In an era where opinions often differ, most experts agree that real estate is a solid seller's market in 2020. Home prices are up, properties sell within a few weeks of listing, and attractive houses attract multiple buyers, each trying to close the deal.
Understanding the art of negotiation is critical in times like these, especially when winners walk away with multiple bidders' dream house. Fortunately, there are strategies that will help buyers positively influence the outcome in their favor. The following actions have produced favorable results in many cases. Depending on the real estate environment in a specific market, some are likely to be more effective than others.
1. Engage a Knowledgeable Real Estate Agent
A quote often mistakenly attributed to Abraham Lincoln best states the case for engaging an experienced professional for important tasks: "He who will be his own Counsellour [sic], shall be sure to have a Fool for his client." A buyer unfamiliar with the nuances of real estate transactions or the intricacies of negotiation is disadvantaged in a buyers' competition for a home.
In addition to experience, an agent can protect you from yourself. Many people get caught in a game of winners and losers, forgetting the goal is not to prove who is the smartest or best negotiator but rather to win the right to purchase the house. Real estate professionals do not lose sight of this goal.
2. Pay in Cash
"It's cliché, but cash is king," says Trenton Hogg, a real estate agent in the Denver area. In that region, three-quarters of home sales wind up in bidding wars. All-cash offers eliminate a seller's worry that the buyer may not secure mortgage financing, cause a renegotiation and concessions on the seller side, or begin another time-consuming process to sell the home.
According to a study reported in the Wall Street Journal, all-cash offers nearly double a buyer's chances of trumping others. The numbers are more dramatic in the priciest 10% of the market: All-cash offers were 437.8% more likely to succeed.
3. Cover a Portion of the Seller's Closing Costs
A seller is primarily focused on the net proceeds to be received when the transaction is closed. If everything goes smoothly, sellers will have closing costs of 8% to 10% of the sale price plus commission paid to their real estate agent. Offer to pay a percentage of those costs or assume financial responsibility for one of the specific closing elements — title and settlement fees, recording, or transfer charges.
Sellers occasionally offer to pay the buyer's closing costs to encourage more buyers. In a bidding war, offers to pay those costs by the buyer effectively raises the seller's net proceeds.
4. Get Pre-Approved Financing
The next best thing to an all-cash offer from the seller's perspective is a buyer with pre-approved financing.
Having a buyer who has already qualified for a mortgage reduces the likelihood that the transaction will not close or that the period between contracting and closing will be longer than planned.
5. Increase Down Payment
Higher down payment amounts reduce the chances that a market price above appraisal value will complicate, delay, or halt the sale. Mortgage companies focus on the value of the collateral supporting their loans.
For example, if the mortgage company that receives a 20% down payment on a house with an appraisal value of $300,000 has a loan to value ratio (LTV) of 80/20. If the sales price is $325,000, and the buyer makes an $85,000 down payment, the mortgage company's LTV is 74/26.
A seller typically views the buyer's willingness to make a higher down payment positively, indicating the buyer's commitment to the sale.
6. Waive Contingencies
A contingency in a contract is language detailing special conditions that must be met by the buyer or seller to close a transaction. Common contingencies that buyers favor include:
- Home inspection: The offer is only valid if the review does not find any problems that the buyer is unaware of or is unwilling to negotiate or repair.
- Appraisal: The buyer requires that an independent assessment confirms a value equal to or greater than the contract price.
- Financing: The sale is contingent on the buyer finding sufficient funding.
- Home sale: The sale is contingent on the buyer selling his current property before the contract closing.
- Title: The sale is contingent on the seller's ability to deliver a "clean" title to the buyer.
Few buyers are willing to make a contingency-free offer for a house, even though the seller would prefer such a proposal. However, buyers in a bidding war can seek pre-approved financing and waive the financing contingency. The Wall Street Journal found the lack of a financing contingency boosted a buyer's odds by 57.9%.
7. Be Flexible on Seller Concessions
In most cases, buyers request concessions from the sellers, such as:
The discovery of a leaky roof is particularly troublesome due to its expense. Fortunately, roof repairs typically have multiple repair options over a range of costs. A buyer might offer to share the seller's repair cost or seek FHA 203K and Fannie Mae Homestyle Renovation loans to do repairs after the closing.
When dealing with a seller about concessions, frame the negotiations encouraging the seller that any concession is effectively an investment to ensure the transaction will occur – a win-win for both parties.
8. Secure a Rapid Inspection
The period between contracting and closing is stressful for buyers and sellers. Inspections are particularly worrying for sellers due to uncertainty about their findings. Sellers favor buyers who can secure a rapid inspection.
Being able to announce a pre-purchase relationship and a quick inspection might be the difference between two competing offers.
9. Get Personal
Negotiations usually work best when the two parties have an affinity for each other. Everyone prefers to deal with people they like.
Unsurprisingly, penning a cover letter from the buyer to the seller that explains the buyer's desire for the house and how ownership might affect them increases a buyer's odds by 52.2%.
10. Raise Your Offer
While increasing the price you are willing to pay may win the bidding war, it is a step taken only as the last option. Professionals know that an auction between multiple interested buyers can drive prices above logical valuations due to the activity's competitive nature. In extreme cases of raise/counter-raise, the value may become excessively above an appraisal and cause financing problems.
Raise your offer to wine a bidding war — but be careful. You don't want to buy a house for more than it's worth.
Success in buying a house, especially if caught in a bidding war, requires preparation. Get ready to buy a home by talking to those who have experienced the process. Ask them what they learned, what they liked about the process, and the problems they faced. Ask for their suggestions if they were repeating the process (the conversations are also an excellent time to ask about real estate agents.).
Finally, consider your financial position and your needs for a house. Pursue pre-arranged financing and know the maximum amount of home you can afford. Your dream house is waiting for you, but do not be surprised that others have similar dreams. Do not be dismayed. Using these strategies improves the odds of success.
Dr. Francesca Ortegren, Ph.D. is a Research Associate at Clever Real Estate where she focuses on helping people understand complex data, real estate, finances, business, and the economy by researching various topics, analyzing data, and reporting useful insights for general consumption.
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