As
Bob Dylan, said, “The times, they are changin’.” Not too long ago, advice on
this topic wouldn’t have been necessary. Since the beginning of this year,
however, one of the biggest challenges buyers have faced is wrapping their
heads around the fact that they don’t call the shots anymore. Inventory is way
down across the board, and for the first time in a long time there are more
buyers than sellers. So landing a great deal takes a bit more effort than it
has in recent years.
As
a buyer, there are certain things you seek in a home. Your needs are unique,
but the general characteristics that make a home appealing within a particular
area or price range are almost universal amongst buyers. That means you’ve got
competition. More and more, well-priced listings are attracting multiple offers
within days after hitting the market, and they’re selling for sometimes far in
excess of the seller’s asking price. Even without multiple offers on the table,
sellers of well-priced listings know if any given offer isn’t all that
attractive, they can simply wait for the next one which should be arriving
shortly. The seller has their pick of buyers, and it’s up to you to convince
them you’re the one!
What
sellers are looking for is NOT just the highest possible price, though –
they’re looking for the best possible price with the highest likelihood of
closing. So what can you do to make your offer more attractive than others?
Price. Although price isn’t the only concern, it’s still the
primary one. Offer high enough, and the other considerations fade out as dollar
signs enter the sellers’ eyes.
Financing. Plain and simple, cash is king. Sellers
frequently accept lower cash offers because their likelihood of closing is much
higher than that of a financed offer. If you don’t have enough cash available,
consider such creative methods as 401(k) loans, private mortgages (i.e. to a
family member), or for investors, hard money. If you must finance, then use the
strongest financing you can qualify for. In order, that would be:
a. Conventional with 20%
or more down
b. Conventional with less
than 20% down
c. FHA with 10% or more
down
d. FHA with less than 10%
down
e. Rehab loan, such as FHA
203(k)
Time. Typically, sellers list their homes when they’re ready to
sell them. (Duh, right?) So the faster you can close, the faster they can move
on with their lives. If you’re buying cash, you can probably close within two
weeks. With conventional financing you can shoot for 30 days, and with FHA
you’re looking at 30-45. Rehab loans take a minimum of 60 days and can easily drag
on for much longer.
Contingencies. The fewer contingencies, the better. Attorney
review and inspection contingencies are built into the contract, but that
doesn’t mean they can’t be waived/eliminated. If you must finance the purchase,
then you must include a financing contingency – there’s no way around that. A
sale of home contingency (you have to sell your house in order to buy the next
one) significantly weakens your offer by extending the time frame and
introducing a large amount of uncertainty. If you’re competing with other
offers and you are contingent-on-sale, you’re very unlikely to win.
Incentives. Additional personal property, closing cost
credits, seller-paid points, home warranties, high tax prorations, pre-closing
possession… These are just some of the “perks” buyers can, and frequently have,
requested when making offers over the last few years. On top of
nickel-and-diming the sellers with these items, they complicate the
presentation of the offer. Author Les Brown said, “Shoot for moon. Even if you
miss, you’ll land among the stars.” Sorry Les, but in this market if you shoot
for the moon as a buyer you’ll likely just end up by yourself in outer space. Keep
the perks to a minimum if you want the best price, or to get the house at all.
Heart strings. Most sellers are human beings, and most human
beings have emotions. In some instances, it can work in your favor to submit a
“personal letter” to the seller to demonstrate why you love their home and how
you’ll take great care of it for many years. When to include a personal letter
is a topic for another day!
Here’s
the rule of negotiations, of which I’m sure Yogi Berra would approve:
Everything other than price costs money. Handing a briefcase full of cash to
the seller on the spot is the surest, fastest way to complete the sale, and if
you could do that, you would get the house for the absolute lowest price
possible (although it’s probably not a great idea for other reasons). Anything
beyond that – each extra step, each contingency, each week that must pass
before closing, each nugget of uncertainty – must be accompanied by a higher
price to compensate the seller for the additional risk. On the opposite end of
the spectrum from the briefcase-full-of-cash buyer is the buyer who makes an
offer contingent-on-sale, financed with a 203(k) rehab loan, a 90-day closing,
and throw in the 1976 Eldorado that’s in the garage. This buyer would have to
pay dearly in order for their offer to even be considered.
Keep
these considerations in mind when you’re thinking about how to structure an offer.
Better yet, hire an agent who can advise you as to how much you can ask for on
any given listing while still getting a house you’ll love for the best possible
price.
