The Covid-19 pandemic unleashed one of the most competitive housing markets in the last decade. Most of the headlines are about how great it is for sellers, but the reality is that this has been a real difficult and frustrating market for the traditional buyer. In almost every situation I have been in with a buyer in the last nine months there have been at least three offers and as many as nine offers.
If this sounds familiar, here are the seven types of buyers who are getting their offers accepted and getting the house you wanted.
First, Let’s Talk About the Appraisal
Before we look at types of buyers let us take a step back and talk about the appraisal. If your offer is not getting accepted you might not have run into the next problem, which is the appraisal. For example, if you are pre-approved for $500,000 with a 20% down payment, the lender is going to finance 80% of the purchase. Then you make an offer on a $500,000 house, but there are two other offers. You agree to pay $515,000 and your offer is accepted. The lender has the house appraised and it comes back at $500,000. Now what? The lender is not going to agree to finance more than 80% of value. You do not want to come up with an additional $15,000 cash to fulfill your obligation. And the seller does not want to lower the price to $500,000 when they can re-list their house or they have a backup offer for $515,000. Therefore, being the highest bidder when you are financing the purchase is not always the best offer for the seller.
The Cash Buyer
If you came to this blog for some insight and the first thing you see is Cash Buyer, you are probably rolling your eyes and saying, “Duh, that damn cash buyer is in my dream home right now and not reading this blog.” But the reality is that there are a lot of cash buyers right now. When your agent is talking with the listing agent they should ask, “Do you have any offers? Are any of the offers a cash offer?”
The Lease Back Buyer
It is a seller’s market, but has soon as someone sells, they are now a buyer and facing the same challenges. One buyer strategy is to let the seller lease back the property until they find a replacement property. You can put a deadline on the lease back, such as 90 days, and there is paperwork required that protects you. In a normal market, the seller would lease back the property based on the buyer’s monthly loan payment. For example, if your loan is going to be $2,000 a month, then the seller would pay $2,000 a month in rent, plus cover all costs associated with the home including PG&E, water, trash, and HOA. However, right now, we are seeing buyers offering to lease back to the seller for free, or for only a minimal monthly payment. Why would you do this?
• Some buyers really want the house and will do what it takes to get their offer accepted.
• The buyer might not have a make their first payment for 60 days, so it is a wash.
• For the seller, the highest price might not be the most important factor. Knowing that they have time to find a replacement property can outweigh a few $1,000 in the purchase price.
• Houses are selling at the top of the market, and some are not appraising. If you have a loan, and the house must appraise, making an offer way over asking price is not really a competitive offer. But, offering to lease back at no cost is a way to add value to your offer without increasing the purchase price. Using the $2,000 example above, a free lease back for 90 days is essentially adding $6,000 to your offer.
The Double Move Buyer
This can be a headache, but it puts you in a really good position to get your offer accepted. Right now, buyers and sellers feel stuck. You would like to buy a house, but you need to sell your house first, so buyers are making their offer contingent on selling their house. But, in a multiple offer situation someone else is probably going to have a better offer. The Double Move buyer sells their house and finds a short-term rental, or lives with a friend or family member. By doing this you have the equity from the sale of your house in the bank and you can make an offer with 20%-50% or more down payment to mitigate an appraisal issue.
You might need to get creative to do this. Some apartment complexes cater to short-term renters. Do you have friend who has a rental available? Check Airbnb. People are traveling less and someone with an Airbnb might want a 3-month rental agreement. Some people still own mom or dad’s house but have not wanted to rent it out. I have had clients rent cabins, and yes, I have had grown adults move back in with their parents for a few months.
The Short-Term Equity Buyer
The Short-Term Equity Buyer is typically a move up buyer. This person has enough cash for a 5%-10% down payment on a loan, but also has a lot of equity in their home. With only 5%-10% down they are not getting their offer accepted because the house must appraise for the loan to be approved. When homes are selling for over asking price, and the lender is agreeing to provide 90%-95% of the financing there is not a lot of giggle room in the appraisal. So, the Short-Term Equity Buyer is pulling cash out of their current property with a second loan and using the money to make an offer with a down payment of 30%-50% or more. You will pay a higher interest rate for the second loan, but the goal is for it to be short-term loan that will get paid off when you sell your house. In some cases, this buyer has so much equity in their home that they can afford to buy their new home, move in, then sell or rent their existing home. How great would it be to pull equity out of your home to buy your dream home, then rent your old home and have someone else pay off the loan?
The We’ll Pay The Closing Costs Buyer
So, you made a full price offer, and it was not accepted. A few months later you look at it again and find out that the house sold for the same amount you offered. What happened? The other buyer could have agreed to pay the seller’s closing costs. If the house has offers at or above the list price, and multiple offers, you are going to run into the appraisal issue (again). But remember it is all about what the seller nets. In your offer you can agree to pay the seller’s closing costs, which helps the seller reduce their costs and increase their net income from the sale without running into an appraisal issue. Keep in mind that your lender will most likely not allow you to include this cost in the loan so it would be a personal expense. In addition, you should have clear and concise language for these terms and a cap on the price. For example, “Buyer agrees to pay seller’s closing costs not to exceed $4,000.”
The We’ll Cover The Appraisal Difference Buyer
This buyer includes language in their offer that if the house does not appraise, they will cover the difference in price. Again, you want clear and concise language for this type of offer. For example, if the accepted offer is for $515,000, the buyer includes in their offer, “In the event the property does not appraise for $515,000, the buyer agrees to pay up to $25,000 cash to cover the difference between the sale price and the appraisal price.” Talk to your lender about this type of offer because it may require cash reserves. This does not mean you are adding $25,000 to your $515,000 offer. But if the house appraises at $500,000 and the lender says we will not finance the difference, you are agreeing to add $15,000 so that loan will be approved. This type of offer gives the seller some breathing room on the appraisal and makes your offer more appealing. But why would a buyer do this and be upside down on a property from day one? Isn’t this how the last recession started? Not necessarily.
- The buyer might be moving from an expensive market to a less expensive market and has no problem with paying $25,000 more when the same house in the expensive market would have cost $900,000.
- The buyer might have planned to put $25,000 into a remodel, but if the house is in great condition, and has the improvements they wanted, then they will put the money into their offer.
- There could be a foreclosure or a low sale in the area that will affect the appraisal.
Keep in mind that traditionally the listing agent meets with the appraiser and as a listing agent you want the house to appraise. But, with an offer like this they might not be as motivated, so you want to insist that your agent meets with the appraiser and has a Competitive Market Analysis to justify the appraisal.
The Escalator Clause Buyer
Here’s the dilemma: you find the perfect house and you want to make an offer, but you don’t want to overpay. One way to make your offer more appealing is to include an Escalator Clause. In this type of offer you submit a purchase price, but you also include that you will pay $1,000 more than any other verified offer. You should include a cap on your offer price. For example, “Purchase price to be $500,000 or $1,000 more than any other verified offer not to exceed $515,000.” On the plus side, this offer is competitive and pretty much guarantees that your offer will be one of the highest offers. On the negative side, the seller knows your purchase price ceiling and might try to counter your offer. But, if everyone is reasonable this is a great way to get both parties to agree that the seller is getting the highest price and the buyer is not way over the other offers that are being presented.
So there you have it. If your offer has not been accepted it’s most likely because one of the other offers included one of the seven scenarios above. If you found this blog to be enlightening and need a Realtor to represent you to help you to get your offer accepted, please contact me.
Disclaimer: Eric McCormick is a licensed Realtor working in the greater Fresno and Clovis area. If you have legal, tax or loan questions you should contact someone who is licensed in those areas.