Bell and Tony, a wonderful young couple looking to buy a home in Woodland Hills CA, had just fired their Realtor. They had made several offers and got shot down in multiple offer scenario time and again. FRUSTRATED, BITTER, and ANGRY, they called your’s truly on a listing of mine. Bell and Tony gave me their story and asked me if I would represent them on that home? They were shocked by my response to their inquiry, “I don’t represent buyers on my own listing because I see it as a conflict of interest”. I further explained, by working directly with a listing agent it may help you win the bid, but how do you know that you were being represented in a fair manner where your interests were put first? The only person who is winning here is the listing agent who will be double end the commission, and the seller who will get away with a lot. Guess who is paying the listing agent to negotiate on their behalf? I guess they got my point. They replied, “we never thought of it that way”. Glad to be of service!
Often times in a hot seller’s market buyers keep making offers and get shot down in a Multiple Offer situation time and again. They end up just like Bell and Tony calling the listing agents directly because they think that is the only way they can get a home in this market. So many horror stories to share but not enough words. What they don’t realise is, either they were not educated by their Agent ( most likely scenario) or they had unrealistic expectations themselves (I see this a lot as well). Truth is, these buyers had no clue how to win as a home buyer, in a hot sellers’ market. Making an offer in a Multiple Offer situation is a science and not everyone knows how to handle it correctly. Before we get to the tips and tricks, you have to understand the background of the dirty Real Estate business.
Most Agents you meet may not have the necessary experience or knowledge to represent your best interests, as you continue to read this article you will get clear examples of that. According to the Danger Report published by National Association of Realtors in 2015:
“ Masses of Marginal agents destroy the reputation. The real estate industry is saddled with part-time, untrained, unethical, and/or incompetent agents. THIS KNOWLEDGE GAP THREATENS THE CREDIBILITY OF OUR INDUSTRY”.
With that said, the key is to find great representation. Being a successful Listing Broker with many years of experience and knowledge behind me, I still decided to take the CAR certification of FTHBS (First time home buyer specialist), in which I learnt some valuable information on how to help First Time Home Buyers. Realtors certified as FTHBS are a good place to start. As a buyer in a hot seller’s market, the agent you hire will make or break your deal. (see my article on how to find a Real Estate agent, Tips and tricks that a Broker would give to his mom).
Without further ado, let’s get into the tips and tricks I have learnt over my career and quite frequently use.
1. Get Pre-Approved, Not Just Pre-Qualified
This is a NO BRAINER. The first thing I had Bell and Tony do is to stop looking at homes and contact at least two very strong and knowledgeable lenders. Why? As a buyer no matter how qualified you feel you are, you must get pre-approved. Most sellers will not look at your offer if you cannot show that you are qualified to get a loan or have a commitment letter from a lender. I had Bell and Tony work with two lenders who presented them with good faith estimates (GFE’s), which they compared and decided on who their loan agent was going to be. Armed with an advanced Underwriting Approval, they felt more confident. The Loan Agent they chose had a good reputation within the San Fernando Valley, CA. This was a leg up for them because now not only did they had a Real Estate Broker who was very well known among his peers but also a Loan Agent who was very well recognized in the local area. Bang!! A double whammy!! So when they made an offer with FHA financing, the relationship of the Real Estate Broker and the Loan Agent in the Real Estate Community, had them stand out among other offers. I call this ‘1 basis point secured.” Find a Broker and Loan agent who has great standing among their peers.
2. Make an offer that the seller will consider:
Cash offers is not an automatic win anymore in today’s market, unless you make a Cash offer that is close to the number the seller is looking for. I was working with an all CASH foreign investor looking to buy in Thousand Oaks Ca. We made an all CASH offer on a home in Thousand Oaks at $1000 above the asking price.There were almost 7 offers on the table. The buyer was stretching thin and he knew that an all cash offer was his strength. Through my sources I found out that we were almost $14,000 away from the winning bid and another critical piece of information. The seller was getting married soon. I requested the permission of the Listing Agent to present the offer of my client in person to the seller and promised it would not take more than 5 minutes to do so. When I presented the offer to the seller in person, I was quick to highlight the obvious advantages of a cash offer with the promise that we could close in less than 7 days, and offered to pick up some of the minimal seller costs. The seller appreciated that my cash buyer did not low ball, and we ended up winning that bid being $14,000 lower than the other offers. The key here was that we found the motivation of the seller and made an offer that seemed reasonable for the seller to accept and yes we did get lucky. Bonus Tip: Never low ball offers, you may run into the same Listing agent again, or that first offer may not close and if the home is back on the market your chances will then be shot. In a hot Seller’s market, you cannot afford to be known as a low baller. Do it right the first time, expect to be countered or given a Best and Final, your chances of getting lucky will ten fold.
3.Have Fewer Contingencies
As a home buyer you have the option to make a purchase offer contingent on several different items, some that are more common than others! I took the time to explain Bell and Tony what contingencies are and how they affect them in a Real Estate transaction. After I ensured that they understood the contingencies and how it could affect their deposit, they were educated enough to make informed decisions. In a hot Seller’s market where multiple offer situation is almost a given, tweaking or not including as many contingencies, can make your offer more desirable than the next. In a recent listing I sold in Reseda CA, we had procured 7 offers and all of them above the listing price. All of them were very well qualified. Some were as high as $25,000 over the asking price. On the best and final round, the buyer’s agent delivered the signed counter offer with the appraisal contingency removed knowing that they were the second highest offer. This meant that the home was not contingent on an appraisal. The offer was accepted. On hearing that, two other buyers decided to up the price and remove appraisal, but it was too late. Buyers did an appraisal and it came in at $5000 below their offer price. The agent told his buyer that with the prices going up by almost $300 a day, if it takes you 20 days to get into escrow with another property you will have added $6000 to the purchase price. In the big picture bringing the $5000 in cash made sense. A happy buyer, happy seller, and it ended up being a great transaction. Negotiation ability of your Agent is worth 2 basis points. This buyers agent worked the magic for his buyer.
4. Work with the Sellers
Many buyers and their agents overlook this crucial aspect. Understanding what the seller’s plans are is one of the most important steps to take in a multiple offer situation. A great real estate agent should try to find out what the sellers plan is. Once this information is obtained, the purchase offer can be structured in a way that is more appealing to a seller. In a transaction representing a buyer on a home in Porter Ranch Ca, I knew going in that there were multiple offers. After doing a bit of my resourceful digging I found out that the sellers who were an older couple were moving to Washington State. That meant moving almost 35 years of memories with them. I told my buyer that in order to win this home you love, you will not only have to compete in the price department but to gain an advantage give the seller some extra time. On top of that my buyers offered to keep the cute lab the sellers were looking to find a home for. The reason we found that out was because I have made it a routine to ask certain questions, when showing the home. My clients offered $300 as a part of the contract along with a letter as to how much their pet would love to live in the same home and be taken care off as lovingly as before. We made a very competitive offer, giving the sellers extra 5 days to deliver the key plus offer to keep the pet. We won the bid and the sellers never charged the buyer the $300. Pay close attention to what the sellers needs may be, it is not as obvious, so you need to think outside the box.
- Do they want a quick closing?
- Do they need some time to retain possession and rent back?
- Do they need any help in selling any items that you can buy from them and thus make the offer more attractive?
- Do they have a pet that needs relocation?
- Are they selling as is?
- Are they giving you closing credit for a repair upfront?
These are all things that are important and take these into consideration when making an offer.
5. Need Closing Costs/ FHA Buyers/ Down Payment assistance buyers:
Many buyers today can take advantage of the low down payment programs. As great as they are in making buyers eligible with having low down payments, it also makes some of these buyers low on the totem pole in a multiple offer situation. Here is a funny story. In transaction years ago, I had a FHA client and we were in a crazy bidding war. We were among the top 3 offers for sure. When we were at the home we saw that the seller was a Soccer fanatic. He was a die-hard Manchester United Fan. My buyers could relate to them so much because they also happen to be soccer fans, but of the opposing club Chelsea. My buyer jokingly said to me, “to have this home my wife loves, I am willing to become a MAN-U fan!” That gave me an amazing idea. He had a Mark Hughes Jersey that he bragged to me about (a star player that played for both the Clubs in his career) that we included with the offer, knowing that seller would love to have a Mark Hughes Jersey signed by Mark Hughes. The deal was made. Let’s look at some ideas that could make you look strong with FHA offers / low down payment offers:
- Put a larger deposit. If you are putting 3.5% down, put most of that in as a deposit.
- Have something that the seller may find interesting or useful? Include that with your offer. Any sports memorabilia or something nostalgic that would appeal to the seller’s heart.
- Reduce the seller’s costs by offering to pay for your own home warranty or some other costs since you cannot go up in price due to appraisals.
- Include a DU Approval to show how good credit wise you are.
- Write sellers a letter and explain why you love the home, how you will take care of it. Most sellers are emotional and you never know what will appeal to them. If this is on a home by an investor, it is counterproductive to do so.
- If you are asking for closing costs and you make the highest offer with 3% credit on closing costs, which on a 400,000 purchase will be approximate $12,000, know that this may not be desirable to many sellers. In a hot seller’s market, Listing agents and their sellers are concerned about appraisal issues. So if you made an offer of 412,000 and asked for $12,000 back, it may not work especially if there is a chance of an appraisal issue. The seller may not accept your offer even though you were the highest bidder. Generally, in a hot Seller’s market don’t ask for closing costs unless it is absolutely necessary.
- Try to be personable with the sellers at the time of the showing. Don’t over work it, be natural. Try to find some things in common so the sellers can remember you with positive thoughts.
- Offer to buy a piece of furniture if you find out they will be selling some of their stuff. It makes your offer look attractive.
6. BEST AND FINAL:
To understand what this term means, you have to go back in history a bit. Remember the REO/ Bank Owned days when there were 12,000 homes in the market in the San Fernando Valley? The Banks would use this tool to make the buyers bid higher even in a slow crawling market. Almost 100% of the times in case of a Multiple Offer Scenario (2 offers are considered Multiple offers) the bank would ask the buyers to submit the best and final offer. In a best and final scenario, have your agent send you the comparable of what has sold, but also what is pending in escrow. Put your best foot forward. The key here is to find that number where you think you are not losing. Do consider the “As Is” number in case the seller does not want to do any repairs( mostly the case). If you go with this perspective, you will not lose that often and even if you did, you know your bid was the best you could do. As a listing agent, I have seen my sellers cancel on buyers who try to get in with a high bid only to negotiate a credit later. Be careful, savy Listing agents will call your bluff. Go in strong with an ability and willingness to close.
7. The Escalation Clause Tactic:
Escalation clause in a contract is usually written in an addendum and agents handle the insertion in different ways. Escalation clause is a set amount of money the buyer agrees to increase his/her offer with, if there are other bids to beat. So for example the purchase price of the home is $500,000, but you expect it could go as high as $550,000, you could use the escalation clause stating, your offer will increase by $1000 over the highest bid with a maximum bid not to exceed $550,000. Please make sure, that the clause clearly states the increment with which you are willing to go above the highest bid by. In other words, if your competitors only go as high as $525,000, the seller can’t expect you to pay $550,000 plus increment. So insert a clause with increments of $500 / $1000 whatever your lucky number is.
- I have used this clause in many negotiations. Having said that, please ensure you understand the consequences of this action. This is not a game, its a binding contract you are signing. Above all, make sure your agent knows how to handle this delicate yet extremely complex clause.
No matter what tactic you decide to use, the one thing I will always stress upon is to hire great representation. Carefully check the credentials of the Agent or Broker you are about to hire. The key is to find a great Ethical and result oriented person among the sea of unethical and money motivated sales people out there.
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