How to know which offer to take
Lack of inventory is common across the country these days. Here in California, municipalities have seriously missed the mark on building new housing. The demand has outweighed the availability for decades. Home buyers continue to compete with higher and higher offers.
As the prices go higher, the number of buyers who are priced out of the market continues to rise as well. The faster the prices go up, that faster buyers are priced out.
Housing prices continue to follow the trend. Realtors are pricing new listings based on the sale price of the most recent home sale.
I was having a conversation with a home seller the other day. We were talking about how to decide whic offer is the best. He asked, “How do we know which offer to take?”
There’s so much more to a good offer than the price. Knowing what a realtor tells their seller clients will help you get ahead of the pack.
One of the first things to be aware of is that a home seller has three options when they get an offer. One, they can accept it outright, the way it is. Two, reject it completely. Or three, give the buyer or buyers a counteroffer. That counteroffer will change the terms to fit their situation more completely. Again, accept, reject or counter offer.
Buyers have the same three options when they get that counteroffer. Accept that counteroffer, reject it and walk away from the house, or respond with another counteroffer.
1. Real Estate is Local
It’s common for nearby cities to have very different real estate markets. In some neighborhoods, there are micro-markets as well as markets divided by price range or property type. Your realtor should know all of these intricacies and how to work them to your favor.
2. Realtors should be local too. That local knowledge will enable buyers and sellers to know what’s happening in their market on a deeper level.
In a fast-moving market, it can literally change day by day. A realtor that focuses on a specific area, city or neighborhood will be more likely to know the “inside” information. Everything from what houses are coming up for sale to what price the house down the street sold for. Realtors that work in a community all know each other, have worked together many times, and are often friends. We talk about what projects we’re working on. What issues are coming up for our clients. How to resolve a problem, or what contractor to call for a particular repair. If you’re working with a local agent, you’ll benefit from those relationships.
If the buyer’s realtor is from out of the area they’re not going to understand the expectations and nuances, the standards of the area. Home sales are driven by expectations. Both the buyer and the seller have them. If something happens that’s outside of that norm or standard, people get worried and concerned. If the agent can’t prepare their client for those unexpected – or even expected – events that are common for the area, the buyer could get nervous and decide not to buy the house. Their change of mind can cost a home seller thousands of dollars and a significant amount of time.
3. Get Solid Representation from a Professional Realtor
When the market is moving lightning fast agents are trying all tactics to get their buyers the house they want but they can take it too far. If an agent is overly aggressive, rude, or condescending that’s going to hurt their client. A home sale is a difficult enough process without adding a bully or trouble maker to the mix.
Once the contract terms are agreed on, it’s everyone’s job to get the sale through to the end. An antagonizer will put barriers in the way every chance they get and make it a much more difficult transaction. Those problem-makers will put closing a transaction at risk. Most transactions have problems. Our job is to figure out how to manage any complications that come up – and do it without letting it cause a delay in the close.
If the buyer’s agent is a jerk – and we have a choice of another similar offer – I will advise the home seller to avoid that situation altogether. All things being equal, their offer will be rejected.
4. The Offer Price Needs to be Competitive
Pricing is another piece of a sale that is very much driven by expectation. How a house is priced should be based on those assumptions. If a home is priced too high based on the expectations of the home buyers in that market, the house with either take longer to sell or not sell at all until there’s a reduction in the price.
In some markets, the homes have to be priced with the knowledge that buyers are expecting that they’re going to have to offer more than the house is listed for. If the house is priced high and the buyers think they have to offer more than the house is listed for, that seller may not get any offer at all.
Your local-focused agent is more likely to know – or able to find out – what houses currently under contract (pending sale) have sold for. That will allow you to be ultra-competitive in submitting the right price for your next home.
5. Understanding the Direction of the Real Estate Market
Here we go again with the local agent… It’s difficult to follow multiple markets, especially with the specificity needed to anticipate subtle changes. If the market is changing rapidly, whether it’s increasing or decreasing, it’s important for you as a home buyer to know that.
If you are pre-approved near the top of the market pricing for the neighborhood you want, time is of the essence. You’ll need to get a home quickly to avoid getting priced out. A local agent can help you see what’s coming.
If you’d like tips on selling your home fast take a look at How to Sell My House Fast: Selling Houses Fast Tips from Bill Gassett, Metrowest Mass realtor.
6. Pre-qualification vs Pre-approval vs Commitment Letter
Pre-qualification used to be sufficient to submit an offer on a home you wanted to purchase. You’d call the bank, tell them what you earn, how much savings you had and they’d say, “Okay. You qualify for X dollars.” And you’d go try to buy a house.
Sometimes the transaction wouldn’t go through because of something negative on your credit that the bank wasn’t aware of. So the seller would have to put their house back on the market and start over. To avoid that, realtors started requesting that buyers be pre-approved which is a more in-depth process. As a buyer, you’ll need to provide bank statements, check stubs, taxes, and whatever other proof the lender asks for.
You can be in a stronger position than a buyer who’s pre-approved by having a commitment letter. The commitment letter indicates that your loan has been reviewed meticulously by the underwriter who is the person that will ultimately process your loan. So every document you’ve submitted has been analyzed to ensure that it meets the requirements of the loan you’ve applied for.
Getting pre-approved should be your first stop. Luke Skar with Madison Mortgage Guys explains How to Get a Mortgage in his article.
7. Your Initial Deposit | Good Faith Deposit
The initial deposit you indicate on your offer shows the home seller the strength of your commitment to purchase the house. That good faith deposit should be reflective of the purchase price. So if you’re buying a $1,000,000 house, a $5000 deposit is not going to make the seller jump up and down for your offer. In order to be competitive and stand out, your deposit should be 3 to 5% of the purchase price.
8. The Facts about the Amount of Your Downpayment
The amount of your downpayment indicates the level of risk the bank is taking on when they make the offer to provide you with a mortgage. That risk is how they determine your interest rate. The higher the risk, the higher the rate.
The higher your downpayment, the better your chances of getting your offer accepted because the seller is aware of the extra risk the bank is taking on with a lower down. The seller is taking on the risk that you may not be able to get your loan.
A pre-approval or commitment letter is not a guarantee of a home loan. There is no law that says that once they provide you with a pre-approval letter they have to give you the loan. So if their requirements change or you do something to lower your credit score – like buy a car – they can decide not to give you that loan.
9. The Contract Terms can Make or Break Your Offer
There’s a lot that goes into an offer other than the price. The terms offered must match what the seller is looking for – especially in a seller-driven real estate market. That’s easy enough for your agent to find out. All they have to do is call and ask.
Some of the terms may include the close date, appraisal, loan and inspection contingencies. If you need to sell your house in order to buy the next one you might have a contingency to protect you from owning two houses at the same time.
Home sellers may be flexible on some terms more than others. If you really want that house, try to give them exactly what they’re looking for so you’ll come out on top.
Cincinnati and Northern Kentucky Real Estate Agent Paul Sian has more tips on preparing your best offer in How To Write An Offer To Buy A Home