Cash-Out Refinance vs. Home Equity Loan: Which Is Best for You?
Low inventory listed for sale combined with the high buyer demand has created a piping-hot housing market where properties are getting sold left and right.
A Zillow report published in May of 2021 found that 47% of homes stayed on the market for less than a week in April, and 76% of homes were on the market for less than a month.
Whether you’re looking to buy your first house or buy a second house, searching for a home in this market may be a challenge. Chances are you’re putting in offers on homes that have several other bids.
So how can you win in a bidding war? Here are some strategies to consider:
Get pre-approved for a mortgage
If you’re wondering how to get a loan for a home, mortgage pre-approval is the first step. At this stage, lenders look at your finances to conditionally approve you for a loan amount.
Having this loan amount on hand can help you narrow down your home search. Michael Bartol, a Realtor at Homes By Bonk in New Jersey, says, “Honing in on homes within your budget will help you to make quicker decisions; this is key in our current market where inventory is lean, and buyer demand is high.” Having a pre-approval also shows sellers you’re serious — some sellers may not even entertain offers without one.
The process to get pre-approved for a mortgage is pretty simple. Lenders typically do a credit check, ask for your down payment amount, and check documents to verify your income and employment. If you’re ready to get pre-approved, check out DadeLoan’s list of the best mortgage lenders to consider.
If you find a home you like, time is of the essence. Another family (or several) could also be lining up to put in an offer, so throw your hat in the ring as soon as possible.
Your real estate agent will put the offer letter together, including information such as when you expect to close on the mortgage, your pre-approval letter, and the date you want to move in. You can gather some of this information beforehand so you can put an offer in quickly when you find a house.
Don’t bid a common or rounded number
Believe it or not, there may be science behind what number could win a bidding war. A study performed by Harvard Business Review found that sellers gravitate toward numbers that are not rounded. For example, $223,900 instead of $225,000.
The reason behind this is that there’s an expectation that you put greater effort into calculating the value of something when the result is a precise number. Meanwhile, rounded numbers are viewed as possibly unreliable estimates. Bidding a number that’s not rounded or common could catch the seller’s eye.
A contingency is a condition that you put on the real estate offer. If the condition is not met, you may be able to pull out of the deal without repercussion. For example, an appraisal contingency may let you terminate the contract if the appraisal of the home’s value comes back too low.
A title contingency may let you get out of the deal if there are liens found on the property. Financing and home sale contingencies may let you out of the contract if you cannot secure a mortgage or are unable to sell your current home.
Waiving contingencies could make your offer stand out against others because the owner can sit back and relax, knowing the results of an appraisal or other factors won’t cause the deal to fall through. On the flip side, this could put more risk on your shoulders.
If you waive the home sale contingency and your old home doesn’t sell, you might not have the cash to buy the new house. If you waive the title contingency, you could be stuck repaying someone else’s debt if there’s a lien.
Skip the inspections
An offer with a waived inspection could be attractive to a seller who prefers not to have their house scrutinized. Waiving inspections is not uncommon for large condo buildings since mid-rise to high-rise buildings are constantly being looked after by the board or HOA, said Bartol. In this case, you at least know the owner had to adhere to guidelines for upkeep and maintenance.
Waiving inspections could be a riskier move for single-family homes since the upkeep is up to the individual homeowner. If you’re buying your first house, going the waived inspection route may be something to consider carefully because it could end up becoming costly. “Many first-time homebuyers don’t have a lot of liquid cash to be investing in major repairs on a home,” said Bartol.
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If you find a mold infestation, non-working appliances, or structural issues down the road after not inspecting the home, you could end up in a financial bind. Your agent can advise you on the pros and cons of waiving your contingencies in the market where you’re buying.
Put down more earnest money
Earnest money is money you bring upfront to show you’re serious about the home. Typically, the earnest money is about 1% to 5% of the sale price, but offering more could help you stand out. This money generally goes toward your down payment or closing costs.
However, you may want to choose the amount of your earnest money with caution if you also plan to waive contingencies. If the deal falls through, the seller may be able to keep the earnest money if a contingency isn’t there to protect you.
An all-cash offer could help you win a bidding war because there’s a high probability of closing, according to Bartol. The seller can sleep a little better at night knowing a lender can’t potentially refuse to issue the loan at the last minute.
Cash deals may also go through faster. “A seller does not have to wait on the buyer to get [their] loan commitment, which can take on average anywhere from 45 to 60 days,” said Bartol. Of course, not everyone has six figures to buy a home in cash, so this may not be an option.
Add an escalation clause
An escalation clause is a unique contract addition that increases your offer to a certain amount if another higher offer is submitted. Let’s say you put in an offer of $249,500 and another offer of $253,900 comes in. Your escalation clause could automatically increase your offer by a certain amount — for example, $5,000 — above that other offer.
If your offer isn’t the highest one initially, an escalation clause could motivate the seller to keep your bid in the running, and you can still set an upper limit, so you don’t go over budget.
Be flexible about the move-in date
“Price is always important, but there may be something else that is really important to the seller that could make your offer stand out,” said Bartol. It’s your agent’s job to do some digging to figure out what the seller’s needs or concerns are.
In some cases, people sell homes they can’t move out of right away. Maybe they’re getting a new home built and the builders are behind schedule, or they’re moving across the country and they need a bit more time to settle affairs before the big move. Being flexible with the move-in date could potentially help you win a bidding war.
Write a personal letter
If you fall in love with a home, you could try writing a letter explaining your interest to grab the seller’s attention. In that letter, Bartol recommends you explain all the wonderful memories you hope to create. “Attaching a photo of your newborn or family pet can go a long way as many sellers are emotionally attached to their homes,” Bartol said.
While writing a letter could help you, keep in mind that some sellers may decide not to consider letters to protect themselves from potential liabilities. The reason being that a letter gives the seller information about you and your family, and basing a selling decision on someone’s race, color, religion, sex, disability, familial status, or national origin could mean the seller is violating the Fair Housing Act.
Be in communication
Your initial offer is the start of the conversation. The seller could make a counteroffer, and there could be ongoing communication from there. If the seller engages you in negotiations, be sure to respond promptly by email, phone, or text. Your timeliness could edge out other competition that takes hours or days to respond when the buyer is itching to make a deal.
Buying a home during a hot seller’s market can be intimidating. You could look at home after home and encounter bidding wars each time you put in an offer. But the tips above could help you stand out among other buyers.
Strategies like waiving contingencies or waiving the home inspection may work but should be considered carefully. While they could help you win the house, you could lose in other ways.
Waiving a title contingency and finding liens against the home could be expensive, and making repairs after a waived inspection could be a headache. Your real estate agent can guide you on the best moves to make, given your personal situation, and they can answer any first-time homebuyer questions that you have.
Like any other part of home buying, know your budget, know your goals, and incorporate whichever of these tips align with them.
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