5 Ways a Home Buyer Can Look Strong in a Seller’s Market

YouTube responded to TubePress with an HTTP 410 - No longer available
Trying to buy a home while in the middle of a seller’s market can be a frustrating process if you’re not prepared. You have to stay on top of the new homes coming on the market every day; otherwise, you run the risk having the house sold before you even get a chance to see it. Then, once you have walked through the property, you need to make a quick decision if you want to write an offer. This is not the time to spend a few nights “sleeping on it” – you’ll sleep right through your chance. Finally, when you do walk through that perfect house and decide to move forward, your offer is going to be 1 of 5 … 10 … maybe 20 other offers, if not more.
So, how in the world do you separate yourself from the competition?
It boils down to addressing 5 separate areas of your contract. Each one plays a pivotal role in shaping the overall offer.

1) Price

Unfortunately, there’s no getting around it … price trumps all. We live in a capitalistic society, and the opportunity to get an addition $10k or $20k will rarely be overlooked.
Most buyers will have a price range in mind that they’re willing to pay for a home. Generally, they like to start by offering an amount at the bottom of that range to give themselves room for negotiations. However, when you know you’re going to have a lot of competition, the price you initially offer may be your only shot at the property. Now is not the time for lowball offers.
When in a seller’s market, I tell my clients to be prepared to not get another shot at the property outside of the initial offer. Are you ok losing out on this house based on your offer price?

2) Down Payment and Loan Terms

Many sellers view a buyer with a large down payment (ie, 20% or more) as being strong because:
  • Potentially, the buyer will have an easier time qualifying for loan
  • Financially, the buyer will have the ability to better handle unforeseen inspection issues
  • Financially, the buyer will have the ability to better handle a low appraisal
If you don’t have 20% to put down, though, don’t feel as though you are out of luck. Seller concerns around smaller down payments can be overcome. But, make sure you are working with an experienced and creative agent … the seller probably won’t come right out and say, “hey, this is my concern with your offer.” Rather, it’ll be up to your agent to discover this information at an early enough stage in the process to give you a chance to counter it.
For example, let’s say you and one other buyer have offered the same amount on a house – $500k (on the low end of prices for Walnut Creek homes, but good enough for our example :)). You’re planning on putting 10% down and the other guy is coming in with 20%. The seller is concerned that the house won’t appraise at the value you both have offered. What could you do?
Well, one idea is to add a clause to your contract that you’ll agree, up-front, to covering the difference of a low appraisal all the way down to an appraised value of $466,300. Now, the seller has reassurance the he’ll get the full $500k for his house even if an appraiser doesn’t agree with that value.
How’d I come up with the $466,300 price? Here’s the logic:
  • You’re already planning on putting $50k in cash into the property (10% down payment on $500k).
  • Whether you were going the conventional loan route or the FHA route is unknown to me. However, going the 3.5% down FHA route isn’t going to be a huge change in loan type or loan terms from what you originally were going to be in (considering you never planned on putting 20% down, so you were always going to be forced to deal with PMI).
  • At 3.5% down on the lowest appraised value we’re allowing, $466,300, the lender will require a down payment of only $16,320.50
  • This new down payment gives you a difference of $33,679.50 from your original $50k
  • Take this difference and add it back onto the top of the loan ($33,679.50 + $466,300 = $499,979.50)
  • We’ve restructured your loan terms while managing to keep the purchase price at $500k and your cash outlay at $50k
DISCLAIMER: It’s important to point out that this approach isn’t for everyone on every deal! As the buyer, you are agreeing to pay a premium over the value an appraiser has stated the home is worth. But, depending on your circumstances and love for the house, you may be ok with doing this.

3) Contract Terms

Buying a house is an expensive endeavor for more reasons than the purchase price alone. Inspections need to be paid for. Reports paid for. There are title and escrow fees. Loan fees. Doc fees. Courier fees. The sky-is-blue fees. You get the point :) Well, all of these fees are negotiable. As a buyer, you can ask the seller to pay for any or all of them. These fees will add up, though. And, if you ask the seller to pay for them, keep in mind that this will detract from the purchase price you offered.
If the seller is working with a competent agent, each of the offers will be distilled down into the net proceeds that the seller would walk away with if they accepted it. Meaning, the agent would place a dollar amount on each of the terms that you are asking them to pay for and then subtract it from the purchase price you offered. Because of this, it’s important that you consider the cost of each item before you ask the seller to pay for it.
Each market will have customary practices as it relates to certain terms. For example, in Walnut Creek, it’s generally expected that the seller will pay the county transfer tax. On our example of a $500k purchase price, this would amount to $550. It’s also customary that the seller pay for a one-year home warranty for the buyer – which isn’t unrealistic to think could cost $450. Between these two terms, you’re asking the seller to pay $1k. What if, on the other hand, you took on the cost for these two items? If you negotiated with your lender ahead of time, they may be giving you a large enough closing cost credit to cover this completely … just an idea!
While it’s not uncommon to see offers sticking to the customary break down of costs during a seller’s market, it’s in your best interest to not go beyond that unless you absolutely have to. Using Walnut Creek again as our example, it’s customary that the buyer pay for the title and escrow fees (on our example purchase, could be in the $3k range). This would be an item that I absolutely wouldn’t recommend asking the seller to pay for unless you have a very specific reason for doing so.

4) Contingencies

Most offers have 3 contingencies written into them: loan, appraisal and inspections. These contingencies allow a buyer to back out of a contract while still retaining all of their deposit money. The shorter these periods are, the better. There’s nothing worse for a seller than having their property tied up for a couple weeks only to have things fall apart. They then have to put the house back on the market, negotiate with new buyers and then go through all the hoops again. If a buyer is going to back out of a contract, the seller would prefer it happen sooner rather than later. Shortening (or completely bypassing) your contingency periods minimizes the seller’s exposure and makes your offer look all that much better.

5) Closing Time

Each seller has a different reason for wanting to sell their home. Some need to move immediately (maybe due to a job transfer). Others might be downsizing and need some extra time to find their next place. Whatever the reason may be, it’s best if you can find out what their desires are and then accommodate them as best you can. If the seller is staying in the area and needs more time, consider offering them the potential for a short-term rent back (generally done at the cost of your PITI: principle + interest + taxes + insurance). If they need the proceeds to close on a new house, think twice before you ask them to wait 60 days for you to close.

Summary

Looking strong in a seller’s market requires you to consider each and every aspect of your offer very carefully. You need to shape it to the desires and concerns of the seller. You need to be prepared to put your best foot forward on the initial offer; otherwise, you may not get another chance. When a seller receives 15 offers, they’re not going to go back-and-forth with every one of them. If you’re not in the top 2 or 3 from the very start, don’t expect anything other than a brief email or phone call stating you weren’t selected but they wish you all the best in your continued search.
If you need some help flexing your buyer-muscles, let’s talk!

Why Work With the SPARRproperties Group?
Arek P. recommends Walnut Creek Home Buyers Choose Brian Sparr
We easily went through 12 agents before running into Brian. Brian immediately stood out from the pack – he is extremely knowledgeable, smart, and real estate is his passion – which is an important distinction and an absolute necessity for a great agent.
[Read Arek's entire feedback >>]
Jenny K. recommends Concord Home Sellers Choose Brian Sparr
Brian is hard-working, ethical, timely, savvy, confident yet modest, knows the in’s and out’s of the current market, and a really nice guy on top of it all. If you have any doubt, at least meet with him!
[Read Jenny's entire feedback >>]
Dennis H. recommends East Bay Real Estate Investors Choose Brian Sparr
I do not think I have worked with anyone in ANY business that demonstrates the kind of dedication, integrity and diligence of Brian Sparr. I would never again work with another realtor and would recommend Brian Sparr to anyone without hesitation.
[Read Dennis' entire feedback >>]
Alan M. recommends Out-of-State Real Estate Investors Choose Brian Sparr
Brian’s been an incredible advisor, setting expectations for short sale & foreclosure opportunities, educating me on commercial property financial modeling, and going beyond the number crunching...
[Read Alan's entire feedback >>]