If It's a Seller's Market - Strengthen Your Offer
It is “officially” considered a seller’s market when there is less than 4 more months of inventory on the market. By these standards, most segments of the Denver metro market have continuously been in a seller’s market since October 2013. At the time of writing this article, we are in the midst of the most severe seller’s market that I have witnessed during my 25 years in real estate (there is less than 2 weeks of inventory). When making an offer, there are 5 basic negotiation categories – price, terms, dates, inclusions/exclusions, and contingencies. Following are 11 strategies I have found success with to help strengthen my buyer clients’ offers during this extreme seller’s market.
Offer a Higher Price
Strategy: Offer a price higher than asking. I know this sounds like the no-brainer strategy – that’s because it is. Of course, price is a major consideration when the seller is deciding on an offer.
Drawback: You might pay more for the property than the fair market value says it is worth. However, the real value is determined by what a buyer is willing to pay and what a seller is willing to accept. If there are multiple offers, all higher than asking; the current real value is higher than asking price.
Offer a Quick Acceptance Bonus
This strategy works best when a property first comes on the market, especially if the seller wants to wait a weekend or several days to accumulate offers.
Strategy: Offer a bonus dollar amount if the seller accepts the offer before a certain deadline. An example might be, if asking price was $600,000 and we expect multiple offers to come in at $625,000 to $630,000. Offer $620,000 with a provision that if they accept before 5:00 today you will pay them an extra $10,000. Effectively you are offering $630,000, while exerting some pressure on the seller to accept it quickly.
Drawback: Again, you might pay more for the property than the fair market value says it is worth.
(earnest money, down payment, and financing or cash)
Offer More Earnest Money
Strategy: By offering more earnest money, you are showing the seller that you are very serious.
Drawback: You will have more funds tied up and at risk if you terminate the contract without cause or after contingency dates have passed.
Let Some or All of Your Earnest Money Go 'Hard'
Strategy: Offer to make some or all of your earnest money go hard immediately or after certain deadlines. If you truly want to compete with cash buyers, make your earnest money hard after the inspection, title, insurance, and HOA contingency deadlines have passed. If you feel great about the property and your loan, this is a strategy that really makes your offer stick out.
Drawback: Some or all of your earnest can be lost if you terminate the contract.
Make Yourself a 'Cash' buyer with a Knock GO Loan
Strategy: An intriguing new loan product offered by Knock, is the Knock GO Loan. With this loan, Knock fully qualifies you and guarantees that your loan will close. This bypasses the need to have a loan contingency and puts you on even playing field with cash buyers. I am a Knock certified Realtor and can help you with this program.
Drawback: There is a small extra fee associated with this loan and there are a few exceptions to their guarantee, such as if you lose your income prior to closing.
Offer To Pay for Some of the Closing Costs That Are Typically Seller's Costs.
Strategy: Offer to pay for some or all of the negotiable closing costs such as title insurance and HOA transfer fees.
Drawback: You are essentially giving the buyer more money with less worry of appraisal issues.
Work With the Seller's Desired Dates
Strategy: I always ask the seller’s agent what dates work best for the seller. If you can abide by the seller’s best scenario timelines, your offer will be stronger. Sometimes this involves letting the seller rent back the property for up to 60 days (if the rent back fee is $0, your offer is even stronger).
Drawback: The seller’s timeline might not be ideal for you. If you don’t charge for a rent back, you are essentially giving the buyer more money with less worry of appraisal issues.
Inclusions and Exclusions
Don't Ask for Exclusions
Strategy: If the refrigerator or the washer and dryer are listed as exclusions, the seller wants to keep them. Don’t let your desire to keep a $2,000 refrigerator be the reason you don’t get the home.
Drawback: You will have to bring your own appliances (or whatever is being excluded).
Strategy 1: Delete the inspection contingency altogether. I don’t typically recommend this strategy, there are however some situations where this strategy makes sense.
Drawback: If there are expensive structural issues and you decide to terminate the contract because of them, you will lose your earnest money.
Strategy 2: Delete the inspection objection and resolution deadline but keep the inspection termination deadline. By doing this, you have the option to terminate the contract; however, you cannot ask the seller to make repairs or concessions for repairs.
Drawback: You will have to accept the property as is or terminate the contract.
Strategy 3: Add a provision that says you will not ask for any single item under a certain dollar value. This gives the seller assurance that they will not be nickel and dimed for small issues.
Drawback: You will be responsible for any small repairs and/or maintenance needed once you buy the property.
Strategy: Offer appraisal gap coverage. This means that if you offer more than the asking price and the property does not appraise at or higher than the purchase price, you will pay the difference in cash at closing. For example, if the asking price is $600,000, you offer $630,000, but it only appraises for $620,000 – you will need to bring an extra $10,000 cash to closing.
You can put a cap on how much of a gap you are willing to offer. In the example above, if your cap was $5,000, then the purchase price would become $625,000 and you would need to bring an extra $5,000 cash to closing. This strategy provides assurance to the seller that the transaction will still close if the property does not appraise at the agreed price.
Drawback: You need to have the extra cash on hand and be able to show proof of the funds at the time of the offer.
Strategy: Delete the loan contingency. If you and your lender are confident that your loan will close, this is a great way to compete with cash buyers and/or beat other financed offers.
Drawback: If your loan doesn’t close, you will lose your earnest money.
If you have questions about any of these strategies or would like to sit down and discuss anything real estate, please reach out to me at 303-564-4055 or Nathan@NathanSellsDenver.com.