Arm yourself for a bidding war
The bidding war is back. While not every local real estate market is experiencing bidding wars, some homebuyers find themselves competing for houses because there aren't many for sale in their markets. For example, in Phoenix, it would take just 2.3 months to sell all the homes currently on the market, says Susan Paul, owner of Better Homes and Gardens Real Estate Move Time Realty in Scottsdale, Ariz. The result? Many homes have 10 to 15 offers the day they go on the market, she says.
To compete in a bidding war, buyers need to prepare financially for the home purchase. They have to familiarize themselves with property values in their target neighborhoods. And they must know what they want.
While offering the most money might seem like the best way to win a bidding war, sellers don't always choose the highest offer. Instead, sellers often prefer offers that are most likely to go through and that meet their conditions. Here are six tips to increase your chances of making the winning offer in a bidding war for the house of your dreams.
Have a lender on speed dial
"Too many buyers talk to a lender and start looking at homes at the same time," says Eldad Moraru, a Realtor with Long & Foster Real Estate Inc. in Bethesda, Md. "You need to have everything (financial) done before you begin to look." Then you are more likely to win a bidding war.
He suggests selecting a lender and loan product, completing everything the lender requires and having a preapproval letter in hand -- all before submitting an offer.
"You need to make sure your lender is ready to issue an approval letter specific to the property at the drop of a dime," Moraru says.
Paul recommends keeping a file folder constantly updated with your most recent pay stubs, all pages (even blank pages) of recent bank statements and any other documentation the lender may need to make a quick loan approval. Then you are ready to make an offer.
A strong preapproval is essential, especially if you are competing against buyers with cash to offer, says Alan T. Aoyama, vice president of Century 21 M&M Associates in Cupertino, Calif. Any hint that you might have trouble qualifying for financing could eliminate you from the seller's choice of buyers.
Cash in your pocket plus the paperwork to prove it
"An all-cash buyer can even waive the appraisal," Aoyama says. "If you're a noncash buyer, you need to have a copy of your proof of funds with your offer along with a strong preapproval. At a minimum, you should offer a down payment of 20 percent if you know you'll be competing against other buyers. You need to show you have the funds to close and the ability to make up the difference if the appraisal comes in too low."
Moraru says that in Washington, D.C., and Maryland, it's common to accompany your offer with a financial information sheet detailing your job history, salary and bonuses, 401(k) balance, how much you have for a down payment, and where the down payment money is.
A higher-than-customary earnest money deposit can sometimes impress sellers when there is a bidding war, Moraru says. Just make sure you fully meet all deadlines and terms of the contract so you don't lose your deposit.
Make a fast, personalized offer
To compete against other buyers in a potential bidding war, make sure you see a potential home the day it goes on the market, so you can move quickly, Paul says.
"Your buyer's agent should talk to the listing agent to find out what is motivating the sellers and what they need -- such as a quick settlement or a post-settlement rent-back," Paul says. "Be flexible, and work that into your offer. Make it as easy on the sellers as possible so your offer is chosen above 15 others."
Paul says buyers should offer to help the sellers in any way they can, such as helping them find a home for their pet if they can't take it with them.
Moraru says while price is important, sellers want to know the buyer can finance the property and meet any other conditions. If you don't know the date when the sellers want to settle, you can write "will settle on seller's schedule" into the offer.
Aoyama suggests offering 30 days of free rent if the sellers want to stay in their home after settlement.
Keep your home inspector on alert
Most Realtors don't recommend buying a home without an inspection, but making your offer contingent on an inspection can weaken your position if other buyers are waiving an inspection contingency. Aoyama says buyers should carefully read all disclosures and reports that are available because some sellers provide a home inspector's report for buyers. You can also have an investigative home inspection after your offer has been accepted that can provide information on the home's condition.
"If you're serious about a particular house, you can have a home inspection before you make an offer, and then make a noncontingent offer if you're satisfied with the report," Moraru says. "You'll need to move fast, though, and have a home inspector ready almost the day the home goes on the market."
Paul says you can bring a home inspector along when you first look at the home and say the inspector is a friend, just to get an inspector's feel for the condition of the home without an in-depth checkup.
"If the inspector says the house looks OK, you can feel better about waiving the home inspection contingency," Paul says.
Eliminate or reduce contingencies
One of the best ways to make your offer stronger is to eliminate contingencies regarding home inspection, financing or appraisal, says Aoyama. That puts you in a more solid position to win a bidding war. If you have cash reserves to cover the gap between a low appraisal and your offer, you can waive the appraisal contingency, he says, but leave your financing contingency in place to protect yourself.
"If you can't waive these, you can at least shorten the time frame, such as (by) reducing the loan contingency to 10 days if you know your lender can provide you with proof of financing quickly enough," Aoyama says.
Offering to buy the home as is can be tempting, but make sure you have an accurate idea of the home's condition with an informational inspection for safety.
Paul says buyers need to make their offer as strong as possible, so if you don't need a home warranty or help with closing costs, don't ask for them.
Try an escalation clause -- maybe
An escalation clause is an addendum to a purchase offer that authorizes your agent to offer a specified amount (such as $5,000) above the best offer the seller receives. It's a powerful way to wage a bidding war.
"Buyers are offering escalation clauses a lot less often than when the housing market was booming, unless the home is priced way below market value," Moraru says. "I recommend that buyers who want to offer an escalation clause be very careful to go as high as they can with the understanding that they can live with the price if it goes to the maximum amount. They also need to feel that if someone else gets the house at a higher price, that buyer overpaid."
Moraru also says that buyers need to make the escalation big enough to make a difference to the seller.
"Escalating by $500 doesn't necessarily matter," he says, "but offering $10,000 above the highest bid on a $400,000 to $500,000 property does."
If you offer an escalation clause and have waived the appraisal contingency, you'll need to make up the difference in cash between the appraisal and your offer.