How to make a more competitive offer
It is hard out there for buyers right now. In Portland there’s so much competition for the small amount of listings we have that along with high all-cash offers some buyers are doing things like waiving all inspections and agreeing to purchase homes as-is, even sight unseen. It can be discouraging, but regular people are still getting reasonable offers accepted without giving up all their rights as buyers.
Putting a house on the market can be stressful for the sellers too, and they’re not necessarily just looking for the most $$ they can get. They want the transaction to be easy and certain. There’s nothing worse as a seller than accepting an offer, having the sale fall through (for any reason) and having to put the house back on the market and explain to everyone why that happened. Regardless of reason (and it could have been totally unrelated to the house), the house starts looking like damaged goods. As a buyer, the more assurances you can give the seller that this sale is going to happen, the better. Let me run through a few ways you can make an offer more appealing that aren’t about price. Of course the feasibility of any/all of these options will depend on your situation. Here’s some things you can do to make your offers more appealing to sellers without screwing yourself over in the process.
Appraisal gap coverage:
As part of your loan the bank will order an appraisal of the property. They basically want to make sure that the property is worth what you’re paying for it and that they’ve made a good investment by loaning you the money. The appraiser does this by comparing it to properties of the same square footage/bedrooms/baths/etc that have sold recently nearby. It can take a while for comparable property records to catch up to current offers if a market is hot. So let’s say you offer $600k on a house but the appraiser comes in and calculates that it’s valued at $580k – you have a $20k appraisal gap. This means the bank is going to want $20k more added to your down payment to offset their risk. It doesn’t mean you’re paying 20k more for the house than the price you offered, just that you’re bringing more cash to the table so the bank’s loan amount is reduced. Back when it was more of a buyer’s market and an appraisal gap happened, the buyer and seller would often negotiate who would cover the gap. Often they would split it or the seller would offer a price reduction to cover it and make sure the deal held together. Right now buyers are making their offers more competitive by stating that they are willing and able to bridge the gap. This can be specified as ANY amount (no limit), or something like “up to $30k.” This is just to tell the seller that you’re not going to let the deal fall apart if you can help it. Even offering a smaller amount like $10k in gap coverage is good because even if it doesn’t cover a large gap, it shows the seller that you’re going to try to make this deal work. If this does come into play (and it may not), you would need that amount of liquid funds in addition to your down payment and closing costs at the time of closing, so don’t commit if you can’t come up with the additional cash.
During the inspection period you find out as much as you can about the house. Traditionally you would then negotiate repairs or credits for repairs based on that info. Some buyers offer to accept the property with no professional inspections. I never EVER recommend doing this unless you happen to have unlimited funds or are in the construction business yourself. If there’s a serious problem you need to know about it before you buy the house. That said, there are other compromises you can make.
• You can agree to ask for no repairs – this is your “take it or leave it” option. If you discover in inspections that there are serious problems like a cracked foundation or the roof is leaking, you can walk away without penalty (you will get your earnest money back in full, but bear in mind you will have already paid for your home inspectors). Or if you find minor, less expensive things wrong with the house you can opt to go ahead with the purchase and pay for those fixes yourself at some point.
• You can agree to ask for no individual repairs under a certain amount ($2000 for example). This tells the seller you’re not going to nickel and dime them for small things, and you will only ask them to negotiate if you find something seriously wrong with the house.
Both of these options can help reassure the seller that you are committed in your desire for the house without waiving the inspection contingency entirely.
Sometimes a seller will need to rent the house from you after closing in order to give them time to find a new home. This is called rentback. For insurance reasons most mortgages will only allow you to rent back to them for up to 60 days. As the new owners you would typically charge the sellers rent at the same amount as your monthly payment (with taxes, insurance, etc included), prorated by the day. However if you are feeling generous you can offer them some amount of rent back time for free. One week, one month, the whole time, whatever you want to offer. Just bear in mind you will be responsible for both the new mortgage and your current rent/house payment during that time. You can also do some combination thereof – for example: “Buyers to grant sellers 30 days of rentback with the first week free – all subsequent time to be charged daily at a rate of 1/30th of buyer’s monthly payment”
These are a few of the things you can do to make an offer more competitive that go beyond the highest bid, and there are other options as well. It’s important to remember that solid terms are sometimes more important than the highest price.
Got questions? Contact me!