Making A Competitive Offer In a Seller’s Market

The Arizona real estate market has been swept with low inventory and a surge of incoming buyers. I’ve seen and heard countless stories of 5, 10, even 20 offers on various listings. With finite resources and low inventory, it can seem impossible, as a buyer, to make a competitive offer that will win you the deal. Outside of the emotion that comes with picturing yourself in the perfect home, there are a ton of logistics, document signings, and stress that can come with submitting your offer. So, as a buyer in a raging market, what things can you do to make your offer stand out among the rest? Continue reading below!

Tips for Making a Competitive Offer to Purchase

It may come as a surprise, but many of the steps taken to make your offer competitive happen before you look at homes. Why? One major step is setting the appropriate expectations and guidelines to start your search. What goes on paper will be informed by those guidelines and it can seriously help you make your offer competitive without taking on unneeded property and financial risks. It’s also important to remember that working with a great real estate agent who knows the lay of the land and can help build a custom-tailored buyer’s strategy for you, is key!

The Three B’s

Bank. Budget. Boundaries. Sounds riveting, right? Here’s the thing, as a buyer, you need to understand what type of financing you can get, what you can afford on a monthly basis, and where you draw your financing line. Before you start swooning over homes, it’s important to do the following:

Bank: Determine What You Can Borrow

Start your conversation with, and get pre-qualified by, your lender before you do anything. Make sure you understand what you are able to borrow, what your estimated escrow payments will be, and the rough interest rate you can expect. Better yet, get that interest rate locked in!

Budget: Determine What You Can Afford

A bank will tell you what you are able to borrow. This is entirely different than what you should borrow. Look at your monthly expenses and determine how much you can afford to spend on your monthly mortgage payment. It’s okay to work with your lender to reverse engineer this a little bit. For example, if you tell your lender that you want to spend $3,000 a month on your mortgage payment, they can tell you the loan amount that would put you there.

Don’t forget that buying and moving into a home comes with lots of expenses. From closing costs, to furnishing and repairs, you’ll want to have a separate budget set aside for these items. As a general rule of thumb, you don’t want to rely on savings to contribute towards your monthly payment long-term. Look at your cashflow and expenses instead to determine a healthy mortgage payment.

Boundaries: Setting Them Up Will Help Set You Up for Success

Here comes the difficult part, setting your upper boundaries. Particularly in a seller’s market, it’s important to set your home search up below your maximum price range. What do I mean by that? Let’s say you’ve spoken with your bank, you’ve looked at your finances, and you’ve determined that the maximum home price you can afford is $500k. Many buyers will head over to Zillow and plug in their search at $500k and start oo-ing and ahh-ing.

Rather than taking this approach, you may want to consider discounting your top dollar by 10-15% and starting your search there. Why? In a seller’s market, there are generally multiple offers on a home and you’ll want to have some wiggle room to beef up your offer if needed.

How It Can Make Your Offer More Competitive

Seller’s agents will strategically list a home at a price they think will drum up offers because bidding wars are GREAT for sellers. By starting your search at $425k – $450k, you’ve created a nice buffer that will allow you to offer above asking if you find the right home. It beats setting your heart on a $500k home without the wiggle room to make your offer competitive.

Spend Time Setting Expectations

Once you’ve determined your budget and your boundaries, it’s worth spending some time online or with your real estate agent to set your expectations for homes you will encounter. This is especially important if you’re moving from another state, city, or neighborhood. Money goes different lengths in different places and it’s good to know what your money will buy you. Here are some things to focus on:

Home Size

Have your real estate agent provide you with average price per square foot in your target area. Take your boundary number and divide it out. For example $450k at $254 per square foot will land you with a home that’s around 1,800 square feet. 

Amenities

Do homes in your target area and price have granite countertops? A pool? Nearby parks? Be sure to understand what your money will get you. Remember that, in time, cosmetic shortfalls can be repaired or enhanced. 

How It Can Make Your Offer More Competitive

Understanding what you will and won’t get will take a lot of the buyer emotion out of the transaction. Timeliness is essential when it comes to making an offer on a popular listing. A pool may be on your bucket list but if your budget doesn’t allow for a pool, you’ve already set this expectation with yourself upfront.

Understand How You Can Improve the Competitiveness of Your Paper Offer

There are a lot of items seller’s and their agents prefer not to see in incoming offers. Each of these items comes with their own benefits when making an offer competitive. That being said, there are also risks to a buyer with each of them. Be sure to discuss each one of these with your real estate agent and/or your lender to ensure you understand their repercussions.

Earnest Money

Earnest money is essentially your “skin in the game”. Submitting more earnest money with your offer generally indicates to a seller that you are more serious. Why? Because if you, the buyer, fail to comply with any portion of the contract, the seller has the advantage of claiming your earnest money (without you getting the house!). You will generally have to submit some form of earnest money but the amount should be discussed in detail with your agent.

Buyer Sale Contingency

A buyer sale contingency refers to you needing to sell an existing property to finance the purchase of this new property. It protects the buyer in the event that their existing home doesn’t or can’t sell. It’s very typical for buyers to have this need but seller’s don’t particularly like taking on the risk. In essence, they will wait for your deal to go through before they get their check. If something with your sale falls through, you get your earnest money back and the seller has to re-list their home. It’s not always an option to waive your sale contingency but it can definitely make your offer stand out among other offers that may or may not include this clause.

Financing Contingency

Like it sounds, a financing contingency protects you in the event that your lender won’t underwrite your loan. Unless you are paying cash, it’s generally not advisable to throw this clause out. This is because if you waive this and then your lender says “no can do”, you’ll still need to find a way to pay for the home on your offer terms or forfeit your earnest deposit to the seller.

Appraisal Contingency

The appraisal contingency waives your right to back out of the transaction based on the appraisal value. In a seller’s market, this can be tricky because home’s that end up in a bidding war may appraise for less than you’ve offered. Waiving your appraisal may not be an option if you need financing to purchase the home as your bank may require it. Talk with your lender to see if this is an option for you and ask your real estate agent to produce a thorough Comparative Market Analysis (CMA) for your home to get some sort of understand as to the home’s true market value. 

Inspection Contingency

Another item that can be waived in your offer is the inspection contingency. When this is waived, the buyer is still allowed to have an inspection but they are unable to cancel the contract for anything that arises during the inspection. I generally do not advise my clients to take this route unless they are planning a total gut rehab. Even then, it’s good to know the condition of major items like the sewer lines and structure foundation. Talk this over in length with your real estate agent.

Repairs and Seller’s Credits

In general, the fewer costs and repairs you ask the seller to handle, the better. This is especially important up front. It’s not recommended to ask for any money in your offer. Remember that boundary we set a few steps back? Talk with your real estate agent about balancing your “wiggle room” with what you may need for repairs on a property. This is probably the least risky item to waive in a contract, especially if you’ve seen the home and have a general understanding of its condition. You can always ask for seller’s repairs or credits after your offer is accepted and you have your inspection report to reference. 

How It Can Make Your Offer More Competitive

There are many levers you can use in your offer to make it stand out among the rest. However, it’s important to understand each one and what you might be giving up by electing to waive one or more of them. Speak with your real estate agent and lender in detail on all of these.

Personalize Your Offer

When a seller receives multiple offers, it can sometimes be overwhelming for them. This is especially true if many of the offers are neck-and-neck. In competitive situations, I often have clients write a brief, but heartfelt, letter to the sellers thanking them for the opportunity and letting them know why they love the house and how they envision their lives there. It might seem like a silly task but I’ve actually had clients with less-competitive offers win the deal because of this. 

How It Can Make Your Offer More Competitive

Making your offer a little less transactional can add a human component to the process which some sellers might find favorable in their decision making process. 

Finite Financing Doesn’t Mean You Can’t Get the Deal

In summary, it’s good to remember there are a lot of different ways to make your offer to purchase a home more competitive. Don’t get discouraged by a limited budget or multiple competing offers. A good real estate agent will work with you to appropriately set expectations. With some good strategy and a little luck, you could be moving into your dream home before you know it!

Need Help Navigating the Seller's Market?

As an Arizona native and real estate agent, I’m here to help you navigate this tough market as a buyer. Contact me today and let’s start your real estate journey!

Photo by Adeolu Eletu 

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Madison Wetter
Realtor®
My Home Group

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