You hear it on the news, you see it on social media, you hear your friends talking about it: “I’ve put in 5 offers, and I’ve lost out on every home.”
It’s competitive, it’s crazy, and it’s stressful.
“We are already under contract on our current home and only have days to find a new home. We can’t sell our home if we don’t have a new home to move into.”
This is currently the stress of every seller looking to upgrade or downsize for a new home. Multiple offer situations are happening throughout the United States due to a lack of inventory. We have about one million fewer homes on the market now than a year ago, leaving buyers frantic.
In addition to lack of inventory, per the National Association of REALTORS, in the years 2020 to 2024, Mother Demographics is providing the U.S. with the most significant number of adults of first-time home-buying age ever in history — and this is during a time when we are enjoying the lowest mortgage rates. With this one-two punch, is it any wonder that the U.S. housing market has outperformed all other economic sectors during COVID-19?
If every cloud has a silver lining, then every advantage has its disadvantage. The advantage of having excellent housing demographics and low mortgage rates at the same time is that we will have stable demand for homes during this period.
Think of it this way: Every time a person buys a home, a potential homebuyer is removed from the market for the time that person (or family) remains in the home. Since housing tenure (the length of time a person stays in a home) has been increasing, that potential homebuyer is being removed from the market for a longer time.
Because we now have the largest number of 27 to 33 year-olds in history, we can count on a stable supply of replacement buyers in 2020-2024. So add to young homebuyers, move up, move down, cash buyers, and investors, and we have stable demand during this period.
The disadvantage to this seemingly ideal scenario for the housing market is that home prices could escalate to an unhealthy level during this period.
Providing housing to meet demand during and following the COVID-19 crisis has created its own set of problems. Shortages of goods and services are evident in everyday life here in the US. Shortages of everything from computer chips to lumber along with shortages of labor to make and deliver goods means we are paying more for certain items and services. The world marketplaces are negotiating, going from zero to full speed to meet demand.
Pricing.
Redfin reported earlier this month that the national median home-sale price hit a record high of $377,200 in May, up a record 26% year over year. Over half of homes — 54% — sold above their list price in May for the first time on record.
Bidding wars.
Redfin also reported this month that seven in 10 buyers — 70.4% — faced bidding wars in May. That’s down slightly from the prior month, but it still indicates that house hunters are facing unprecedented levels of competition as demand skyrockets.
Lack of inventory.
Real estate agents cited a lack of inventory as the main hurdle preventing their clients from completing a transaction, according to the National Association of Realtors. Due to the pandemic, homeowners have been reluctant to list their homes, so available homes — in any condition — get snapped up quickly.
So, what are some steps you, as the buyer, can take to win the deal?
Start with a stroll — or a scroll.
Spend some time looking at what’s available before you get serious. Scroll through stale listings that may not be someone else’s first pick but could be your dream home.
Find a good real estate agent.
Not all REALTORS are created equal. Take the time to sit down with your agent and make sure they are qualified to help you navigate the process.
Questions to ask your REALTOR before signing on to work with them as a buyer:
- Are they full-time? How often do they work? Do they work nights and weekends when needed?
- Do they have access to off-market properties, coming soon listings, etc?
- Does their communication style match yours? Are they able to effectively communicate with lenders, closers, other agents, and most importantly, with all of their clients? Can they handle their current workload and give all clients the service they deserve?
- How well do they know the market? How well do they know the contract? Are they experienced enough to properly guide you through this process?
Remove Some or All Contingencies.
When you make an offer to purchase a house, you know the deal could fall through for numerous reasons, and you don’t want to lose your earnest money because of it. That’s why you include contingencies in the purchase contract; if the home inspection uncovers major problems or you can’t sell your current home in time to close on the new one, you can get out of the contract without penalty.
But if you’re in an intense bidding war, you can get an edge by removing all or most contingencies. The seller would likely prefer fewer potential roadblocks, so this might slide your bid to the top of the list. However, there are problems with this approach: you could be stuck with a badly flawed house or be forced to forfeit several thousand dollars in earnest money if you can’t afford to buy the new home while your current one is still on the market.
Have your financing lined up.
Not all lenders are created equal. Take the time to sit down with your lender and make sure they are qualified to help you navigate the process.
Questions to ask your lender before deciding to work with them as a buyer:
- Are they full-time? How often do they work? Do they work nights and weekends when needed?
- Do they constantly monitor the market to ensure you are getting the best interest rate? Are they able to guide you on when the proper time is to lock your interest rate to ensure you receive the best rate?
- How do their administrative costs compare to other lenders, and can they properly explain their fee breakdown? You want to ensure there are no hidden fees!
- Does their communication style match yours? Are they able to effectively communicate with lenders, closers, other agents, and most importantly, with all of their clients? Can they handle their current workload and give all clients the service they deserve?
Sweeten your offer. Include an Escalation Clause.
Once you know the maximum amount you’re willing to bid, you can include an escalation clause in your purchase offer to ensure you can instantly counteract any other bid. An escalation clause lets you increase your bid to avoid being outbid by another buyer up to a specified amount.
For example, if a home is priced at $300,000 and you know you’re in or may face a competitive bidding situation, you could offer $305,000 and agree that you’ll beat any other bids by $5,000 up to $330,000 if that’s your limit. It will be up to the seller to accept this clause, but it shows that you’re serious about closing the deal.
Provide More Earnest Money.
Buyers typically provide 1% to 5% of the purchase price as earnest money—a form of a security deposit—in a purchase contract, which gives sellers the assurance that you will follow through with the purchase. If you bail out on the contract without citing a contingency, you will likely lose the earnest money. If you put down more than the typical earnest money amount, it will tell the seller that you’re determined to follow through to the closing.
Be Flexible on the Move-in Date.
First-time homebuyers and those who have already sold their previous home might be in a position to be flexible with the sellers on their move-in date. A seller might ask for more time if they have concerns about potential delays for a new home build. In this case, they could go through the closing and then rent the home back from you for a few weeks or a month. This flexibility could be as valuable—if not more valuable—than a higher bid on the house.
Write a Personal Note.
Home sellers, especially ones who have lived in a home for a long period of time, can sometimes be swayed by a personal note that explains why you believe this is the home of your dreams. For example, you might know that the current owner raised a family in the home, and you can discuss how you hope to do the same. It might seem a bit over the top, but it’s certainly worth a try when not much separates your offer from others. And yes—sometimes it works.
Last Resort, Offer to Pay in Cash.
If you have the ability to offer an all-cash bid, you gain a distinct advantage because you can remove all contingencies, making the process go more quickly. Even with an all cash offer, you can work with a lender who moves quickly and have the opportunity to have financing in place and meet your closing deadline, with the ability to pay in cash if necessary. Alternately, paying in cash doesn’t mean you will not be able to finance your purchase. In fact, you can finance it as quickly as the next day if you meet the delayed financing criteria. Bottom line is, make a game plan and speak to your lender about how to be the most competitive with your finances. If you can’t cover the entire purchase price in cash, you could agree to a larger down payment on the house, increasing your approval odds and making your bid more attractive.
Be patient.
When it’s meant to be, it will be. You will win the offer on the perfect “home”.
At Eustis Mortgage, we have a 33% increase in purchase transaction loans from the Summer of 2020 to the Summer of 2021 ... Our buyers ARE winning in the multiple offer situation game - let's connect today!
