HOME BUYER NEGOTIATION OPTIONS IN A COMPETITIVE MARKET
We are currently experiencing a very strong seller’s market because of the low availability of homes for sale. Nice homes are attracting multiple offers within the first 3 or 4 days of going on the market. Because of this many buyers are using aggressive strategies to “win” the bidding competition. Highest price still means a lot but depending on the seller’s unique circumstances and the condition of the house some of the terms of the agreement other than price can make all the difference. Here are some options buyers may want to consider when they submit an offer.
PRICING ISSUES
- The highest price still is a high priority to sellers but depending on other terms the seller may select a lower offer because of other more favorable terms of the agreement. Most homes are selling above the list price and appraisers are assigning values that support the higher prices because they know the market values in general are rising. It is unlikely prices will decline so buying houses is still one of the best investments anyone can make.
- Buyers may want to use an escalation clause. Here is an example of how that works … the buyer offers $450,000 but agrees to raise their offer if another buyer has a higher price to $2,000 above the other buyer’s price up to a maximum of $465,000 (these are just examples). If a buyer “wins” because of the escalation clause the seller must show the other offers they received to prove the escalation clause was needed. Some seller agents do not allow this option to be used but if it is allowed it can be a valuable strategy.
BASIC AGREEMENT TERMS
- Higher deposits help
- Shorter inspection periods help
- The more cash the buyer has available on the BFI the better
- The better the “Debt to Income” ratio that shows on the BFI the better
- Flexibility with settlement dates helps (usually sooner the better but sometime the seller wants a longer settlement period) … see more about creative settlement strategies at the end of this document.
CONTINGENCY TERMS
There are several contingency clauses in the Pennsylvania standard Agreement of Sale whereby the buyer can terminate the agreement and get the deposit back if the contingency is not met. Every time a buyer “waives” a contingency it improves the offer … in many cases the waiving of contingencies is worth a lot to the seller. Here are some creative options a buyer may want to consider …
Mortgage Contingency – CASH offers are very valuable to a seller because they don’t have to worry about a buyer’s mortgage being approved. A seller will often select a cash buyer who offers $5,000 to $20,000 less than a buyer that needs a mortgage. However, most buyers are NOT in a position to submit a cash offer so buyers usually are not faced with competing against a cash buyer.
Appraisal Contingency – Buyers are sometimes waiving the appraisal contingency. If a buyer needs a mortgage, the lender will require that the home be appraised. Purchase prices are now often exceeding the appraised value. As an example if the appraised value is $5,000 below the purchase price a buyer can terminate and get their deposit back … unless the buyer waives the appraisal contingency. In the above example if the buyer waived the appraisal contingency, the buyer would have to increase the down payment by $5,000 to avoid losing the buyer’s deposit.
- Instead of waiving the appraisal contingency the buyer could offer to make up a part of the difference if the home does not appraise for the full purchase price. For instance, the buyer could offer to increase the deposit by “up to” $10,000 if the home does not appraise for the full purchase price. This is looked at as a very valuable term to the seller. The seller will also look at the buyer’s BFI to see if the buyer has the cash if needed to offset a low appraisal value. Note that this offer does not cost the buyer any more to buy the house it just increases the cash needed up front.
- Another option which addresses the seller’s concern that the home may not appraise for the full purchase price is for the buyer to offer to pay the seller’s 1% transfer tax. The buyer should think of this as moving the last 1% of the price they are willing to pay from the purchase price to the transfer tax. This makes it more likely that the home will appraise because the purchase price is 1% less than it would be if it included the additional 1%.
Inspection Contingency
Buyers are sometimes waiving the inspection contingency entirely, especially if the house appears to be in good condition.
- Waiving the inspection contingency is a bad idea … BUT … a buyer could include a term in the agreement to provide a “deductible”. For instance, the buyer could agree to be responsible for the first $2,000 or $3,000 of defects uncovered by an inspection. This is an option that should be considered since the possible deductible may only equal ½ % to 1% of the purchase price. With most homes in good condition this does not require the buyer to pay any more since the buyer is expected to only ask for inspection repairs to items that are material defects to the property.
HOA Contingency
When the home being purchased is part of a Home Owners Association the buyer has a contingency that allows them to terminate and get their deposit back if they don’t like the policies or financial situation of the HOA. Buyers can terminate for any reason within 5 days of receiving the HOA documents. This would be an easy contingency to waive since buyers rarely terminate due to HOA policies.
Rent-back agreements.
For buyers who do not have to sell a home first this is a strong option to use to “win” bidding wars.
Although this is a very strong seller’s market many sellers are delaying putting their home on the market because of the fear they won’t find a home to buy quickly. Some sellers are now selling their home with a contingency that they cannot settle until they find a home to buy.
Buyers who can wait for months to move into the house they want to buy can offer to provide the seller with a rent-back agreement … this allows the seller to remain in the home after settlement and pay rent to the buyer to give the seller time to buy their next home. This is becoming a popular strategy that helps buyers beat the competition and it gives the seller the time they need to buy their next home with the equity from the sale of their current home … with significantly less stress. The rent-back period is typically not more than 60 days.
SUGGESTIONS: Buyers should consider all of the above when deciding how to submit an offer. Many of the creative terms may sound risky or extreme but if used carefully they can all be limited to amounting to 2% or less of the purchase price … and many of the creative terms may cost nothing.
SELLER SUGGESTIONS
The market for sellers is extremely strong and if you are planning to sell once you can find a way to buy a home that meets your goals, then you may want to consider putting your house on the market contingent on you finding a home to buy or contingent on the buyer agreeing to a “rent back” agreement.