How To Win Multiple-Offer Situations

Great a number of buyers who have submitted an offer to purchase a property in the Grand Rapids, MI, area in the last couple of years have become acquainted with multiple-offer situations, accepting them almost as a unavoidable tenet of life. Often an insurmountable obstacle to some, a few grow discouraged and eventually throw in the towel (more below why this could be a fatal mistake.)

So, how do buyers emerge victorious in a bidding war? Agents who carry out their duties with diligence will win an offer through attention to details, perseverance, and patience.

Attention to details. An offer should never be construed as a one-item contract, namely the purchase price. Rather, because it comprises many movable parts, each of them surges to equal importance in the equation. In bare terms, the purchase price always stands out as an initial statement. Especially, going above asking price carries enormous appeal, but it comes with drawbacks, which listing agents are quick to point out to their sellers. For example, unless cash, a financed offer is contingent to an appraisal ordered by the lender. Offers that seem too good to be true risk not appraising. Among the possible consequences are a renegotiation of the deal in terms which are more favorable to the buyers; or deals not closing at all: both situations are not in the best interest of the seller.

Sellers who receive multiple offers are looking for their net-to-seller, a speedy and smooth transaction with fewer contingencies, and above all the reassurance that the sale will close.

Typically sellers are responsible for outstanding loans; broker’s fees; the Michigan Transfer Tax; the County Revenue Stamps; title insurance; recording fees; unpaid taxes, assessments, or liens; some inspection costs – i.e. termite inspection in case of a VA loan; and perhaps home warranty costs when warranted by the situation. Some of these costs cannot be negotiated: for example VA loans do not allow buyers to pay for termite inspection. Others however can, and will be negotiated.

Thus, offering to cover some or all of seller’s closing costs will increase the net-to-seller without increasing the risk of under appraising.

Let’s consider a property listed for sale at $150,000. An offer at $165,000 and an offer at $160,000 with buyer covering $5,000 of seller’s closing costs are equivalent in what they will net to the owner. However the latter has better chances to appraise than the former. If the risk of property appraising below purchase price is still present, this can be minimized by adding a provision to bring extra cash, if available, at close.

On the other hand, asking for seller’s concessions will reduce the net-to-seller. Yet, it is still possible to win over other offers with such provision.

It’s no mystery that sellers prefer cash offers. Typically there is no appraisal contingency, unless buyer makes it contingent to buyer’s appraisal, and the deal can close fairly quickly. On the other hand buyers making a cash offer are aware of the strength and advantages of their bid, and tend to be more conservative on the purchase price.

When a lender is involved, its reputation will go a long way. A well-know local lender with a history of closing all deals timely could potentially be seen more favorably than an unknown lender from out of state with no history on record. When multiple offers are on the table every detail matters.

The downpayment size should not be overlooked. A mortgage in the amount of 75% of purchase price versus one in the amount of 97% speaks to the greater strength of the former to close the deal.

Similarly, the type of mortgage in a multiple-offer situation may be viewed differently by sellers: a conventional mortgage for example carries fewer requirements than an FHA or a VA one.

Offers that are not contingent on the sale or exchange of another property have a higher chance to close and/or close sooner. If possible, it is preferable to sell first, then buy. The discomfort of a housing hiatus is easily compensated by the increased strength of one’s offer.

When speaking of contingencies, inspection and investigation is probably the most consequential. Any offer waiving inspection is by far a seller’s favorite. It speaks to the absolute commitment of the buyer, who no longer relies on the ten-day exit-window protection, and accepts the property as-is.

Asking for appliances, light fixtures, and window treatment is customarily accepted and acceptable. But if the seller has specifically excluded some or all appliances, or has reserved that beautiful chandelier gifted by her late grandmother, then the offer might be moot. A chandelier too many could be all it takes to lose a property with another twenty offers on it.

Before writing an offer, it might be a good idea to verify taxes and assessments. These can be negotiated, for example by offering to cover all outstanding assessments: yet another way to increase the net-to-seller without incurring in appraisal issues later on. I recall writing an offer in which my client proposed to cover these figures. They were less than $300, a relevant amount, but quite insignificant when compared to the purchase price. In the end, it is not the amount that can make a noteworthy difference, as it is the kind gesture to take a burden away from the seller.

It is always recommended to verify property boundaries. Even when… a garage looks solidly in the backyard of a property, it could be in fact comfortably sitting on the property line – yes, I heard of a similar situation once. Ordering a land survey will immediately dispel any doubts, as long as its cost does not burden the seller – who can choose among… twenty seven different offers! Asking for an existing survey could be an acceptable compromise, making sure that the seller does have an existing survey and she would be willing to share it before submitting the offer.

In a seller’s market it is not unusual for sellers to ask for possession to be delivered to buyer a week, a month, or sometimes two months after the closing of the sale. In a financed offer a seller cannot ask for more than 60 days of possession, because of lender’s rules. In fact, at close seller becomes buyer’s tenant, and lenders would consider the property an investment property beyond 60 days of tenancy. As tenant, seller can be asked to pay an occupancy fee. Minimizing or waiving that fee allows seller to live in the property saving on rent. Yet another way to increase the net-to-seller without having to touch the purchase price.

And now the final touches. Sellers want to sell, now. They want to close, now. They want to cash that check, now. Understandably so. Keeping a house clean, with a perfect yard, ready to show, requires work. And while the house sits on the market unsold, sometimes already vacant, utilities and mortgage must be paid. Even for a property that is owned free and clear, taxes, insurance, and maintenance, are still the owner’s responsibility.

Hence, proposing to close two weeks sooner than the competition can make a significant difference. On a property that pays $1,500 per month in mortgage, taxes, and insurance, and $400 per month in utilities, such closing date places an astounding $950 in the seller’s pocket.

If not enough, adding an earnest money deposit (EMD) that is substantial, and partly or completely non-refundable, in the very least will make the seller seriously consider one’s offer.

Perseverance. Losing on an offer pinned against many others can be discouraging, especially in a low-inventory market – which in turn is one of the causes of multiple offers. However a loss can become the opportunity to foster problem solving skills, to remain focused, and to allow for more flexibility in crafting the next bid. Managing client’s expectations should be one of the agent’s areas of expertise. If you know that properties in the $150,000 – $170,000 range are selling in two days and for an average of $20,000 above asking price, you should have a conversation with your buyers about what might reasonably be within their reach and what might not. For example, buyers who qualify for a $175,000 conventional loan with 5% down repeatedly losing bids on $170,000’s properties, would be better served by considering just-listed properties in the $150,000’s, or properties at the top of their borrowing abilities, which have been sitting on the market for a while.

Moving away from a difficult market because of a few losses might not always be the best idea. If a market analysis reveals a strong market tendency, waiting or abandoning the search will make all but impossible to secure a property in the near or far future. This is because while prices and interest rates continue to increase, buyer’s borrowing power remains unchanged. It might be better for buyers to secure anyway a more affordable house not at the top of their list, build some equity, then resell a few years later: property value follows the market.

Patience. Purchasing a home requires time, thus a good amount of patience. Losing a bid does not mean that the deal is necessarily lost. In fact, not all deals close, due to various circumstances. In these cases, back-up offers can be the ultimate key to success!

This is the perfect time to hone and test those skills. I am always reachable for comments or advice, and… happy purchases!

GL

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