Ways to Strengthen your Offer in a Hot Real Estate Market
TL/DR - In a hot market, it can be difficult to compete and not overextend yourself. We don't want to see you becoming house poor, so here are a few tips that can help strengthen your offer, but limit your risk:
(1) Remove the Appraisal Contingency & have the appraisal completed during the Inspection Period
(2) Put Down a Substantial Earnest Money Amount
(3) Have Portions of the Earnest Money Go "Hard" as Time Moves On
(4) Use a Lender to make an All Cash Offer
In a seller's market you can be battling against tens of offers on a single property. We urge our clients to be patient, and make sure they're always comfortable with the offer they're providing to the seller. In many cases, we'll work with them to come up with a creative offer that isn't always about offering more money. Here are a few easy ways to strengthen your offer to stand out amongst the crowd.
Remove the Appraisal Contingency
It's no surprise, removing contingencies is the single most effective way at strengthening your offer. We typically don't advise removing any contingencies to protect the buyer throughout the purchase process. However, there is a way for you to remove your appraisal contingency, while still protecting yourself. First, chat with your lender and get an understanding of how quickly you can get an appraisal completed. If your lender says they can get the appraisal completed before your inspection contingency due date, then you have an amazing option. You can now remove your appraisal contingency. If your appraisal ends up coming in lower than the offer amount, you can negotiate a reduction in the purchase price or simply back out of the contract during your inspection period.
Increase the Earnest Money Amount
Buyers typically wire 1-2% of the purchase price as Earnest Money within a few days of an accepted offer. At the time of closing, your Earnest Money is applied as credit towards the cash due at close. To show you're more serious, we recommend you put more earnest money down. 5-10%+ is typically enough to stand-out amongst the crowd.
Have Portions of the Earnest Money "Go Hard" After Reaching Certain Milestones
Now, we're getting really creative. One of our buyers was recently in a multiple offer situation. To stand out amongst the crowd, we staggered portions of their $20k earnest money to go hard when certain milestones were met during the 30 day close. What does it mean for the earnest money to "go hard"? When this happens, instead of the seller having to wait until close to collect any cash, they are wired portions of the earnest money during each milestone that's met during the 30 day close.
This is how we structured their offer, which ultimately beat out the other offers:
- The Seller gets $1,500 of the earnest money upon accepting our buyers offer
- The Seller gets $5,000 of the earnest money when the inspection contingency is lifted
- The Seller gets $3,000 of the earnest money when the financing contingency is lifted
Use a Lender to make an All Cash Offer
The vast majority of homebuyers need some type of financing in order to purchase a home these days. The lending process is the long pole in the tent and it's the reason why it takes 30-45-60 days before you close on a property. Those that make an all cash offer can close in as few as 3 days, which can be a huge win for the seller, especially if the seller is in the process of purchasing another home.
With that said, how do you make an all cash offer on a home when you don't have that much cash in your accounts? Well, good thing the lending space is very competitive. In order to keep up, there are certain lenders that are now pre-approving buyers to make all cash offers on a home. The lender fronts the cash and the homebuyer will essentially "refinance" with a 15/30 year loan after the purchase is complete. Some lenders charge a fee for this service, while others don't as long as you use them as your lender during the refinancing.
At Homsby, we have a few lenders we work with that can help you make an all cash offer on a home.