In a market
where multiple offers are common and cash buyers are showing up in huge
numbers, it is becoming increasingly difficult for buyers to get financed
offers under contract.
We are 125
days into 2014, and by my count, I have written 24 offers for financed buyers
this year that have not been accepted.
Every one of those was a multiple offer situation.
This is a
stunning turn of events. The Denver real
estate market remains as hot as any in the country, and I am amazed every
single weekend at the massive numbers of buyers out swarming the market as I am
showing homes.
Because the
same question comes up week after week – “How do I make my financed offer more
competitive?” – I am going to share a number of strategies that have
been effective in 2014. Keep in mind
that many of these strategies involve risk, and they are not for
everybody. But if you find a property
that is truly worth competing for, here are some winning negotiating tactics
than can help you break free from the pack:
INCREASED EARNEST MONEY – The earnest
money deposit is effectively a down payment on your down payment. If you purchase a $300,000 home with a 10%
down payment, your total down payment is $30,000. If the seller is requesting a $5,000 earnest
money deposit, that $5,000 is held upon contract acceptance by a neutral
third-party title company and credited to your down payment at closing. Earnest money is refundable under numerous
scenarios, including a cancellation of the contract based on inspections,
appraisal, title, HOA documents, or the inability to obtain financing.
Increasing
the earnest money deposit does not necessarily create more risk for a buyer,
since that money is generally refundable (unless otherwise specified in the
contract) based on the triggers outlined in the paragraph above.
Increasing
your up-front deposit, say from $5,000 to $10,000, can imply a seriousness to
the seller which is helpful in your negotiations without greatly increasing
your risk. It’s still credited to your
down payment, and it’s still refundable, but it implies a higher level of
commitment.
Some buyers
are going as far as committing their entire down payment ($30,000, in this
case) as earnest money. That’s
dangerous, because it’s a lot of money, but obviously effective in standing out
from the crowd.
STAGGERED EARNEST MONEY RELEASE – Ready
to step it up? Offer to allow portions
of your earnest money to go “hard” and become non-refundable early in the
process. For example, if you have a
$5,000 earnest money deposit, propose that $1,000 of the earnest money go “hard”
after inspections; $2,000 goes “hard” after the appraisal; and the balance goes
“hard” upon loan approval.
Yes, you are
now committing real money that will be lost if the deal doesn’t close. Can you lose money under this scenario? Absolutely.
If you want to compete, however, you may need to accept this risk.
PAY TO PLAY – Ready for some real
craziness? Then how about letting a portion
of your earnest money go “hard” and become non-refundable the minute the seller
signs the contract?
In the
scenario above, with a $5,000 deposit… you could propose that $1,000 goes “hard”
upon acceptance; $1,000 goes “hard” after inspections and the balance goes “hard”
after the appraisal.
This means
before any inspection, before any appraisal, before you really have any
detailed information about the property (other than what is available through
public records and the MLS), you are committing non-refundable money (at least
$1,000, in this case) to the transaction.
If you
choose to do this, you had better be confident about your financing, because
you are putting your neck (or wallet) out from day one. For serious buyers only.
THE “AS IS” SALE – This has become
increasingly common in 2014, and I actually wrote about this back in February (when I listed and sold a home “As Is”, before it was trendy). If you have a comfort level with the
condition of the property, we include a clause in the contract that says “Inspections
are for buyer’s information only. Seller
shall NOT be asked to make any repairs.”
This takes
pressure off the seller, but remember, the seller has virtually all of the
leverage here. An “average” offer isn’t
likely to cut it, and if the home has serious defects, your only recourse is
backing out of the contract altogether.
NO APPRAISAL CLAUSE – In a market with
double digit appreciation, appraisals are an issue. That’s because appraisers look backwards, at
past sales, while buyers are looking at present demand (or even projected future
value) when throwing themselves contractually at new listings.
2014 will go
down as the year of appraisal hell for real estate brokers. Truth is, it’s really hard to get homes to
appraise in this market, where values for lower end homes have been going up as
much as 1% per month.
The lender
will only finance based on the lower of the contract price or appraised
value. So what does this mean in real
life?
If you offer
$300,000 for a home and propose a 5% down payment, your down payment is $15,000
and your projected loan amount is $285,000.
But if the property appraises for $290,000, the lender is only going to
lend on 95% of the appraised value, or in this case, $275,500. Since the contract purchase price is
$300,000, your down payment requirement just went from $15,000 to $24,500. If you don’t have the money to cover the
difference, and the seller won’t lower the price (in a hot market, he won’t),
you’re dead.
So buyers
who have sufficient reserves for an increased down payment (or buyers who are
on good terms with their parents, who may have the money) are increasingly
waiving the appraisal contingency, which obviously is highly appealing to a
seller who wants top dollar and minimal risk.
And what seller doesn’t want top dollar?
THE ESCALATOR CLAUSE – Are you scared
yet? If the previous suggestions haven’t
put a good shock into you, maybe this one will.
It is essentially the real estate equivalent of the “nuclear option”.
An “Escalator
Clause” written into an offer essentially says that the buyer agrees to beat
any bona fide written offer submitted by a certain deadline by a fixed amount,
say $1,000, all the way up to a certain capped limit.
What does
that look like in real life?
If a
property is listed for $250,000 and there are multiple offers, it is
increasingly common to see clauses that say “Buyer agrees to beat any bona fide
purchase offer submitting in writing by 12 p.m. tomorrow by $1,000, up to a
maximum cap of $262,000 (or whatever number you are willing to go to). Buyer agrees to waive appraisal objection
rights and, in the event of a low appraisal, shall bring in any additional
required down payment funds from a lender-verified source, with confirmation of
such funding provided to seller and seller’s agent within 24 hours of receipt
of appraisal.”
There are
other variations of how that can be written, but you get the idea.
This is
serious stuff, and it’s not pleasant to talk about. It is my sincere hope that you won’t have to
break out these “weapons of risk and expense” in your negotiation… but it’s
possible you may need to.
In 19 years
as a broker, I have never seen more cutthroat competition among buyers than I
have seen in 2014, and frankly, if you are working with buyers, it sucks.
If you are
looking to buy in 2014, you have to ask and answer two questions:
Where do I think prices will be a year?
Where do I think interest rates will be in a
year?
If, based on
your own study and research, you believe the answers to these two questions are
“higher than today” and “higher than today”, you may need to break out and
carefully incorporate these strategies in your next negotiation.
Because
there’s a good chance the buyers you are competing with have already done so.
