shopping in the “affordable” price range, it’s important to know what will make your offer a winning offer.
Pick the right lender and real estate agent!
The experts you choose to work on the purchase of your new home may be the most important decision you make in the home buying process.
This may be the most important decision that you make to ensure that your offers are solid.
Your choice of a lender does matter! Just like any industry, there are good lenders and bad lenders. There are lenders that have a great reputation for getting things done and lenders who don’t. Listing agents do look at who your loan is with, so choose wisely. And this does not mean that your bank is the smartest choice. Banks can be difficult to work with and hard to get on the phone after hours.
Second, make sure your mortgage broker works weekends. Often times a listing agent will want to talk to your lender about the solidity of your financing. If you make an offer on a weekend, which is quite often the case, you want a mortgage broker who is willing to take a call on a Saturday afternoon. Even better than that is a mortgage broker who is eager and willing to initiate a call with the listing agent to ensure them that your loan is rock solid and build some report.
So how do you find a great lender? If you have a REALTOR, ask them for a list of lenders they recommend. Don’t yet have a REALTOR, then interview several mortgage brokers. Find a broker who is eager to get the job done. In fact, you will want to get a quote from more than one lender anyway. Try two or three lenders out, and see who gives you the best service.
Picking the right Realtor is just as important as picking the right lender. Your Realtor is the one who will be writing your offer so they had better be experienced at it. And just because an agent is experienced in one aspect of real estate, doesn’t mean they are experienced in writing competitive offers. For example, a very experienced luxury listing agent may not be your best choice as a buyer’s agent in the 300,000 price range. Also, your best friend’s cousin may be a Realtor but do you have any idea if they are experienced at writing competitive offers?
Here again, if you don’t know a good Realtor, you can always ask your lender for suggestions. Or you could interview several Realtors and ask them what strategies they have for winning offers. (After reading this, you’ll have a good idea what some of those strategies are.) Or if you are in the Denver area, you can call me. I have had my fair share of working with buyers in competitive situations.
Now that you have your powerhouse team of experts behind you, it’s time to start shopping and considering your options for that winning offer.
How are you paying for your home?
Cash? Conventional? FHA? VA? Down payment assistance?
Just as in many instances, cash is king! Often times a lower cash offer can beat out a higher offer that involves financing.
But, unfortunately, most people are unable to purchase a home in cash. The next best thing is a conventional loan. Conventional loans have less restrictions than FHA or VA loans. For example, an FHA loan or VA loan will not allow you to buy a home that has peeling paint or a broken window, this may mean a seller will have to do repairs on a home before the loan will be approved.
If you think that you can’t afford the downpayment of a conventional loan, I suggest taking a look at a 1% down conventional loan.
If you have an FHA loan or VA loan, don’t worry, you aren’t alone. In fact 46% of first time homebuyers use FHA loans. If possible I would suggest having extra cash on hand to be flexible in making a winning offer. (You’ll see what I mean when I talk below about appraisals)
Now, if you have an FHA loan and downpayment assistance, like a CHFA grant, you will need to be very competitive in your offer. Although downpayment grants are great ways to buy a home when you don’t have much to put down, they can make your offer a bit less attractive because a CHFA grant adds one more area where your loan can be held up. But even if you are shopping with a downpayment grant, do not worry! I have shopped with many homebuyers using an FHA loan and a CHFA grant and each one of them has successfully purchased a new home. And as a listing agent, I have had sellers except offers that included a downpayment grant.
Buy the house as is.
One way to be competitive is to offer to buy the house as is. This means that right up front you are telling the seller that you will not be asking for repairs or money for repairs. Does this mean that you can’t have an inspection or that if your inspector finds out the foundation is falling apart that you are stuck buying the home as is? No, you can still have an inspection, and if at that point there are more repairs that need to be done than you want to deal with or the home is falling apart, you can walk away from the deal at that point.
Offer to buy a home warranty effective the date you go under contract.
A home warranty is not very expensive, typically about $200 to $300 per year. Purchasing a home warranty that is valid from the date you go under contract gives sellers extra assurance. If the inspector does find issues within the home, there is a good chance that it will be covered by the home warranty.
Include an appraisal provision.
Sometimes homes don’t always appraise for the full purchase price. This can happen even more frequently when homes have multiple offers and the competing offers drive up the purchase price above the appraised value. When a house appraises for less than purchase price it can put both the sellers and buyers in a pickle. Sellers were expecting to get the purchase price but the lender will only lend money based on the appraised value. Including an appraisal provision in your offer addresses this issue upfront and tells the seller what you intend to do if the house does not appraise. How an appraisal provision works is that you state that if the house does not appraise at purchase price, you agree to pay an amount in cash above the appraised value. Example, “if appraisal is lower than purchase price, buyer agrees to pay $5000 above appraised value up to purchase price” In order to include an appraisal provision, you must have enough cash on hand to honor it.
Use an escalation clause.
An escalation clause is a clause which says you will pay a certain amount higher than the highest offer that the seller receives, and of course you put a cap on the top amount you will pay. The escalation clause can be a great tool but it has drawbacks. First off, if you make an offer of $250,000 with an escalation clause going up to $265,00. You have just told the seller you are willing to purchase the house at $265,00 and they may just counter your offer with a price of $265,000 whether they get an offer higher than your $250,000 offer or not.
Also, not all sellers or listing agents appreciate escalation clauses. Some listings on the MLS even state, “no escalation clauses”.
Be flexible with possession date.
Have your Realtor find out when it is ideal for the seller to move out of the home. Maybe they need to find a new home themselves. If this is the case, offer to allow them to stay in the home an extra 30 days, 60 days, whatever they need. If you can afford it, allow them to stay rent free.
Although I have had buyers win offers in competitive situations where contingencies were involved. It’s best not to have them. What is a contingency? A contingency means that you are purchasing a home contingent upon another event taking place, most likely contingent on you selling your home.
Write a letter.
More than once, I have had a listing agent tell me that my buyer’s offer was chosen because of their letter. Some agents will tell you they don’t do any good. And maybe to some sellers they make no difference. But I’ve seen it make a difference and it can’t hurt.
Write a letter to the seller that tells them about you and your family. Include some pictures. Tell them what you like about their house and why you want to make it your home. A touching letter may make the difference!
Even great offers don’t always win, but a well written offer can definitely increase your chances.
If you don’t win the 1st, 2nd or 3rd offer, don’t get discouraged. You will get a new home! Like I said, I have shopped with some homebuyers in some pretty challenging situations but each and every single one of them is now enjoying their new home.
And if you need a REALTOR who is ready to work for you, call me today!