February 22, 2011
Dealing with multiple offers in real estate
In a hot market, there are more buyers than homes for sale. Prices rise, and the days a home is on the market may shorten to a week or even less. Some homes will sell before they are even registered in the local MLS. This can mean that some sellers are presented with multiple offers. How can you position your offer to be the one the seller accepts? The best way is to gain an understanding of how multiple offers work and how they benefit the seller. Multiple offers mean that the seller has their pick of offers, but that doesn’t necessarily mean a disadvantage for you as a buyer. You just have to determine how badly you want that particular home. If you want to compete in a multiple offer situation, here is what you will need to know: there are two things that matter to the seller – price and terms.
To be that winner you have to hit the right note with the seller where the other contracts don’t. Just to give you an idea of how important terms are to the seller, let’s look at a hypothetical situation. You offer a seller the highest price for their home, but you put in the contract a condition that you must sell your home first before you close on the seller’s home.
It may seem reasonable to you, but this a condition that all sellers do not like. When they have a choice, they will not accept this condition. Sellers do not want to wait to see if a buyer sells their home first, before they know they have made a firm sale and will generally accept an offer with a lower price to avoid such a condition. The seller’s desire is to accept terms which meet their own needs, so keep conditions to a minimum.
Ask your agent to find out from the seller’s agent what terms will be most favorably viewed by the seller. If you can’t get there first, get there the best way you know how. In a multiple offer situation, the seller is not under any obligation to negotiate with the first buyer who submits an offer. So, if your offer is not the first offer, don’t panic. Because the seller has the liberty of choosing the best offer to negotiate, your offer stands a chance of being noticed.
As you already have learned, the seller will accept the offer that best reflects their needs. They not only consider price, they also look at such things as the buyers financial situation, what the buyer wants included or excluded from the sale, and the possession date. That means room to negotiate for you.
Believe it or not, the highest price doesn’t always buy the home. Sellers have a number of needs aside from price; they want a quick closing, or a delayed possession, or they may wish to exclude items in the home, and so on. Any offer which puts any of these goals at risk will not be looked upon as favourably as others that come closer to what the seller wants. Sellers are very interested in the buyer’s financial capability of completing a purchase.
A seller who accepts an offer from an unqualified buyer is taking a substantial risk. Should the offer fall through because the buyer fails to qualify for financing, the home will lose valuable marketing exposure and momentum. In a hot market, many sellers won’t even entertain offers presented by unqualified buyers. (Hint: Get pre-approved for a loan. Not only will you know exactly what you can spend, you will demonstrate your seriousness to the seller.)
Your seller may have a special need that is more important to them than price. For example, your seller may have a need to sell quickly, but remain in the home for a period of time until school is out or until a transfer takes place. Your ability to negotiate on this point may be more important than coming up with the highest dollar amount. You can offer a short-term lease after closing or offer to delay possession to accommodate your seller.
You can do a number of things to get the seller’s attention, such as work with your agent to determine the seller’s “hot” buttons, and act accordingly within your budget and your own needs. Deadlines can be deadly. Don’t assume that the seller has to respond to your offer by your deadline. Deadlines are only important to the seller if they plan to accept your offer without any changes.
To make their acceptance of your offer valid, they must accept it within the time limit you specified. If they are not going to accept your offer as presented and are going to make changes to the offer to see if you will accept their changes (this is called a sign back), they do not have to sign your offer back to you within your time period. They will be making a new offer to you and they will then put their own time limit for acceptance on their offer to you. Do not falter in the negotiations. Do not assume that because your seller is negotiating with you that they can’t entertain other offers.
All it takes is for one party to make a change that the other party doesn’t accept and negotiations are over and another offer can be presented and accepted. The seller may be waiting to see your best offer before accepting another offer that may already be on the table. Multiple offers often allow sellers to improve upon the asking price or terms.
The seller’s agent may be instructed by the seller to ask the buyers to “submit improved offers” and may set another presentation time where the seller will either accept the best offer or decide to “work with” the best offer to see if they can make a deal. There are many variations of the offer game and there are no specific industry guidelines in how multiple offers are to handled, but rest assured that there are very specific industry rules that everyone has to be treated fairly.
Hot markets don’t stay hot forever. They may be hot for a while, but there always comes a time when they will cool, at least for a while. The home you are so anxious to get now may level off in value very shortly. Make sure that this is the home you want no matter what the market conditions say. The home’s history may be helpful here.
Ask your agent to provide you with the home’s history or a history of comparable homes in the area. If similar homes have been sold several times in the last few years, the history can tell you how much was gained or lost by the sellers involved and what current price levels are, or at least were. Also, look at the affordability of the home. Are the extra considerations you are offering to stay in the game really worth it? Do they price the home out of your range? Will you be able to afford the other costs associated with move-in such as furniture and updates? Know when to throw in the towel.
There may come a time when it is wise to simply give up and move on to another home. Some sellers, in multiple offer frenzy, will simply make unreasonable demands and some buyers will accept them. Some offers will go beyond what can be justified by recent sold comparable homes or local lender guidelines. Lenders have a ceiling (created by prices of recently sold comparable properties … the appraisal).
Lenders are required by law not to lend more that a certain percentage of an appraised value, depending on the type of loan and insurance paid. In no circumstance can a lender finance more than 100% of the appraised value of a property. You should throw in the towel when you feel that the price has gone too far above what an appraisal might suggest.
The best way to position yourself as the buyer whose offer is accepted is to work closely with an agent who can help you step by step; from getting pre-qualified for a loan, to helping you find homes in your pre-approved price range, to showing you current market value statistics, to helping you negotiate the home of your dreams.