In a seller’s market where you’re up against other buyers, you want to submit a strong offer that will stand out from the rest. When preparing your offer to purchase a property, you should know that there are multiple ways to strengthen your offer aside from a higher purchase price or offering to pay for certain closing costs. Work closely with your Realtor to determine the best strategy for your offer. Here are some options:
1) Escalation Clause – Acceptance Time
This is a way to motivate the seller to accept your offer sooner, which will also help prevent them from receiving other offers. Perhaps you’re submitting your offer on Friday at 6:00pm. However, the seller wants to review all offers on Sunday at 6:00pm, so that’s what they’re requesting the Acceptance Deadline to be. You can agree to that Acceptance Deadline but stipulate that if they accept your offer sooner (say by Saturday at 6:00pm instead), you’ll pay an extra dollar amount over your offer price (it could be any amount, but let’s say an extra $5,000 for argument’s sake). For example, you could offer $310,000, but if they accept your offer sooner than the Acceptance Deadline (by a different, earlier specific date and time), you’ll agree to pay $315,000 instead.
2) Escalation Clause – Outbid Competitors
This strategy states that you’ll pay an extra dollar amount over the highest offer up to a specified amount. I’m not a big fan of this option because you have no way of knowing how much the highest offer will end up being, and you’re basically telling the seller upfront how much you’re really willing to pay. However, it can be very effective. You’ll want to specify how much more you’re willing to pay over the highest offer and stipulate that the purchase price will not exceed a certain amount. You’ll also want to make this contingent on the seller providing a copy of the highest competing offer.
3) Appraisal Gap
Sometimes offering significantly more than the asking price of a property can actually backfire because the seller and listing agent could be concerned that the property might not appraise for that much. Therefore, you could offer an appraisal gap to cover the difference if the property appraises for less than the offer price to give them peace of mind. Lenders will only lend on the appraised value of the property. So let’s say you’re planning on making a 5% down payment, and the lender will lend the remaining amount (95%). If you offer more than the list price, and the appraised value comes in at less than what you offer, the lender will only lend 95% of the appraised value (NOT 95% of your offer price). This can be a very strong negotiating tool to make your offer more desirable, but if you decide to go this route, you’ll have to be prepared to pay extra for the down payment to make up the difference. Here’s an example of how the Appraisal Gap would work:
- Offer Price = $215,000
- Appraised Value = $200,000
- Loan Amount (95%) = $190,000 (95% of the appraised value of $200,000)
- Down Payment (5% + Appraisal Gap) = $25,000 (instead of paying the original 5% down payment of $10,750 for your Offer Price of $215,000, you would have to pay the total difference between the Offer Price of $215,000 and the Loan Amount of $190,000 to cover the Appraisal Gap for a difference of $14,250 extra)
4) Home Warranty
Purchasing a home warranty is always recommended for your protection when it comes to your new property. In addition to protection for yourself, your offer can include a buyer’s home warranty that also has seller’s warranty coverage. This will cover you once you take ownership of the property while providing coverage for the seller from contract date through closing while the house is under contract. By offering the seller home warranty coverage, you will be giving the seller peace of mind during the course of the transaction. This strategy is especially useful for older homes and adds value for sellers that may be concerned with the condition of the property, appliances, systems, etc. It can also send a positive message by telling the seller you will be cooperative for a smooth inspection and closing process.
5) Inspection Contingency
Buyers have the right to have an inspection done of the property they are purchasing, and they are urged to do so. Keep in mind that the main purpose of an inspection is to focus on health, safety and structural concerns, not to address cosmetic issues. Real estate contracts allow buyers to ask the sellers to correct any unsatisfactory physical conditions. Buyers may also back out of the deal altogether during the inspection period while still getting their earnest money (deposit) back. This can be a sticking point with sellers because when it comes time for inspections, they don’t want to have to fix a long list of items and pay for the repairs out of pocket.
Though NOT recommended, buyers may choose to waive a home inspection when submitting their offer to alleviate concern a seller may have as to what an inspection might reveal or suggest. This is a very strong strategy for your offer, but by waiving the inspection altogether, you will be relinquishing your right to object to inspection items. This means that you will not be able to ask the seller to address any inspection issues, and you will not be able to back out of the purchase based on the inspection. In this case, if you did back out due to the inspection, you would lose your earnest money. This appeals to sellers because it saves them from having to do any repairs (which also saves them money), and it shows you are more serious about buying the property.
However, if you don’t want to completely waive the inspection, there’s another way to strengthen your offer when it comes to the inspection. You can still reserve your inspection rights by including a contingency with a stipulation that you will only request the seller to repair/replace cumulative or individual inspection items that are more than a certain dollar amount. With this option, you can still back out of the contract if the seller doesn’t do the repairs. This helps your offer by letting the seller know that you’re not going to nitpick or nickel and dime them over every little inspection item.
You don’t have to use any of these strategies with your offer, but by using one or more of them, you may have a much better chance of your offer being accepted when you’re competing against other buyers. Best of luck with your offer and home purchase!
* Please keep in mind that this blog post was written for Colorado (specifically the Denver Metro area) in January 2017. This information may vary in time as well as in other states and/or real estate markets.
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