Buying a home is stressful even at the best of times. However, in a competitive real estate market just finding a house to buy, any house, can feel overwhelming. The first time my wife and I tried to buy a house in the Denver-metro area two years ago we ended up building one instead. Not that building wasn’t a great move, during an inflated market it becomes cheaper to get a brand new house than to buy a seventy year old one. Also, new builds are typically planned in areas that are rapidly developing, which adds significant value for the future resale.
However, when buying our second home in Washington’s now super competitive Camus area, we wanted a house that we didn’t have to wait for, something move-in ready. So I did my research, learned how to prepare strong offers on homes with excellent value and we were able to get the perfect house for us within two tries. Here I will share the lessons that I learned and:
How to structure an offer that will beat out the competition during a real estate bidding war
A higher down payment on paper will strengthen your offer on a home
A higher down payment is significant to sellers because they know that a buyer can only receive financing up to the appraised value of the property. Thus, if the home appraises for less than what was offered, buyers with higher down payments have more options to cover that gap, at least in the eyes of the seller (but more on that below). One of the keys to preparing a great offer is to show your cards, even if you don’t intend to play them.
That is, if you can qualify to put down 20%, but you only qualify with funds that you don’t want to actually use in transaction (like your retirement savings, emergency fund etc.), you can still make the initial offer showing a 20% down payment. That’s because the final terms of the loan will undergo several changes before the final settlement statement (appraisal, loan rate lock, lender’s credits etc.) This showing-your-cards strategy is great if you later decide to put 10% down, instead of 20% but want the seller to be aware of your true buying power.
Understanding “appraisal gap” will allow you a competitive edge in buying real estate
The appraisal process is important because it determines the total amount of financing a buyer can receive for a given property. That’s because lenders won’t finance a property based on just one person’s concept of value (i.e. the amount a buyer offers), rather, they rely on the appraisal which reflects comparable properties among other widely accepted value factors. However, in the real world, offers are almost always made and accepted before the appraisal is even scheduled. Thus, there is an “appraisal gap,” the amount that falls between what a buyer offers and how much lending they can secure. The good news for well-funded buyers is that you can fill that gap with cash and make an offer that is likely to blow away most of the competition.
Making an “as is” offer on a home
If you target real estate built within the last few years – or even better, a property that has never been occupied – making the offer on an, “as is” basis is a great way to further strengthen your. Buying “as is” doesn’t actually mean that you don’t have recourse if issues arise during the property inspection (though you can waive the right to a property inspection too). Issues that present possible health risk, like radon mitigation are usually repaired by the seller before transfer of ownership. The seller may also be willing to attend to less significant concerns like damaged paint or cracked concrete, and buyers retain the option to walk away from the contract for major issues like serious mold or bad plumbing.
Offers without “contingencies” are much stronger than one’s that require the sale of another property first
The most common contingency that most home buyers will face is the contingency that they must sell their home prior to buying another one. This contingency is mandated by the lender and can create chaos for real estate deals in a number of ways. Primarily, needing to sell your home prior to being approved is inconvenient for buyers because they then need temporary living accommodations during the house hunting process. It is also problematic for sellers because in a competitive real estate market there will definitely be offer on the table without this roadblock.
There are a couple of things you can do. You could do the obvious and sell your house first, which may be necessary depending on your finances. This works particularly well if you can negotiate a later possession date (when you hand over the keys) in your sale contract. A second option, is to get a cosigner or a co borrower, though that often presents it’s own set of issues. Talk to your lender about other options because, depending on your circumstances you may be able to find other ways to make offers on a non-contingent basis. For instance, we were able to make non-contingent offers based on buying property as a “secondary residence,” based on various factors, which allowed us to later convert the property to our primary residence.
Other contingencies you could but probably shouldn’t waive:
- Home inspection: As opposed to buying a property “as is,” waiving the home inspection contingency provides you with no recourse if major issues affect the home’s true value.
- Financing contingency: Waiving this right means that you can’t walk away from the contract if your lending falls through. You may be tempted to waive this right, but think twice because there are a multitude of ways for a loan to fall through. However, statistically most accepted offers do eventually close and the majority close without issue (4% fail to close).
- Appraisal contingency: If you waive the appraisal contingency you will be locked into the contract even if the house is appraised for lower than what you have offered offer and walking away would mean losing your deposit/earnest money. As stated above, lenders will only finance your loan up to the appraised value of a property, so if you waive this contingency you must be certain you can fill the entire appraisal gap either in cash or supplemental financing.
Find out what the seller wants and give it to them
The final piece of advice (not formal financial advice, see Valuist disclaimer) I will give on how to make the best offer on a house, is to give the seller what they want. A skilled buyer’s agent will be able to navigate this best but if they are not forth coming about what they are doing, ask them if they know the buyers preferences such as:
- When they would like to move?
- How fast they want to close?
- Who are they looking for in a buyer (if they have a preference)?
- Would increasing earnest money strengthen your offer?
If you are among the final two offers in contention, once you know who your seller is and what they want, give it to them! A lot of the concessions you make can help close the deal and typically without further price or appraisal gap considerations, though those can certainly come into play too if you are really serious about a property.