Like just about everything else, the housing market is subject to the laws of supply and demand. In a “Buyer’s Market” we generally see a lot of homes for sale with an average, or perhaps even low, number of prospective buyers out shopping for a home. A “Seller’s Marketing” is, of course, the opposite: hordes of potential buyers but a low inventory of homes being sold. The situation usually leads to multiple offers and bidding wars, which can be extremely frustrating for potential homebuyers. Here are some tips to increase your chances of winning the bid and getting the home of your choice.
Get Your Ducks in a Row
Be as far along in the mortgage process as you can possibly be before you even begin physically looking for homes. Every situation is different, but the home you love might be currently owned by a very motivated seller who wants to close as soon as possible. Your ability to settle sooner than your competitors may be, in the eyes of that seller, of more benefit than the other offer they received for a couple thousand dollars more money.
Not to oversimplify it too much, but there are generally two sides to the mortgage approval process. The borrower side is all about you: your income, your assets, your credit, your employment history, etc. The collateral side is all about the home you are buying: it’s value and condition, the title history, and so on. Until you have a ratified contract signed by you and a seller, there is no collateral side yet; however, much of the borrower side of the equation can be done ahead of time.
Shock & Awe
This is not the time for a back-and-forth negotiation or “taking the night to think about it.” If the home meets the “smarts” test, meaning it is not way out of your price range, the schools are good, the neighborhood is safe, and so on, and you are feeling the love for the home, then your first offer needs to be your final offer. You have to assume that you will be competing against multiple offers.
Let your competitors be the ones who offer less than full price just because they don’t want to pay full price. Take this as a general statement and not as any specific promise to your situation – getting a seller to agree to sell you a home for $10,000 less will save you somewhere around $60 or perhaps less, depending on where interest rates are, on a 30-year fixed-rate loan payment. As much as anyone, I understand that $60 is $60. But the questions to ask here are these: how bad do you want this home and are you willing to lose it over $60 per month? If the answer is yes, then submit your low offer and hope for the best. But if this is “the home!” for you…shock & awe.
Don’t Wait, Escalate
An Escalation Clause is an optional part of the contract that basically lays your cards on the table and says “I’m willing to offer this much, but if you have better offers, I will increase my price in $_______ increments up to a maximum of $_______.” Escalation clauses can be very popular in a seller’s market so you could even find yourself competing against other escalation clauses. When the clause is activated, the seller does have to have evidence of a competing offer that justifies the escalation.
The Escalation Clause can be a very effective weapon in your bidding war, but you have to be very careful. Most of the time, people searching for a home start off looking for homes that are pretty close to the maximum sales price they can buy while maintaining a comfortable monthly payment. Though you may be able to qualify for more, the payment on “more” may not be as manageable for you and the lifestyle you want to lead. It is pretty easy to get caught up in the emotion of loving the home and the competitive drive to win and lose sight of the fact that you are blowing past your comfort zone. This is not to say that you may love the home so much that you are willing to adjust your lifestyle a bit; however, that should be an intentional, logical decision and not a quick, reactive decision.
A hot seller’s market puts seller’s squarely in the driver’s seat. They simply have much more negotiating power. That may lead some to question whether or not they should even buy in a seller’s market. That is a reasonable question. There are several disadvantages to waiting, though. For example, a seller’s market can last for years and the financial consequences of renting can be considerably less favorable than buying a home for a few thousand dollars more. Also, seller’s markets tend to drive prices up quickly, meaning the home you buy is more likely to appreciate rapidly. That actually means it may be financially beneficial to try to buy a home at the start of a seller’s market. Either way, the decision to purchase a home is usually a very personal one. As always, I am here to help you however I can when you have made that decision.