Crafting a Strong Offer: Bidding Wars Explained

Most buyers think that the winning offer in a bidding war is simply the highest dollar amount. It’s not uncommon for me to hear first time home buyer clients say that they often feel perplexed with how to choose a price and rise to the top, that it feels like throwing a dart at a dartboard and hoping for the best. However, price is rarely the only factor and a good agent will spend quite a bit of time gathering information from a variety of sources in order to narrow down what it will take to craft a strong offer. I often advise my buyers to think like a seller. Sellers are not just enticed by a high price; they are also always considering the strength of the offer as well. After all, an offer that does not close is not only worthless but it actually hurts the sale overall because it is unlikely you will ever get all those other offers back. So, how does a listing agent advise their clients on the strength of an offer and how can you make your offer communicate to that seller that you are the most committed and strong offer? Examine these factors:

INSPECTION

Inspection is the most common point at which a buyer terminates the sale agreement. Sellers are very nervous during this part of the process and when they look over multiple offers, they are looking for points where the buyers have shown a commitment to the property as well as fewer opportunities for the buyer to find problems and back out. Of course, buyers want to protect themselves against expensive unknown repairs and costs. However, you should know that some competing offers may waive certain elements of the inspection or the inspection all together. This is fairly risky for a buyer to do and many aren’t willing to completely waive the inspection contingency but many use other tactics to get close. Have you considered shortening the inspection period contingency to 6 or 7 days? Have you considered which inspections are vital to this home? Perhaps, eliminate those that seem excessive. A savvy buyer’s agent will also--with the client’s permission--write that buyer will not ask for specific kinds of repairs or credits. Any combination of these terms can strengthen your offer and give you a leg up when other parts of your offer are not as strong. I must put a big BUYER BEWARE sticker on this one. Inspections are an important factor in protecting you from purchasing a home with problems you may not want to deal with. However, there are ways to demonstrate your commitment to the home while still protecting yourself from catastrophe. Ask your agent to go into more detail about how to carefully deploy these strategies.

APPRAISAL

When a listing agent begins to receive multiple offers, it’s pretty typical for the price to start escalating 5%, 10%--sometimes even more--over asking price. But, if you, the buyer, escalate the price, what will you do if the home doesn’t appraise for the agreed upon sale price? If you have an appraisal contingency in place, you probably aren’t terribly concerned as the buyer. But the seller is very worried. Sellers want to know that the buyer can or will cover the value difference if the appraisal comes in lower than the offer price; the last thing a seller wants is a terminated sale agreement due to a low appraisal. If the buyer has a small down payment, the seller knows the buyer likely can’t cover a large gap so they view the escalation as monopoly money when compared to a lower offer with a lot of money down. If a buyer can’t waive an appraisal completely but have a significant down payment, some buyers will write a clause in the sale contract stating that they will contribute a specific amount towards a low appraisal, which can give the sellers a bit of confidence that the deal will close and that they won’t have to pay for the price discrepancy. Buyers who can’t cover the difference between the offer price and the appraised value should know that sellers may have an incentive to consider a lower offer price with some combination of larger down payment and appraisal contributions/waivers. This is also why a cash offer at the same or even a slightly lower price than a financed offer is so valuable to a seller—cash offers do not have to appraise. If you are financing your home purchase, as most folks are, consider how much you might be willing to contribute towards a low appraisal. A term like that can make you more competitive against cash offers while still preventing you from covering an unknown amount.

LENDER

Another common factor that is overlooked by buyers is the importance of the lender. Once you submit an offer, a strong listing agent will spend time vetting the buyer’s lender to make sure that they are well qualified and that the deal will not fall through. All lenders are not created equal in terms of service or their pre-approval process and listing agents know that. A weak lender or a lender that the buyer’s agent has had no communication with does not give the listing agent or seller confidence. If your buyer’s agent has a good relationship with the lender, the lender is more likely to do things like call a listing agent and vouch for you, write a specific pre-approval letter for that home and price point, and explain how far through the underwriting process you have gone. A strong lender will also reiterate that the close date on the contract can be achieved and that the loan can be processed within that time frame.

If you are financing the transaction, it can sometimes be confusing why the way a buyer pays for the home can matter to the transaction. After all, it all deposits the same in a seller’s account right? Sure. But a financed deal must appraise and takes 30 days to close. That’s 30 days for something to go wrong and for the buyer to back out of the deal. Cash can close much faster—often in under two weeks—and it doesn’t have to appraise or be in any sort of condition, as is the case with some loans. So, what do you do if you are at a disadvantage to cash? You have to increase your terms, communication, and prove to the sellers that you are well qualified to the property. A good lender and agent can help communicate that.

PRICE

It can often feel like a bidding war goes to whoever guesses the top dollar correctly. It is not. Bidding wars tend to be won by agents who gather a lot of information over the course of 24-48 hours about what other offers are in hand and what it is going to take to overcome those offers. Agents compare recent sales in the neighborhood—not just looking at the sale price but also how much over asking the home sold for—and a great buyer’s agent will also follow up with the listing agent several times before submitting and offer to see if they can get answers to direct questions—Has the top bid already exceeded this price? What percentage over asking is the top offer? Is it cash or financed? Then, they inform their client of what it will likely take to win and the client decides how to move forward. Trust your agent to gather the key information and advise you on how to craft a strong offer. Ultimately, you make the final decision about price and terms.

COMMUNICATION

Above all, the communication between a buyer and their agent is an important key to a successful offer as well as the communication between the buyer’s agent and the listing agent. In order to represent the buyer’s best interests in the transaction, the agent needs to have time to study the property, know what concerns, questions, needs, and buying power the client has for that specific property. In a multiple offer situation, it’s important for the buyer’s agent to prove to the listing agent that the buyer is well qualified financially, committed to the home, educated in the process, and trustworthy. This helps build confidence in the listing agent that both sides are going to uphold their end of the contract and see the deal through to the end. Weak communication is often why transactions fall apart. During those initial conversations, agents build rapport; the listing agent is trying to find out how well the buyer’s agent knows their client and the strength of the team: lender, agent, inspector, etc. In multiple offers situations, buyers often feel like the seller has all the cards, but once they are in contract, only the buyer can back out of the agreement; this makes vetting the offers in the initial stage crucial to the health of the transaction. Make sure your buyer’s agent knows your questions, concerns and interest in the property up front and keep them updated along the way. If they know what you are thinking or feeling about a specific property, they can help navigate the situation for your best interest and secure a much sought after home.

There are many more tips and tricks for overcoming multiple offers. If you are thinking about entering into a competitive seller’s market, let’s schedule a buyer’s consultation to go over the many ways that we can highlight your strengths in an offer and secure the right home for you.