The real estate market of 2021 is unlike any I have seen in my 43+ years of being a Realtor. Demand for homes is up while inventory levels are at the lowest level we’ve seen in a very long time. New home construction was stalled for years after the housing crisis and the combination of supply shortages and changing housing needs, brought on the pandemic created a perfect storm that has lead to rising prices and bidding wars as buyers attempt to beat out their competitors. It’s been a frustrating year for buyers, real estate agents and even sellers.
Although it is definitely a tricky time in real estate, you can still find the right home for you and your family. Since the market has changed so much over the past year, I thought it might be helpful to give you some strategies on how to write a good offer to help you win your next home.
Understand what you can afford and get your pre-approval letter
Before you even start to think about what you want your next home to look like, it’s important to meet with your mortgage lender or your financial planner. Work with them to understand what you can comfortably afford. You should also know the top end of your price range and make sure that you look for homes below that price. Multiple offers and bidding wars are common, so you want to leave yourself room to go up in price if you find the right home.
If you are going to procure a mortgage, get a pre-approval from your chosen lender with your loan amount included. Make sure to share that letter with your Realtor so that it can be sent to the listing agent when the time comes to write an offer. Don’t wait to do this important step. If you try to get a pre-approval after finding a home you like, it might be gone before you get it. If you will be paying cash, make sure you are able to show proof of funds when you submit an offer.
If you need to sell before you buy, don’t start looking until your home is under contract
Do you need the equity out of your current home in order to purchase a new one? In this market, you will need to have that home under contract and in many cases it should be through inspections and appraisal in order for a seller to take your offer seriously. There is no point in starting a home search before your home is under contract since many may be gone by the time you are in a position to write an offer.
There is a lot of cash in the market right now, so financing contingencies can put you at a disadvantage. In most cases, a seller will choose a cash offer over one where the buyer is obtaining a conventional, FHA or VA loan for several reasons. The two biggest are that there is no appraisal required for cash buyers and they are able to close more quickly than their counterparts who need 30-45 days for loan approval.
With our low inventory levels, trying to find something quickly after your home is under contract can seem like an impossible task. There are a couple of things you can do to make the process less stressful. If you have a lot of equity in your current home, talk to your lender about the possibility of a bridge loan. This type of product will allow you to access that equity to help finance your next home. Once you have sold your old property, you can work with your lender to refinance your new home. Another way to ease stress is to extend the closing and/or possession dates when you negotiate an offer on your current home. A lot of people need to sell before buying, so pushing these dates farther into the future is not unusual and will give you extra time to find the right home.
Escalation clauses can eliminate the need to guess at the right price
If you find yourself in a multiple offer situation an escalation clause can help you beat out the competition. It will increase your offer based on the other offers a seller receives. You don’t have to worry about going over budget, since you can set a cap for the top end of your offer price. The escalation clause is an addendum to the purchase contract and uses the price on the contract as a starting point. If the seller gets another offer that beats your price, the escalation clause kicks in and automatically beats that other offer by a specified amount (typically $1000) up to the cap you set forth in the clause. For example, a buyer offers $250,000 for a home on the purchase contract. They include an escalation clause that increases the price over the next best offer by $1000 up to $265,000. The escalation clause will only get triggered if a seller gets a higher offer than yours. The listing agent is required to provide proof that the clause needed to be used.
Appraisal gaps can help you win the deal
It is not unusual for buyers to write offers above the asking price. If a mortgage is being used for the purchase, the lender will send an appraiser to the house as a condition of the loan. The appraiser ensures that the value of the home matches the price on the contract. Because home prices are rising so quickly, homes can receive a short appraisal. That means that the appraiser does not think that the home is worth the price agreed to on the contract and the lender will not go forward with the loan at that price.
Buyers can cover an appraisal shortfall with cash at closing. This helps sellers feel more confident in taking higher offers without worrying that the price may have to be renegotiated if the home does not appraise. An appraisal gap is often used in conjunction with an escalation clause and is typically part of the same addendum to the contract.
Using the example from above, let’s say that the buyer offered $265,000 for the house that was listed at $250,000. The buyer stated on the escalation clause that they would cover a $10,000 appraisal gap when they submitted the contract to purchase. If the appraisal for the property comes in at $255,000, the buyer will have to give $10,000 to the sellers at the closing to cover the difference between the price on the contract and the appraised value. If you have cash, this can be a particularly effective tool to put you ahead of the competition.
To inspect or not to inspect, that is the question
Inspections protect buyers by allowing them to hear an expert opinion about the condition of a property. I always advise my clients to get an inspection for any property they want to purchase. Inspections add a contingency and a potential future negotiation to the contract. In the current market were buyers are competing for homes, some are removing inspections from the contract to improve the quality of their offer versus the competition.
There are a couple of cases where a buyer may feel comfortable waiving inspections. If the buyer is handy or knows a lot about home repair, they may choose to do their own visual inspection and agree in writing to purchase the home “as-is”. A buyer may also choose to not do inspections if the home they want to buy seems to be in great condition and expertly maintained by the sellers. They may decide to take a chance and risk the consequences.
For most people though, I think inspections are important. There are two ways include inspections but still improve your offer. The first is to have a home inspection completed but state up front that you will not ask the seller for repairs. If you find something very costly, this option still allows you to back out of the contract. The second option would be to have the inspection but cover the cost of repairs yourself up to a specific dollar amount. Using the example from above, the buyer conducts inspections, but tells the seller in writing that they will cover all repairs up to $3000.00. With this option, sellers know that the buyer will not be asking for lots of small repairs and that they will cover a lot of repair expenses out of their own pocket.
Remember to be patient
When you start searching for your new home, it is important to be flexible and patient. There are a lot of buyers in the market and some of them can put together a higher or better offer than you can. That’s okay! Do not panic. New homes hit the market every single day, and the right home for you could hit the market at any time. Sometimes in desperation, you may be tempted to overpay for a property. This is not a good idea, particularly if you don’t plan on living there for less than 4-5 years. Work closely with your agent and keep your budget goals in mind. If you aren’t finding something that will work for you, consider reevaluating your wish list. Even slight changes to your house hunting criteria could help you find your next home.
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