Multiple Offers
Despite signs that the market is softening, we are still seeing many buyers face competitive, multiple-offer situations on the properties they desire. There are many tools at a buyer’s disposal to present a compelling offer. At ELEETE, we want to ensure that our clients are fully informed of all the options so that they can put their best foot forward when placing an offer. We’ve developed a comprehensive summary of those tools, their pros and cons, and when they are best applied. It is our agents’ job to review every possible consideration with you so that you present a winning offer with terms that both the seller and you are happy to sign off on. We have created an “ELEETE Multiple Offer Disclosure Addendum” that we give each of our buyers to acknowledge.
ELEETE Multiple Offer Disclosure Addendum
ELEETE Real Estate wants to ensure that all our buyers are fully aware of the most common things we see in multiple offer situations. By acknowledging this document, you are only confirming that you have received it and that your agent has given you the opportunity to place forward your best offer. Described below are the areas where you could choose to improve your offer and give yourself the best opportunity to own a home when competing with other buyers. We are not encouraging or endorsing the usage of any of these strategies. Our intent is to fully inform you of the potential options that we see implemented frequently in a multiple offer situation.
Price:
We all know that the highest offer price is typically chosen. In order to have the confidence to make the highest offer, we will give you data indicating what the home is worth based on historic comparable sales.
Next, the question for you is how much over “logical” value, if any amount, are you willing to pay? At the same time, that amount should also be the number whereby if we tell you that you did not have the winning offer, you say, “that’s okay, I would not have paid anymore”.
In many cases, buyers are willing to pay significantly over the list price. There is truly no way of knowing the motivation or need of the other buyers and for this reason, all buyers go in blind. The best gauge is to truly know the actual value your agent validates based on doing our ELEETE Price Report.
Although not scientific, a method to estimate how much a home will sell for above the listing price would be to assume that offers will go up 1% for each offer on the table (assuming the home just hit the market). However, if the home is underpriced to begin with, one needs to base the starting number on the actual value. Second, the offers could also increase an additional 1% for every three months that has gone by since the last similar type home was available for purchase in this community. This is in no way a proven model, but rather a gauge to give a rough range as to what a home may sell for. For example, a $500,000 home with four offers may sell for $520,000+, and if there have not been any homes like it available for 12 months, then an addition 4% would be added. (1% for each 3-month period). So, a home of this nature in a high demand area with four offers may have one of those buyers willing to pay $40,000 over the list price. Another gauge is to see if there are any homes in the overall area that have sold over the list price in a multiple offer situation.
Escalation Clauses:
Escalation clauses are an excellent option for a buyer to write a winning offer without paying significantly more than the next highest offer. For example, your clause states you will pay $900,000 for the home or $10,000 higher than the highest offer up to a maximum of $1,000,000. The biggest mistake most buyers make when using an escalation clause is to start too low on the base offer and not have enough incremental power in the differential number. In the example above, $10,000 is significant, enough to capture the seller’s attention. Buyers often want to do a small figure, like $1,000, and that is typically not compelling enough to stand on its own merit. As for starting with a base price that is too low, this shows a seller what you are hoping to pay and thus, the seller knows that if you are told you have to pay $50,000 more within a day or two of acceptance you may have buyer’s remorse.
Pros: An escalation clause hedges you from not paying too much and allows you to go higher than you might ordinarily go, but you do so knowing others were also willing to pay that price.
Cons: Sellers and their agents know that buyers are often hoping to get the home for the low number, but once they win at the maximum number, they start to second guess their offer and frequently back out. Thus, listing agents and sellers will often accept a clean offer for $950,000, because they can see the buyer is confident to offer that price without needing the justification of another offer to make them feel good about it. Many agents will specifically state that they will not consider an escalation clause. Also, some sellers have been known to counter at the highest price on the escalation clause regardless of the other offers in hand.
Earnest Money:
This is often overlooked and underutilized as a tool. At ELEETE, on a standard offer, we recommend 2% of the offer price, but in the case of a multiple offer, we think there is value in going up to 5%. Under most circumstances, earnest money is refundable, so it is a low risk proposition to “show the money”. It is important to note that earnest money isn’t “additional” funds you are offering. This money is applied to your down payment at the close of escrow.
Non-Refundable: Buyers can make their earnest money non-refundable to show their commitment to the purchase. Buyers who do so may choose to back down the percentage to 2% or leave it high if they know they plan to close.
Timing: You as the buyer determine when you want the money to become non-refundable, it could be any of the following:
- Upon acceptance of the offer.
- Upon review of the disclosures and the expiration of the 5-day rescission period.
- Upon removal of the home inspection contingency.
- Upon receiving the appraisal back, confirming the value.
- Upon receiving formal loan approval.
- Within a set time frame as proposed by you the buyer.
Release of the money directly to the buyer: This method is never recommended by your legal counsel but is a tactic that we do see implemented by confident buyers who want to win, and who know they will close on the transaction. For these buyers, they do not see the utilization of this clause as being any risk as they know they want to get the home and under no circumstance would they back out. If they did, they would lose the entire earnest money that was released to the seller.
The timing of the release of the earnest money would likely be determined in synchronization with any of the above bullets.
The most common approach is that the earnest money is never released to the seller, but rather it is held by escrow as a non-refundable deposit to you as the buyer. The purpose of this approach is to protect you, the buyer, if the seller cannot deliver a clean title or in the case that catastrophic damage was to occur prior to the home closing and the home was no longer habitable.
Proof of Financing or Cash:
For buyers who finance, it is often tough to compete with a cash offer. However, there are many elements, other than cash, that will determine the seller’s selection of the winning offer. A buyer financing the offer needs to have a pre-approval letter. It is very helpful when that pre-approval letter is drawn by a local, well-known lender or mortgage company. It is even more advantageous when it is a lender who is well known in the Realtor community. Internet lenders and unknown lending institutions can impact the listing agent’s confidence in your offer. It may also be beneficial to have your local mortgage broker or lender call the listing agent to confirm your pre-approval status. This can go a long way in expressing the level of your financial credibility.
Buyers who know that obtaining a loan is purely a formality that will waive their financing contingency. This means that their earnest money would be forfeited to the seller if the home did not appraise and/or the bank denied their loan. This is an excellent method to exercise if the buyer knows they will get the loan and are not concerned about the appraisal.
Cash offers are best submitted with formal documentation. It is ideal to have a recent bank statement with the account number lined out, and/or have a contact at the institution write a short letter on your behalf confirming you have the liquid funds to close, and/or have your financial contact make themselves available for a phone call.
Down Payment Amount:
If the offer is not cash and you as the buyer are financing, sellers and their listing representative know that the larger the down payment you have, the smaller the loan. Simply put, this means you are more likely to get the loan. If you have a loan that is greater than 80%, then the appraisers know that the bank is at greater risk and everything from the underwriting to the appraisal is under a tougher microscope.
Buyers must disclose whether they currently have the funds to close or if they are coming from a contingent source, such as the closing of another property. Clearly having a contingency of this nature makes it difficult to compete in a multiple offer situation.
Waiving the Right of Rescission:
Like releasing your earnest money to a seller, your legal counsel will never advise you to waive right of rescission. That said, it is a tactic that is frequently implemented by confident buyers and those buyers who have done a lot of research in advance of making the offer. First off, make sure your ELEETE Realtor has requested and delivered to you all the property disclosures prior to ever implementing this strategy. It is essential to see these documents before making the offer.
The reason many buyers are willing to waive this right is because they still have the inspection contingency and feel that gives them a secondary exit plan if any of the inspections uncover an issue. Note: if the inspection does not uncover an issue, and a buyer just changes his or her mind (as they could under the right of rescission protection clause), the seller could try and challenge the termination, potentially jeopardizing your earnest money. Thus, it is crucial that the buyer is fully committed to the purchase if they waive the right of rescission.
Waiving HOA Review:
Both your ELEETE Realtor and your legal counsel do not advise you waive this review period contingency. However, for that reason it is a powerful statement in an offer. Anyone willing to consider this would have already done their research in advance of making the offer or have inside information about the HOA.
Shortening or Waiving the Inspection Contingency or Paying for the Repairs:
Shortening the inspection period is a commonly implemented strategy done in a multiple offer situation. It requires that the buyer, perhaps with the assistance of their ELEETE Realtor, pre-schedule the inspections to ensure they can be completed prior to the shortened time frame.
Waiving the inspection contingency is another item that would not be advised by your legal counsel or your ELEETE Realtor. We ALWAYS recommend that you obtain your own inspections. However, this is an offer strategy that buyers will utilize when they know that they want to own the property, they are confident in the condition of the property, or they have done their own pre-inspection with the permission of the seller.
Sellers are very pleased when the inspection contingency is removed as this is the most common reason a sale fails.
Buyers can also offer to pay for any repairs found by the home inspection up to a set dollar amount. This tactic can put a seller’s mind at ease that once they accept your offer, that they will not be “nickel and dimed” during the repair process for minor items that seem to bring tension during a typical transaction. Sellers love to know that the buyer is so committed that they are willing to let those go and cover them up to a certain amount. Additionally, this is another way to effectively improve your offer without paying more. You as the buyer can address those items in your own time down the road.
Address known obstacles up front:
Does the home have a questionable roof, siding, or an element that needs to be addressed or will come up during the inspection period or the HOA review period? If yes, some buyers will accept the roof or siding condition “as is”, or if it is an HOA assessment, they will address it up front. In a multiple offer situation, the more you can eliminate the “unknowns” and be pro-active, the more likely the seller will select your offer as they can see everything is transparent. Having the confidence and ability to do this requires doing research well in advance of crafting the offer.
Waive the Appraisal or Address Any Appraisal Shortfall:
The reason buyers typically waive the appraisal in a multiple offer situation is to compete with a cash offer. In most cases, they do not know if the other offer is cash, but it is common knowledge that cash offers are becoming more prevalent and are often the winning offer when we see multiple offers. Cash offers do not require an appraisal and in most cases cash buyers do not make their purchase contingent upon getting an appraisal to confirm the value of the home. On the contrary, all traditionally financed offers require an appraisal and every offer states in the boilerplate language that the offer is subject to the property qualifying for the loan and that the home appraises at or above the purchase price.
When a buyer waives the appraisal, they are stating they will still purchase the home even if the appraisal comes in below the sales price. If you choose to waive your appraisal, you can truly only do this if you have the cash liquidity to make up the difference between the purchase price and the appraisal. This strategy should also be first discussed with your lender to verify that you have the cash funds and liquidity to come up with the additional funds needed to close.
For example, if the sale price is $500,000 and the appraisal comes in at $450,000, you will likely need your 20% down payment of the $450,000 appraisal price ($90,000); additionally, you will need cash to cover the shortfall between the $500,000 sale price and the $450,000 appraisal, in this case, $50,000. Typically, you would have needed 20% of the $500,000, or $100,000 down payment. Due to the shortfall, you would need to have $90,000 + $50,000, or $140,000.
It will be important to be prepared to demonstrate to the seller that you have the additional funds to close in this event.
Finally, buyers may offer to pay up to a set amount above the appraisal such as $10,000 or $20,000. This is an effective method to demonstrate to the seller and their Realtor that you are willing to pay a premium above market. It is safer for the buyer as it limits their exposure to a low appraisal and could be the differentiator for your offer over an identical offer.
It is important to note that lenders will only lend on the appraisal value, regardless of the ultimate sales price.
Flexible Closing and Possession and or Free Rent:
Your ELEETE Realtor will check in with the listing Realtor to see what the seller’s “perfect world” would be for a closing and possession. It’s not that every buyer wants to accommodate the seller, or even can accommodate their wishes. However, in a competitive situation this could be the factor that determines which offer is selected by the seller.
Ideally, one would be able to meet the seller’s wishes for both the closing date and the possession date. While it is often thought to be the same date, it is relatively common that sellers will take advantage of a multiple offer situation and ask if they can move out of the home anywhere from a week to a couple of months later.
In most transactions, the seller is appreciative to be able to stay in the home after closing and they are happy to pay a rent that is equivalent to your new house payment.
Free Rent: This is a nice gift that some buyers will use to really entice the seller to select their offer, as they will not only allow them to stay in the home for an extra month or two, but they get to do it having all of their cash in the bank after closing and then live rent free until an agreed upon date.
Personal Letter:
Lastly, writing a personal letter to accompany your offer expressing your excitement of potentially owning this home is a nice touch and in many cases buyers will attach a family photo. Most sellers do like to know who will be the future caregivers of their home. If the home is currently owned by an investor, a letter has little impact unless it really demonstrates a buyer’s desire to have this home (for parents, one level, school, etc.). Sellers want to accept the offer that will close.
On the contrary, if it is an owner-occupied seller home, and the buyer is an investor, most sellers do not want to see a renter in their home. In this case a letter is not advised.
