Yes, Mr. and Mrs. Seller I Will Give You My First Born Male Child If You’ll Let me Buy Your Lovely Home!

Unfortunately, this is how many buyer’s feel during the drafting of their offer in a multiple offer situation.   Writing a winning offer usually involves having the highest price.  However, we all have heard of offers being accepted that didn’t have the highest price or even the “best terms.”  How much should a buyer offer for their home?  Does the buyer realistically have the money to compete?  How can a buyer package an offer that will get them the home and not bankrupt their future?

Unfortunately, when the seller underprices a home, offers come in from buyers who realistically can’t afford that home.  This creates added pressure on qualified buyers to increase their offer price.  In an appreciating market, if a house is priced in line with recent sales, it might receive 4-6 offers.  But when it is underpriced… by say 5% (or more),  there usually are many more offers.  These additional offers create a frenzy, substantially inflating the home’s final sales price.   That is why so many agents recommend a low list price.  Price em’ low and watch em’ go!  Buyers can combat this somewhat by doing their homework.  Learn the recent sales prices for homes that are comparable in style, size, location and condition.  Try to find out how the transactions went down.  Were there six offers with one clearly overpaying or where all six close in price/terms?  Try to learn everything about the offers on the homes that are currently sale pending.  These offers and how they were packaged will give buyer’s their best market information.

More often than not, buyers involved in multiple offers are not including a financing contingency in their contracts.  Buyers better be comfortable that the property will appraise at or above its purchase price or they will need to increase the down payment to match the appraisal shortfall. 

Typically a buyer will also need a substantial down payment.  The reality is that seller’s prefer an offer that has at least 20% down.  Anything below 20% down makes the buyer look weak and anything above 20% shows good financial strength but may not be necessary.  Note:  One strategy that we’re seeing more and more of is the use of writing in a large down payment into the contract (say 40 % down, 60% financing) and then once the loan is in place the buyer uses a smaller down payment (20% down, 80% financing) to complete the transaction.  This gives the appearance of financial strength, yet allows the buyer to maintain cash reserves.   Note to buyers: make sure that what ever one writes into the contract, one can perform.  Otherwise, one could be in a heap of legal trouble.  Can you say fraud!!! I can hear it now… “Honest Judge,  it was my agent who told me that it didn’t really matter what I wrote in as my down payment.”

Lastly, one should include a 3% initial deposit check with the offer.  This is the minimum that a seller will look for as a deposit.  On the flip side, I’ve seen huge deposits, non-refundable deposits and even option money used as a deposit.  It depends on how desperate the buyer is and how “desirable” the home is.  Buyers should make sure that any representations about finances can be backed by third party sources.  Include a pre-approval (not pre-qualified, which means nothing in the real world) letter showing a loan committment from a reliable lender.  Not your cousin who also happens to do loans part time!  Unfortunately, experience has proven that I’m not a huge fan of online lenders.  Most (although not all) of the deals that we see go bad are from online lenders.  Most (although not all) tend to be online lenders not being able to meet the deadlines written into the contract and/or who never really had the buyers pre-approved in the first place.  This is when we have to pull in our local “brick and morter” lenders to close out the deal.   Include bank statements and/or a bank letter indicating where the souce of the down payment is coming from (ie. that the buyer doesn’t have to liquidate 100,000 shares of “fly-by-night” web company to make the transaction work”).  If a buyer has done the above, he/she just might make it past the first cut.