How to strengthen an offer.

So, up until about a week ago, the real estate market was on fire.  Well, I am not going to surrender to this pandemic, and I will continue to press on – cautiously.  I am hoping that once the uncertainty eases, the market will pick back up, and rates will settle down.  With that said, in a competitive market, the price isn’t the only way to stand out.  In fact, in a highly competitive market, price is usually the last thing to win a deal – most offers are already at or above list price.  When prices/offers continue to escalate, it will essentially come down to how much the bank will let you pay for it – not how much you want to, unless, of course, you’re paying cash.

Here are a few of the variables in an offer, and ideas on how manipulating them can help you stand out.

Time Frame

When writing an offer, I find this to be the single greatest variable.  Let’s consider what drives time frame – Motivation.  Why is this seller selling?  Where are they going?  Think about how these things play into the value of the offer.

The Why.  Why someone is moving can be any number of things.  Upsizing, downsizing, relocation, divorce, marriage, financial distress, etc.  Upsizing and downsizing we’ll touch on in “The Where.”  But, let’s consider these other events.

Relocation – do they have a job offer they need to act on now?  Maybe the new employer wants them in the office in 60 days, 30 days?  Maybe they’re living in a hotel during the week, and that’s growing old.  A shorter settlement time frame puts the family back together, and lets normalcy take hold.

Divorce/Marriage – Divorce is often a bigger motivator than marriage.  Divorce has a certain finality/expiration to it.  It also creates a significant amount of financial stress between the parties, as they’re trying to move on and get this behind them.  They may need to move immediately – or, they may need a flexible settlement window in order to work through the logistics of setting up two domiciles.

Financial Distress – as we touched on in divorce, this can be a huge motivator.  Unfortunately, most people aren’t in a position to negotiate, as their backs are against the wall.  The telltale signs of this sale are an inflated price, baron home, and the appearance of a makeshift living arrangement.  These typically will take longer.  You’re probably looking at a Short Sale – which is a post for another time.  However, what you need to know about a short sale is that they’re not typically short…  During the peak of distressed property sales (2010 – 2013), the average time to close on a Short Sale was about 6 months.

The Where.  Where someone is going has a lot more going for it than you’d imagine.  Remember, we’re talking about a competitive market.  Does the seller have an offer, contingent upon their sale, on another property?  Do they need an offer in hand to be able to remove the contingency and keep the house under contract?  Do they just have their eye on a property that they don’t want to lose, but feel a contingent offer would compromise their negotiating leverage?  The time frame involved in the where is all over the board.  They may be coordinating a time line with the seller’s of the new property.

Another time line to be cognizant of is the school year.  If the seller of the home you’re pursuing has school aged children, they may want to wait out the school year.  So, an offer to settle in 30-days in February might not work, while the same offer with a mid/end June settlement may delight the seller.

The key to all of this is you don’t know the motivation.  I always get the question:

“Do you know why they’re moving?”

Be clear with your agent when asking this question.  Ask if they can discuss with the agent to see what kind of time line they desire.  Is there a date they have in mind that would be ideal?  Put your agent to work.

Deposit

This is simple.  The more “skin in the game” you have, the stronger your offer.  Putting down $500 on a $400k home is ridiculous.  It needs to be painful to walk away from the sale.  There’s a box that should always be checked that states that the seller is limited to fund paid on account as liquidated damages.  When the buyer flakes – the deposit escrow is all the seller is entitled to.

Seller Assistance for Closing Costs

I am amazed at how many people can’t grasp this concept.  Depending on the financing you use, you can get up to 6% of the sales price credited from the seller to you.  But, understand that the seller is paying this.  If you’re looking at a $200k offer with a 6% assist – you’re really offering the seller $188k ($200k – $12k).  In a competitive market, I often advise a client to exceed list price (if I believe appraisal isn’t a concern) and then ask for that amount back.  So, $212k offer with a $12k assist looks better.  Your payment goes up $50 per month, and you get $12k back.  Basically, you’re financing that $12k @ $50 per month in your payment.  Now, while $50 per month seems like nothing (see “Coffee Cup Close”) – but, when you sell, you’re on the hook for all of that $12k.

Financing

This is one that is often overlooked.  There are many types of financing out there, but predominantly you’re going to see FHA/VA or Conventional Financing.

FHA/VA

FHA is often referred to a “first time buyer” mortgage.  Not the case – not at all.  FHA is a loan insured by the Federal Housing Administration.  This type of financing is often used by first time buyers due to the low down payment (3.5%), flexibility in debt ration (sometimes as high as 50%) and lower minimum credit scores (620).  One of the concerns a seller may have with FHA financing is that the appraisal will often look for items to be repaired.  Is there a railing for any stairway with 3 or more steps?  Is there peeling/flaking paint (often on older homes)? Are the necessary GFI outlets present? You’ll sometimes hear that your appraisal came in “at value with no repairs needed.”   This is a good thing, but many times FHA will have some small repairs required by the bank.

VA is similar to FHA in that it’s an insured loan – backed by the Veteran’s Administration.  This allows for eligible veterans to purchase the home using 100% financing (no money down).  Also similar to FHA, the VA loan will have additional requirements – such as a Wood Destroying Insect inspection (termites, carpenter ants, carpenter bees, post beetles, etc).  Not a big deal – but, treatment for a home that shows evidence of these insects can cost the seller a few hundred dollars.

Other similarities with these loans exist in seller assist (maximum 6%) and appraised value.  Appraised value is one to be concerned with in some instances.  Both FHA and VA loans have a built in Appraisal Contingency – basically, this states that if the property doesn’t appraise for the agreed upon purchase price, the buyer isn’t required to purchase the home.  Another appraisal caveat is it’s attachment to the property.  Appraised values are attached to the property for FHA and VA loans for 4 months and 6 months, respectively.  What this says is that once the appraisal is done, if it doesn’t close the next FHA/VA buyer will have the same appraised value on the property.

Conventional –  Conventional financing starts with a minimum of 5% down and increases from there.  It’s sometimes a little more expensive at the higher LTVs (Loan-to-Value Ratio) due to PMI (Private Mortgage Insurance).  This insurance is required for any purchase with less than 20% down payment.  It basically insures the  bank’s interest above 80%.  In the case of a default, if the bank only get’s 80% of the value for the home, the insurance would kick in to make them “whole” or close to it.  Conventional’s biggest perk is that you can buy almost anything and finance it.  No repairs, no appraisal attachment, etc.

Do you know what we haven’t discussed in financing – THE LENDER!

There are a lot of online mortgage companies – Quicken Loans, Rocket Mortgage, etc.  STAY AWAY!!!  Recently, I had a buyer using Quicken Loans.  The origination fees for a $325k purchase were $8000!!!  They switched to my lender, and all lender fees were less than $2000.  They’re thieves.  Beyond the fact that they’re crooked, they’re an unknown.  Agents have a comfort level with lenders that are local and reputable.  I use one lender for 99% of my loans.  The one thing I can say about “Tanya Mace – The Mortgage Ace” is that she’s never failed me – on either side of the table.  There’s a confidence among the professionals in the business that know she is going to get the loan closed.  Some preapprovals aren’t even worth the paper they’re printed on.  Are you using a lender that adds strength to your offer?

Lastly, on the lender…. the difference between a banker and a true lender is that a good lender is available most all of the time.  Especially in a hot market.  While not instantaneous, you should’t have to wait until Monday at 9:30 AM to get an answer to Friday’s 7 PM question.

Contingencies

Contingencies, for lack of a better phrase, are “loopholes” in the contract.  Every contingency provides the buyer with an exit strategy of sorts. Here are a list of some of the common contingencies you may have in an agreement:

1. Financing – must be able to get the loan.
2. Home Inspection
3. Wood Destroying Insect Inspection
4. Water Test (FHA has a more stringent water requirement)
5. Septic System Test (a home that’s vacant will require a Hydraulic Load Test)
6. Radon Testing
7. Property Insurance/Insurability due diligence
8. Home Sale & Settlement Contingency
9. Settlement of Other Property Contingency

These are all variables in the offer.  Financing goes back to the last topic, and doesn’t really need much explaining.  Cash is King.  A cash offer is often viewed as the best; however, if you have the cash to buy a property outright, the deposit should be more significant so they are inclined to stay the course, or lose a significant chunk of change.

Home inspections are normal; however, in the age of consumerism, one would often describe home inspectors as alarmists.  That’s good and bad.  If you’re a savvy buyer, you know things are going to come up in the inspection.  Are you going to nickel and dime the seller for all the minutia on the report?  Or, are you going to assume some responsibility for some of the items?  One way to mitigate this contingency is by an addendum stating that you’ll proceed with the purchase if repairs listed on inspection are less than $X…  If you’re only looking for major items, this is something to discuss with your agent when writing the offer.

WDI/Radon/Water on relatively inexpensive fixes – USUALLY.  Termite damage can be extensive and require structural repairs.   Water is dependent on appliances mostly.  If the water isn’t too hard, acidic, etc – you can usually get away with a UV Light on the system.  That’s about $850.  Radon may run as high as $1200-$1500 for correction.

Septic is a big one.  I wouldn’t advise anyone to forego a septic inspection.  That’s a significant system for the house and replacement of a standard system probably starts with a conversation at $15k.  Other systems, depending on the land, can run in to the $50k range – although that is specific to specialized circumstances.  Sometimes a septic can’t be replaced.  Then you get into a holding tank situation that can be costly for years and years.  Frankly, you wouldn’t buy a house that didn’t have some sort of waste disposal, and the seller shouldn’t expect you to.  Unless you’re getting a steal on the home – that is already priced with the septic repair under consideration, you need this test (not with public sewer).

Property Insurance is an important one.  You could be in a flood zone.  Have there been many claims against the property?  From what I’ve been told in the past – the claims follow the home, not the home owner.  So, if you’r buying a home that’s had 4 claims in the past year, you may find insurance cost prohibitive.

Sale & Settlement contingency – this means your home isn’t under contract.  It may not even be for sale.  This is a tough pill to swallow for a seller.  I’ve often said that in the market there are buyers, and sellers that want to become buyers.  If you can’t carry both homes and purchase without selling your home, you’re the latter.

Settlement of Other Property Contingency – this one is very common.  This states the home is under contract.  At what point is it?  To really use the leverage of this contingency, you should be through appraisal and inspections.  Contingencies on your sale shouldn’t be contingencies on the other sale….   “don’t make your problems my problem.”  Make sense?

In NJ, the due diligence is built into the contract.  There’s also an Attorney Review on every purchase – similar to a 3-day right of rescission on a refinance.

Price Escalation Clause

These are few and far between these days – but they exist.  They do become more popular in a hot market.  What this clause states is that you agree to beat any other offer by a predetermined amount, up to a maximum price.  This can help you win a home with out having to throw all of your money at it.

Special Clauses

You can pretty much write whatever you want in a contract.  There’s a special clauses section at the end.  If it’s legal, you can add it here.  Lender’s may have the final say as to whether or not they’ll allow something.

Summary

A lot of this is personal preference and what you’re willingness to take on risk.  However, you should be discussing with your agent in detail:

1. Time Frame – have your agent do some digging to find out what the seller is looking for.
2. Put down a deposit that is reasonable with the price range you’re in.  Under $500k range should never exceed $20k as a total deposit.
3. Avoid seller’s assistance if you can.  If not, add what you can to the price – it doesn’t have to be all or nothing.
4. Use a reputable local lender.  Is your lender adding value to your offer?
5. Almost all deals have a financing contingency.  Using the right lender should make any of the financing options viable.
6. Contingencies – less is more!
7. Are there any clauses you can add to increase your chance of winning the day?

I hope you find this useful!