This is the question of the day particularly when there is low inventory and high demand especially with homes priced under $1 million – and even up to $1.5 million. Multiple offers can be quite frustrating for all involved, but mostly for you. You are blindly bidding without any information about what your competitors are offering. You want the house, and yet you don’t want to overpay for the house. Overpaying could be an issue when it comes to the house appraising (if you are getting a mortgage) not to mention resale. On the other hand, you want to submit an offer that is so appealing to the seller that he chooses yours. It’s stressful, to say the least. To help with this scenario, I am sharing a few tips and thoughts to help guide you when you find yourself about to dive into a multiple-bid situation.
But a quick segue first outlining the general timing of the offer process. After your offer has been accepted, you have 7-10 days to have the home inspected and come back to the seller with any issues you would like addressed, which usually results in another negotiation. This is the time when most deals fall apart. Assuming you get through this hurdle, you’re on to the P&S, which is signed 14 days after the accepted offer. When signing the P&S, you put a hefty deposit down as well – in our towns of Weston, Wellesley, and Wayland, it’s generally 5% of the purchase price. The last hurdle is the satisfaction of the mortgage contingency – in other words when you receive your mortgage commitment from your lender – and this generally happens 5 weeks after the accepted offer. So in essence, with a mortgage contingency in the offer, a seller won’t be able to rest assured that his house has sold until 5 weeks from the accepted offer.
Now back to the tips and thoughts about how to win a multiple-bid situation (note that I’ve evaluated these tips in terms of effectiveness and frequency with which they occur):
- Exclude your mortgage contingency – Very effective, and happens often – This is the first contingency that buyers tend to remove in a multiple-bid situation. From the seller’s perspective, this is very appealing because now he knows his house has “sold” after the inspection issues have been resolved and you’ve signed the P&S and put down your deposit. In this scenario, he has peace of mind that the deal is done just two weeks after the accepted offer. Phew. From your perspective, if you are paying cash there is no need for a mortgage contingency so this is a no-brainer. But if you still need to get a mortgage in order to purchase the home, excluding the mortgage contingency is a bit risky. You would only do this if you are extremely confident about getting the mortgage – based on the counsel of your mortgage broker – and if you feel strongly that the house will appraise. The repercussions are as follows. If you don’t ultimately get approved for the mortgage, you forfeit your deposit money – not good. And/or if your new potential home appraises at a lower price than the agreed-upon purchase price, you must come up with the extra money necessary for the loan to be approved or you can try to renegotiate the price of the house with the seller. Both are less than ideal scenarios. So think seriously about this tactic before you commit to it.
- Increase the purchase price significantly – Very effective, and happens occasionally – You can also decide to inflate the price and “blow it out of the water” as they say. This is not always financially prudent from a resale perspective, but almost always, price is the most important thing to the seller. Therefore by paying a high price for the house, your odds are better that the seller will choose your offer. In reality, though, most people don’t want to overpay for a house, so buyers don’t often go crazy when it comes to the “best and final” price.
- Remove the inspection contingency – Very effective, and happens rarely – Sometimes in a competitive bid situation, buyers will waive their home inspection contingency though it’s not often done. We only advocate removing the inspection contingency if you are tearing down the house. Sometimes a seller will have his own home inspection prior to putting his home on the market, and then share the inspection report with you. The seller’s reasoning is that this way you might be less likely to do your own home inspection – after all the seller has had an inspection and repaired the items that were found in the report, right? Well, not exactly. The problem with this is two-fold. First, two home inspections of the same house usually result in different issues arising. It may sound hard to believe, but I have seen this happen time and again. This brings me to my next point. What happens if you decide not to do your own home inspection and just accept the seller’s inspection report. And then five months later when you own the home, you find that there is significant termite damage – something that the seller’s inspector missed. Unfortunately at this point, this is your problem and you are stuck with remedying the damage without any recourse from the seller. Despite the fact that removing your inspection contingency significantly strengthens your offer, it puts you at significant risk and so most home buyers do not follow this path.
- Conduct a pre-offer home inspection – Very effective, and happens rarely – This is a great option, and my buyer clients and I just followed this strategy in a recent multiple bid situation. There are several advantages to this approach. First, since you’ve had your own home inspection prior to submitting the offer, you don’t need to include an inspection contingency in the offer making it much stronger. Not to mention that most of the deals fall apart because of inspection issues and the ensuing negotiation, and so this gives the seller complete peace of mind from that perspective. The seller knows that you have accepted the house and its condition, and you don’t run the risk of walking away because of something discovered during the inspection. Furthermore, you can make a better-informed pricing decision when you’re in the “best and final”phase of the multiple bid situation. You will know the work that needs to be done to the house and the price tag attached, and this will enable you to make a more informed pricing decision. The disadvantage to this is that you’ve paid for a home inspection, which isn’t inexpensive, and you are not guaranteed that the seller will choose your offer. Yikes…hundreds of dollars potentially down the drain.
- Remove all contingencies – Very effective, and happens rarely – This, of course, is the best-case scenario for the seller from a security standpoint so it’s quite effective, but it’s also a rarity. The seller will love your offer if it doesn’t have an inspection or mortgage contingency because technically and for the most part, as soon as he signs the offer, the deal is done. You are not protected, however, at least from an inspection and financing perspective. It’s like a complete leap of faith, and most buyers are not willing to throw such caution to the wind, especially when it comes to their most expensive asset. That being said, if you’ve had a pre-offer home inspection and can pay cash for the property, then this is certainly the path to follow, and the offer will be quite compelling to the seller.
- Include an escalation clause – Can be effective, and doesn’t happen often – Let’s assume a list price for the home of $1,000,000. In this scenario, an escalation clause would go something like this.”I will pay $5,000 more than the best offer up to a maximum of $1,030,000.” So if the best offer is $1,020,000, then you would be paying $1,025,000 for the house. If another buyer is willing to pay $1,035,000 for the house, then you are out of the running. Some agents don’t like escalation clauses because they feel that it gives that party an unfair advantage. They feel that a buyer should come up with a price – and not a moving target – at which they feel comfortable buying, or not buying the house. This has an element of gamesmanship which some agents don’t like. Other agents are fine with it. Something to consider.
- Find out what is most important to the seller – Always important, but not very effective – On rare occasions, price is not the most important thing to the seller. Sometimes it’s the closing date. Sometimes it’s the buyer’s profile. Some sellers might want to sell their home to a family and not to a builder, who is planning to tear down their beloved house where they spent years building happy memories. In these cases, you’ll want to give the seller some information about you and your family. Find out from the listing agent, the seller’s priorities and then work to put together an offer that mirrors what he wants as much as possible.
Hands down, price is generally the most important thing to the seller. But so is the security of his house ultimately selling. And so sometimes, a seller may accept an offer with a slightly lower price if there aren’t any contingencies. And if you can meet their ideal closing date, that can go a long way too. The bottom line is to put your best offer forward in terms of price, contingencies – or lack thereof – closing date, etc. In other words, submit the strongest offer with which you feel comfortable – both financially and emotionally. And then keep your fingers crossed and do a lucky dance too!
Have you ever found yourself in a multiple-bid situation when purchasing a home? What was your strategy, and did it work? Did some approaches work better than others? I can’t wait to hear
