How to get your offer accepted in this crazy seller market?

How to get your offer accepted in this crazy seller market?

Saeed Ghaffari

Saeed is the founder of Money, Real Estate & More. With over 30 years of experience as a lender, investor and a real estate professional, he provides free consulting in these fields. To connect with Saeed, sign up for free / log in on moreandmorenetwork.com

 

Saeed Ghaffari

How to get your offer accepted in this crazy seller market?

Right before I started writing this article, I opened my email and as a loan advisor on a transaction, I was copied on the multiple counteroffer email to the buyer’s agent. I found both the email and the counter offer helpful in describing the unprecedented market condition we have been in for a while and here are the excerpts from the email and the counteroffer.

49 offers on a property, 20 of them strong and competitive enough to deserve and receive a multiple counter!  Is this ridiculous or what? Would you like to see something even more ridiculous? Read the terms of the counteroffer, picked and rearranged from ridiculous to most ridiculous order below:

 

  • Item 2. Inspection period to be 5 days or waived altogether. (Translation: rush – rush – rush, rushing into a decision often leads to mistakes and bad decisions – ridiculous)
  • Item 4. Loan contingency to be removed. (translation: You should do all loan paperwork upfront and make sure you are fully approved (so far so good). But if the lender has made a mistake in underwriting your file, or if the interest rates go up to a point that you can’t afford the payment, or you lose your job and have no income, or for some odd reason you cannot get a loan, you are contractually obligated to purchase the house or you lose your initial deposit of 3% of the purchase price to the seller for wasting their time – ridiculous)
  • Item 3. Appraisal shall be waived or maximum appraisal shortage coverage possible (translation: For example, if you waive the appraisal and you offer $700,000 for the property and it appraises at $600,000, you are contractually obligated to pay $700,000 for the property. If you offer shortage coverage of let’s say $50,000 and your offer is at $700,000, you are contractually obligated to purchase the property if the property appraises at $650,000 or higher – absurd)

Item 10. 60 day leaseback provided to seller free of charge (Translation: Seller gets to stay in the house for 60 days after you purchase the house from them for free, while you pay for the property monthly loan payment, taxes, insurance, homeowner association (if any) and the same for your current residence. In other words, you cover the housing expenses for 2 properties, the one you just purchased and your current residence for 2 months and seller gets to live in your property RENT FREE FOR 2 MONTHS – absurd – crazy – ridiculous – unfair)

What I described above is not unique to this particular seller or transaction. Unfortunately, it’s very common these days. Not long ago, I was advising a buyer on his mortgage who offered $70,000 over the asking price and the property was sold to another buyer who offered $100,000 more than he did ($170,000 over the asking price) on a property that was listed for $650,000 in Irvine, CA. The property went into escrow for $820,000.  Soon after, my buyer ended up offering $100,000 over the asking price on another property with similar ridiculous terms and finally closed the transaction. I am currently working with another buyer who has seen more than 50 properties with his agent, written close to 10 offers, offering tens of thousands over the asking price to no avail.  I have an earful of similar stories from other agents and their buyers. The more I dive into writing this article, the more frustrated and dumbfounded I get about this market and sellers’ ridiculous demands.

Why the sellers are so ridiculously unreasonable & unfair?

Why has life become all about money only and the bottom-line dollar figures and nothing else?  What goes on in the buyers’ head, what they are thinking and why they put up with it? Why isn’t there anything anyone can do to fix it?

Fixing the situation and teaching sellers morality and life lessons is neither my expertise nor this writing’s objectives. But if you are a buyer, I can throw in my 2 cents and help you improve your approach to sellers and increase your chances of getting your offer accepted and better cope with the situation when you encounter a ridiculous response from a seller.

I often get asked about the secrets of successfully buying a house in this market.

My response is always the same, simple and short in 6 words;

be ready, patient, quick and realistic.

Here is what I mean by ready, patient, quick and realistic.

Be Ready: Do all your homework upfront. Get all your down payment ready and put it in your bank, preferably in one account. If you must sell a property, a car, or arrange for a gift from family for the down payment, have that all done before you start writing up offers, because with your offer, you will be asked to present a proof of funds to cover the down payment and closing costs. Unless you have a clean proof of funds with sufficient funds to cover all expenses, you are not getting your offer through.

If your credit needs improvement to get you a loan or a better interest rate on your loan, do it ahead of time. You may have to pay off a credit card, take care of a derogatory / erroneous reporting on your credit report, or take other actions to improve your chances of getting your loan at a favorable rate, do all that upfront.

Shop for your loan, choose a right lender (a topic for another article), get full credit approval (not pre-approved), this means your financial and credit package has been reviewed, underwritten and approved by your lender’s underwriter with all conditions met. This task is the lengthiest part of getting your credit approval, especially for self-employed people and those with complicated income sources. Your final approval should be only subject to the title report, appraisal report and the terms of your purchase agreement and nothing else. When you are in this ready position, your chances of getting your offer accepted is highly increased.

Be Patient: As you see from the example of the seller counter-offer I shared with you above, you will encounter many unreasonable sellers and agents through your house hunting process in this market.  You will be countered with ridiculous terms by unreasonable sellers and you will have to compete against some buyers who are willing to pay through their noses for a property, as if the world will end if they don’t buy one.  When you encounter situations like this, exercise patience. Sit back and let someone else pay an arm and a leg for the property. There will be other sellers, some more reasonable, and other properties out there. Your turn will come and you will end up buying a property, and the right one too, if you do things right.

Be Quick: A few years back when buyers considered a property for purchase, they took their time on making a decision. Often, they saw the property twice or more before making an offer. Some even showed it to their parents or friends and got their opinions too. Once they figured the property is right, then they did their homework on the neighborhood, schools, and the community for the second time. And after everything checked out, they slept on it for another day or so before they finally wrote an offer.  They asked and got 30 or 60 days escrow periods, long contingency periods and took their time shopping for a loan and getting it secured with a lender. They negotiated for closing costs, seller concession and minor repair to be fixed.  Well, times are different now. If you find a house you like, there is no time to show it to cousin Tom or uncle Harry. You must make quick and smart decisions and move fast with it.

Be Realistic: We live in an unprecedented, historic, seller advantaged market. This is caused by low inventory and high demands. There is lots of money in the market, lots of young people with high income (tech space), and they are driving the prices up. Under current situations, a buyer needs to over bid and accept all seller’s reasonable terms. No questions asked.

Buyers should have all T’s crossed and I’s dotted. Be patient and do not cave into sellers’ unreasonable demands and be quick when the opportunity arises and deal with the situation in a very realistic manner.

With consideration to the above principles, there are also strategies that may be deployed to enhance one’s chance of getting his/her offer accepted. The residential purchase agreement in CA is an 18 page long legal contract. The items of importance to both seller and buyer and those that may make or break a deal may fit in no more than half a page and I will address them below.  The rest are mostly required legal mumbo jumbo or items of less importance that neither the seller nor the buyer could care less about them.

Important Items:

Price: The seller wants to sell the property as high as possible and the buyer wants to pay the least for the property and is the number one item that could make or break a deal.

Financing Terms: Cash buyers are most welcomed and desired buyers by the sellers as they come with no loan or appraisal contingencies. Since the cash buyers are aware of their advantage to the sellers, they usually don’t offer the highest price for the property. That gives buyers who depend on financing a chance to compete for the property. After the cash buyers, buyers with the most down payment and a full loan approval have the best chance of getting their offer accepted, as they pose the least chance of backing out, due to their inability to obtain a mortgage. Financing terms is important but is not a deal breaker if the other terms and conditions of the offer are desirable to the sellers.

Loan and Appraisal Contingencies: When a buyer makes an offer on a property without a loan contingency, he is obligated to purchase the property, even if he/she cannot obtain a mortgage. If the offer is made without an appraisal contingency, the buyer is obligated to purchase the property even if the property does not appraise to the purchase price.  If the buyer has the financial means to purchase the property without a mortgage or to cover the gap between the purchase price and the appraised value, removing the two contingencies highly increases the buyer chance of getting his/her offer accepted. Should the buyer not have the financial means to carry his contractual obligation to the seller without the mortgage or to pay for the difference between the appraised value and the purchase price on top of his down payment and closing costs, removing such contingencies come with the risk of losing the buyer’s initial deposit to the seller upon cancellation of escrow. In a normal market, loan and appraisal contingencies are standard and are not considered deal breakers, however under the current market conditions, they are potential deal breakers, especially with unreasonable and greedy sellers.

Property Inspection: Inspecting a property before finalizing a decision on its purchase is normal and highly recommended. It provides buyer with a report from a licensed professional on the property’s condition, defects, and any damages invisible to an untrained eye of a typical buyer or his/her agent. In a normal market, after receiving the report, the buyer may ask from the seller for any concession towards any present defects or damages and if not granted, will have a choice to proceed with the purchase or cancel the escrow without losing his/her initial deposit to the seller.  With the market the way it is now, most sellers enter a contract with the buyer with the property in its As-Is condition, making it clear that they will not pay for any repairs, should there be a need for one, and the only choice the buyer is left with is cancelling the escrow if they don’t like the property’s condition.

Escrow Period – Due Diligence Period – Contingency Removal Periods:

Escrow Period: Escrow period is the length of time a buyer offers a seller to complete and close the transaction. It usually takes 30+ days for a typical transaction with mortgage financing involved to close during a normal market. However, for the buyer who has obtained a full loan approval ahead of time, subject to an appraisal and the preliminary title report, barring any unforeseen appraisal or title hurdles, such escrows can close inside the 30-day period, closer to 20 days.  Shorter escrow periods are more desirable to the sellers, but it is not a deal breaker on the contract, especially if the purchase price and other terms are good enough to the seller to compensate for the longer escrow period.

Due Diligence Period: This is the period during which a buyer can do all the homework on the property, neighborhood, community, and everything related to the transaction and finalize his/her decision to move forward or not. The most important task a buyer does during this period is hiring a licensed home inspector to inspect the property and provide him with the report of any damages or defects present in the property. If the property is a condominium, reviewing the homeowner association rules and regulations referred to as CC&R (covenants, conditions & restrictions) is as important as having a home inspection done on the property, as the CC&Rs dictate a certain lifestyle in their community that may not be to everyone’s liking. Buyers who find the property, the community or the CC&Rs not to their liking, may back out of the transaction during the due diligence period without risking the loss of initial deposit to the seller. Sellers like this period to be as short as possible, in order not to lose too much time, in the event the buyer wants to back out.  The standard due diligence period in CA is 17 days, but in today’s market conditions, buyers either waive their due diligence period or shorten it to as low as practical to get their homework done, and yet, make their offer attractive to the sellers.

Contingency Removal Periods: The 3 standard buyer contingencies on the real estate purchase contract are the Due Diligence, Appraisal and Loan Approval contingencies. There are times a buyer has other contingencies such as selling their current residence or closing on the sale of their current residence. An example of another buyer contingency is receiving the down payment from another party, either as a gift, a bonus from employer or maybe from selling a car or a boat, etc. In a frenzy market like what we are experiencing today, buyers with contingencies other that the 3 standard ones don’t stand chance to get their offer accepted on a turnkey ready to move in property. The due diligence period was already covered above and the appraisal and loan approval contingencies, as much as they are out of buyer’s control, better be reasonably short for the offer to have a chance to get accepted. In the past 12 months, I have seen many buyers making offers on properties with no appraisal contingencies and having to cover the difference between the appraised value and the purchase price in tens of thousands of dollars. For all the reasons stated above, the shorter these periods are the more attractive the offer is to the seller.

It’s worth noting that the sellers also have contingencies for selling their property from time to time. An example of it is finding another property to purchase, finalizing a divorce or other things.  In this market, the sellers are in the driver’s seat, and they can call the shots and if you like their property for the price they have accepted to sell it to you, you better be ready to accept their terms.

What I covered above so far, is nothing but a piece of education painting a picture of today’s real estate market reality. What you are about to read below are a few tips on how to improve your chances of getting your offer through in such a highly competitive market without compromising your principles and closing your transaction.

To start with, there are 2 types of sellers in the market, the first type, I call them the “un” type, un-reasonable and un-fair, like the one I shared their counter offer above.  With the Un sellers, cash buyers who offer them the most get the property. If there is no cash offer on the table, either the most desperate buyer ends up in escrow with them or someone who plays by the same rules as they do. The latter accepts all the terms upfront, gets the property under contract and while in escrow, starts hackling, negotiating, and asking for extensions of time and making life difficult for everyone.  Although they have their initial deposit at risk, they know how to play the game and avoid jeopardizing it. At the end of the day, sometimes these buyers close escrow and other times back out and the Un seller ends up taking the next best back-up offer or go back to square one and put the property back on the market. The second type are reasonable and fair sellers. Although reasonable and fair, they still want the highest price for their property and the best terms and shortest escrow period. When dealing with fair people, you have a better chance of reasoning with them, if you find a way to enter a contract with them. Before I continue on with an effective strategy to get into a contract with a seller, let me share with you a story on a real situation that I was the advisor to the buyer on their real estate purchase (I had referred the buyer to the realtor) just a couple of weeks ago.

The buyer’s offered price of $1,750,000 was the highest bid and all other terms were negotiated and accepted, and the escrow was opened.  The buyer was purchasing the property with 25% down and I had his loan pre-approved with the lender beforehand. The buyer had budgeted $100,000 to spend on upgrades before moving in. The due diligence period was 10 days. Buyer had obtained an inspection report within the first 5 days and realized that he had to repair a few items before he can upgrade the property and his total repair and upgrade cost would be near $150,000. The property was sold to him in its as-is condition and the seller was not obligated to make any repairs or pay for one. He called me and said he felt he has overpaid for the property and unless he can get the seller to reduce the price or pay for all or part of the needed repair, he must reconsider his purchase. He had a few days left before his due diligence period expired to back out of the deal without losing his initial deposit. I told him to consider the following:

  • $150,000 repair and upgrade cost are a personal choice, and it does not mean the property is oversold.
  • There are multiple buyers in a back up offer position waiting to take your place. If you hit the seller with a dime today, they will cancel your escrow immediately, you get your deposit back, you have wasted your inspection fee of $350 and over 6 months of time viewing properties and writing offers.

After I stressed on the above two items and made sure he understood them, I asked him if would still want to buy the property if there was a way to manage the finances (I wanted to make sure he was not playing games), to which he said yes. Next, I asked him if he is willing to risk addition $700 whether he gets the property or not, but without any promises, will increase his chance of getting some sort of a break on it, to which he replied yes. Next, I told him here is what I will do for you:

  • I called the lender and made sure the appraisal is ordered and scheduled immediately. I wanted to display commitment and show the listing agent and the seller the buyer is committed and has every intention of closing on the transaction.
  • Since he had a legitimate concern for the repairs, I asked his agent to request an extension on the due diligence period so he can send his contractor out for further assessment of the repairs. This action was showing the seller and the listing agent that there were real concerns about the buyer’s post-closing expenses.

I already had the loan pre-approved by the lender and by the time appraisal report came in, we had the title report and all the other paperwork, and we had a full loan approval, ready to move forward with closing disclosures.  In the meantime, I also had the lender underwrite the loan with 20% down payment (5% less) to see if we can reduce the buyer’s out of pocket expenses. The loan was also approved with the lower down payment, but the interest rate and the loan fees were higher with the 80% loan to value program. We were about 25 days in escrow at this time with due diligence contingency still in place and a full loan approval in hand. I called the buyer and told him if you want to hit the seller for any reduction in price or concession, without any guarantee of acceptance, the time is now, for the following reasons:

  • You are only a few days from closing, the seller is vested in this transaction and most likely has planned their move and are ready to get on with their life and the chances of them not wanting to go back to square one and go through the same process with another buyer is much higher now than if you would have hit them with your request only 10 days into the deal.
  • Both realtors, the buyer agent and the listing agent are also vested in this transaction and will do their best to keep the transaction together and avoid going back to square one.

Although he was close to the end zone, I advised the buyer to be realistic with his expectations and be respectful to the seller and their position. He made a request for $30,000 repair fees, ended up getting $5000 from the seller, $2500 from his own agent and $2500 from the listing agent, a total of $10k. The property had appraised at purchase price, he chose to go with the 80% loan to bring less down and closed the escrow shortly after.

The most important lesson in the above story is that there are techniques and strategies used to ask for extensions, discounts and concession. And the timing of asking for things is most crucial to the success of receiving what you are asking for.

To be able to apply such techniques and strategies, one must get into a contract with the seller first.  To get into a contract, remember the most important items to sellers, in this order, 1. Price, 2. No to minimum contingencies, 3. Short escrow period, and 4. Short due diligence period.

With this in mind, take the following steps:

  1. Get your loan fully approved subject to the appraisal and title report.
  2. Get your down payment all together in a checking or a savings account (liquid asset). If your money is in stocks and retirement accounts, there will be time necessary in accessing them and it does come across to the sellers the same way as the money in a checking or a savings account.
  3. Offer the highest price you can afford and are willing to pay for the property. In the current market, not only there is no room to negotiate on the price at this stage of the game, but you may also have to offer quite a bit over the listed price to give your offer a chance to get accepted.
  4. Never remove your appraisal contingency in your offer ‘till the work is done and the property is appraised, unless you are prepared and have the means to pay the difference between the appraised value and what you are paying for the property.
  5. Never remove the loan contingency in your offer ‘till the loan is fully approved and you have signed the closing disclosures and the lender is ready to draw the loan docs, unless you have the means to pay cash for the property or can afford to lose your initial deposit. As rare as it may be, I have seen the lenders pull out and not fund the loan even after the loan docs have been signed in the past. So, there is always a chance that the lender may back off from their loan commitment. Be sure to work with an experienced loan officer with an established and reputable lending institution.
  6. Assuming you are dealing with a reasonable seller and your offered price is good enough, you may get a reasonable counteroffer. If the property is in a desirable area, the chances are your offer is one of many and for you to have a chance to buy the property, you may have to accept the seller’s counteroffer terms and during the due diligence period, either move forward, renegotiate any part of the transaction or back off.
  7. To have the best chance of getting the seller to work with you on any of the terms of the purchase contract, such as extending the due diligence, appraisal, or the loan contingency period, you need to demonstrate that you have all the intentions to close the transaction by getting the inspection done asap and have the lender order the appraisal asap. The key to get the seller to cooperate with you is to have your agent and your lender to communicate on a regular basis with the listing agent and keep them apprised of your activities and progress on your due diligence and the loan status.

I hope the above article sheds light on the reality of today’s real estate market and helps ease the pain for the buyers who feel they must purchase now.

Whether you are buying, selling, financing or investing in real estate, feel free to connect with me.  I will be happy to offer you my 2 cents accumulated over 30 years in over 3000 transactions.

Saeed Ghaffari, Founder

Money, Real Estate & More

Moreandmorenetwork.com

 

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