Two thirds the way through the 2018 first quarter and homes are going under contract before the open house. And to add to the stress, homes that are priced under $400k are receiving mega-multiple offers and the inventory is staying stagnant as owners are just not willing to move. Low inventory and a lot of active buyers ready to buy, yesterday, is the definition of a Seller’s Market and your contract won’t win the attention and ratification of the sellers without understanding a few key points.
If you are wisely using a Realtor, listen to him (or her). Yes, there is tons of information on buying homes from a variety of websites, talk shows, TV ads, friends, neighbors, co-workers and parents, but what is relevant today is what your Realtor should be providing. Sure, last year your brother-in-law bought a house with practically no money down and you want the same deal with an extra low offer and lots of money from the seller to help you close. Not going to happen, right now.
The top items that buyers have control over in their original offer that can make the contract stronger are based on the price offered, the subsidy asked for, contingencies, type of mortgage, and closing date. Let’s look at these items from both sides, the seller and buyer to really get ones head in the game.
Pricing: The seller wants to sell his house for the most money and the buyer wants to buy the house for the least amount of money AND not over pay. Sounds pretty reasonable, right? But, the price is based on what other similar homes have sold in the neighborhood, derived from market comparisons, past sales and condition and amenities offered in the various comparables. The price is discussed between the owner and the listing agent and the price is established on the MRIS.
PAUSE: Now if the price is to high, the market will tend to not make any offers on the home, because there may be other homes priced more practically that provide the same amenities and size and such. Also, if the price is to high, the owner risks that the appraisal will not qualify the home and then he may have to reduce the price during with the current contract, negotiate terms and possibly have the buyer walk away and wasted 21 days or more. AND, if the home is appraised with a FHA loan, that appraisal stays with the house for a couple of months, so the owner is now “stuck” with that price.
Because of this risk, owners will tend to price their home as high as the market will bear, but still be able to pass the appraisal process. Unless the owner doesn’t care about selling his home, it does not make sound business sense to gouge the price, If it doesn’t sell or is off the market for 3 to 4 weeks, by the time it comes back onto the market, the Seller’s Market may have ended and the market price may have dropped.
So, when making an offer, dropping the offer price below the asking price is not a good idea, especially if there are multiple offers coming in. AND, making a to high of an offer may not benefit the owner, due to the appraisal clause, which will bring the price back down and negotiations will have to resume on whom is to pay the difference. Most owners will want to avoid that scenario and simply go with the contract with the reasonable offer price.
Also, your Realtor can verify the pricing of other similar homes in the community with a quick CMA and let you know where the pricing is. This is also important if the listing agent priced to low and wants to create a “bidding war” to really maximize the sellers return and is confident that the home will appraise at the higher expected price.
One last thing on pricing. Besides the CMA, if you’ve seen a lot of homes, more than 10, to buy, you will have a sense of price for what you’re paying. And, even though the CMA may suggest a lower price than the listed price, the appraisal will work in your favor if you make a full offer at the asking price. Once you go above that listed price, then the fingers will start pointing on who should pay the difference.
Subsidy: A subsidy is the owner’s help in paying for your costs. It’s really popular during a Buyer’s Market, but less effective during a Seller’s Market. I like to equate it to going to a restaurant and asking the waiter to give you 3% of the cost of the dinner you would like to order, because you can’t afford it otherwise. Reread that last part, it’s important.
Asking the owner to give you money to buy his home, seems crazy, doesn’t it? Now, if you were the only buyer and had the opportunity to choose from 10 or more owner’s homes, sure, why not, who really, really wants to sell their house. But, in a Seller’s Market when the owner is receiving 5 or more contract offers in a few days of being on the market, why would they want to pay for your costs and give you money back?
I think people believe that when they are purchasing a $400,000 home, that the owner is making $400,000 and could spare $8,000 – $10,000, that still leaves them a net of $390k!!! Unfortunately, this is not how home selling goes. As the buyer, you have NO idea what the owner’s expenses are, why they need to sell the house or really anything about the owner and their finances.
Even if the house is paid off and has no loan to pay back, they still paid money for the house at one point, so that amount has to be deducted from the sales price to break even. Otherwise, the loan and possibly 2nd mortgages have to be paid back from the sales price. Plus there are the cost of listing the home, typically 6%, right off the top and many other governmental costs and taxes for capital gains. These are just a few, but should clearly show that the owner is not walking away with the full amount of the sales price.
And, because of that, no Subsidy is the best offer. Now, some buyers need a few extra dollars to make it through and sometimes you can build in the closing costs with the offer price, but see above and pending on high the listing price is compared to possible appraisals. Lastly, your Realtor should be able to calculate a close amount of closing costs for you to work with and perhaps finding a less expensive home is a stronger strategy.
Contingencies: Most of the contingencies in a home purchase offer help protect the buyer, so any elimination of such contingencies increase the financial risk of the buyer. As a buyer, you have to understand that and must discuss with your Realtor the pros and cons of removing these contingencies. This section is not a recommendation to do anything without proper legal and professional representation consultation.
In a home purchase contract/offer most Sellers want as few to no contingencies as possible. This is because most contingencies allow the buyer to exit from the contract without financial consequence. There are many contingencies in a Northern Virginia NVAR contract and even more that can be added with the correct form. But three of them are the most common, Home Inspection, Finance and Appraisal.
Home Inspection: This contingency has been upgraded through the past years. The basic premise is that the buyer can have a professional home inspector inspect the home and if the inspector finds items that are not working properly or are old or even broken, the buyer can then request to have the seller fix or correct any or all issues before proceeding to close OR simply void the contract completely and walk away.
Now, the option is either VOID or ask, but not both and if the buyer proceeds to ask the seller to fix and the seller says no, the buyer cannot then choose to void the contract. It gets messy and heated and at times, buyers are able to void the contract with another contingency that hasn’t expired. Remember, as a buyer, the seller does NOT have to fix anything you request, short of any contractual items that are pre built into the contract, but may be left to negotiation or interpretation.
Nonetheless, sellers prefer no home inspection or a home inspection for informational purposes only to avoid possible conflict of dealing with various findings of the home inspector. Sometimes, the listing agent will even specify that the home is sold “as is” and request that the home inspection is for informational purposes only.
As the buyer, you have to decide whether to include a home inspection or not, with the later making for a stronger offer, because the seller wants no inspection. But, FHA and HUD recommends that all homeowners have a home inspection and it could be nice to know that the house you are buying is in great working order and if not, at least you know what you may need to correct in the future. Most often, buyers who are not afraid of fixing things or plan to replace items in the upcoming year tend to save on the cost of home inspections. Other buyers who are not as handy prefer to have the security of knowing. Where you fall and a discussion with your Realtor will guide you properly.
Finance and Appraisals: These contingencies, for most buyers, should never be removed. the seller would love it if you removed, because it is saying the regardless if your financing falls through or if the appraisal is lower than your offer, you will still purchase the home. Unless you are buying the home with cash or have a large cash savings, removing these contingencies will not benefit you and most sellers expect them to be there.
“Cash is King” when it comes to these contingencies and more often than not, sellers will go for the cash offer first. But, cash offers are not as frequent, especially in higher priced homes, so more often than not, all the buyers writing contracts will have these same contingencies, making them equal and the other factors more relavant. Discuss with your Realtor on the contractual obligations involved with the financing and appraisal contingencies for more complete understanding.
Type of Mortgage: We just covered a cash deal, so that leaves three more common financing in this area; FHA, Conventional and VA. The type of financing may be dependent on your financial situation, but if you are able to choose one over the other, here are the differences that the seller is looking at and which ones can make your offer stronger.
FHA and VA Loans: These are the most common, especially for first time home buyers, because the terms are very conducive for this market of buyers. Typically, they offered low down payments, allowing first time home buyers an easier time buy a home. But, on the seller side, both FHA and VA loans require extra paperwork, extra requirements and an extra inspection that is different than the home inspection the buyer pays for. And because of these extras, that is adding more contingencies to the offer and possibly more risk in the deal falling apart.
This by NO means is saying not to use FHA and certainly if you are a veteran, take advantage of the VA loans. But, in a very competitive environment, these are not the strongest loan programs for the seller. Yet, some sellers love our veterans and would gladly help out, if all others things are equal.
Conventional Loans: Conventional loans have become more common with reduced down payment programs and even no PMI programs. And because of the lack of rules, regulations and extra forms involved in using conventional financing, this is the second best option for sellers. Simply put, less contingencies!
The financing forms is where you will find the appraisal contingency and subsidy section for the contract. Check with your mortgage provider about any amounts you can receive as a subsidy,, some programs do not allow for subsidies or capped amounts. And, remember, no subsidy is the strongest option for the seller.
Closing Date: The closing date may be an important factor for the seller. Sometimes, the listing agent will provide you with some information that may help. Generally, if the house is vacant, the sellers probably are more incline to want a faster closing. also, if you can’t or don’t want to move for more than 60 days, more than likely, you are a bit early in submitting a contract offer.
But, the closing date has to match up with your financing. FHA and VA loans can take up to 45 to 60 days to process and close. Conventional loans can take 20 to 30 days, pending on how much information you’ve already provided to your mortgage broker and how far down the process you’ve gotten. Knowing these dates and contacting your mortgage person is very important when making an offer.
Avoid delays! Writing an offer with an early financing promise is not a wise decision. Although it can be assumed that the seller will wait a couple of days if the financing isn’t ready, technically you will be in breach of the contract and may be responsible for any related costs occurred by the seller due to the delay. Especially if the seller is purchasing another home with the profits from the sale of his last home and the moving company is at his door wanting to pack up and move them. These costs could be shared or paid by you, the buyer.
So, when choosing the closing date, involve your mortgage team and come up with the best plan that benefits your situation and encourages the seller to choose your offer.
Now, go win some contracts!!! Thank you and I hope this information will help you win your next contract on that favorite home that has multiple offers on it. And, watch those rates and learn why and how from my last blog on Monitoring Mortgage Rates. Happy Home buying!!!