So, you have found your dream home and want to make an offer. In a competitive real estate market, the seller might have multiple offers. How do you make sure yours stands out? Following these steps will increase your chances of getting the house without overpaying and will help you avoid putting yourself in a risky situation.
1. Obtain a Pre-approval Letter
There is a difference between a pre-approval letter and being pre-qualified. In a pre-qualification, the lender is giving you an assessment of what you can afford based upon what you told them. In an actual pre-approval, you have provided documentation on your income, assets and credit. The lender will then give you a pre-approval letter that you can attach to your offer. This gives the seller a greater degree of confidence that you are going to be able to close the transaction without any issues and might help them prioritize your offer.
Find a good lender that is willing to do a little more work than most. If you submit a letter that shows you are pre-approved for $275,000 and you are bidding $240,000, the seller will know that you have room to increase your offer. You don’t want to give away your negotiating position. A good lender will write a customized pre-approval letter for each offer.
2. Have Your Realtor Do a Comparative Market Analysis
This market analysis looks at how much comparable houses in the same neighborhood have gone for. Look for houses that are as close to your prospective house as possible (i.e., same number of beds/baths, similar size) and that have sold fairly recently. This will give you a reasonable starting point for your first offer and help ensure you aren’t overpaying.
While online real estate sites (Redfin, Zillow) can give you an idea of a house’s worth, they are no substitute for a comparative analysis that actually shows you how similar the comparable houses are. Having this detail gives you data to help justify your offer if needed.
3. Determine How Much to Offer
A good competitive analysis will tell you what that house is worth. This is usually a big driver in shaping your offer amount. Another thing to consider is how long the house has been on the market and how long houses in the area are usually on the market. If houses in the area usually sell in 60 days and this house has been on for 120 days, it likely doesn’t have a lot of other interest. This can help your bidding strategy.
The actual offer you make should be determined by market factors and how much you really want the house. If you really want a house, don’t make a low-ball offer that isn’t supported by facts, especially if you are in a seller’s market. This might just insult the seller and have them move on from you as a serious buyer.
4. Decide How to Structure Your Offer
Before submitting an offer, consideration has to be given on how best to structure it.
Knowing a bit about what motivates the sellers and whether or not there are other offers can help with this. The goal is to put together terms that meet the sellers needs and that are more attractive than other offers the seller might have.
Larger Down Payment – a larger down payment sends the signal that you have ample financial resources and are less likely to run into issues getting a mortgage. If two parties are bidding $300,000 for a home, the seller is likely to take the offer with 20% down rather than the offer with 3% down, all else being equal.
Earnest Money/Escrow – When you make an offer you are asked to put money down as a show of good faith. This is usually called “money in escrow” or “earnest money”. This typically falls into the 1% or 2% range but in hot housing markets it can rise to 5% -10% as buyers offer to put more money down to make their bid more attractive. This money signals that you are a serious buyer. One thing is to consider is that this money isn’t necessarily refundable, depending on the contingencies in the agreement.
All Cash – If you can pay all cash, let the sellers know. This ensures them that financing isn’t going to be an issue with getting the deal closed.
Waving Contingencies – The standard closing agreement will have contingency clauses that include things like the right to a home inspection (looking for structural or other defects), hazard inspections (looking for things like radon, pests or lead paint), sewer and well inspections (to ensure they are in good shape), appraisal, loan approval (deal is contingent on a mortgage), buyer selling their existing house, early occupancy and a pre-closing walk through. If you’re the seller, each of these pose a risk that the deal might not go through. To make their offer more attractive, buyers might wave some of the contingencies.
Make the Offer Friendly – if there are certain things that are customary don’t insist on things being different. For example, if it is customary for the buyer to pay for the title insurance, don’t insist that the seller pay for it. In the grand scheme of things this fee isn’t a big part of the agreement and putting in such a change can be viewed as more of a bulling tactic than anything else.
Be Flexible with the Dates – If the sellers are looking to move quickly, accelerating the process shows that you are willing to try to work with them to come up with the best solution for all. Check with the area appraisers, or have your realtor check, and see how fast you can get an inspection. Many standard contracts have a 17-day period, you might be able to reduce that. A good lender can work to get you approved quickly. This might enable you to move up the closing data if that was something important to the seller.
5. Have Your Lender Call the Listing Agent
The listing agent might have a number of offers they are deciding between. The best offer isn’t always the one that offers the most money. Whether or not the loan will actually close is another big consideration. A buyer not being able to get the mortgage financing is one of the most common deal killers. Having your lender call the seller’s agent and assure them that your application looks solid could help influence the decision process
6. Write a Personal Letter
Either at the time of the offer or sometime during the consideration period, it can be good to write a personal letter. Buying and selling a house is an emotional transaction and a personal letter is meant to appeal to the seller’s emotions. Talk about how you can see your family growing in the house, the wonderful look and feel of the house and the neighborhood and other positive elements. Don’t talk about changes or renovations you envision doing.
If the seller is an investor the emotional letter probably isn’t a factor. If the seller is going through a divorce or it is an estate sale due to a death it might be best to stay away from the emotional angle.
7. Talk to a Lawyer
You should always have an attorney involved in crafting the offer letter. There is a lot at stake and if you’re not careful you could get yourself into a position you didn’t anticipate. This is especially true if you are thinking about waiving contingencies. Your attorney can explain the different terms and what they mean. You can make sure you are comfortable with the agreement.
Contact EMM Loans for a Home Loan
At EMM Loans we work with homebuyers every day. We are willing to go the extra mile and do the things that other lenders might find troublesome, like writing a customized pre-approval letter or expediting your closing dates. If you are thinking about buying a home and would like to work on a pre-approval, or just get some advice, we are here. Contact one of our advisors today!