So, you want to buy a house. We know how important it is to you. You and your family might have been working harder than normal just to get yourself a place you can call your own. It’s all nice and adorable until you get into the market.
The housing prices have gone over the fence a long time ago. Recently, the demand for single family homes are outrageously high. At the same time, the demand is high as well. Ironically, the demand is one of the primary reasons behind the higher price of the single unit homes!
As a result, the sellers get more than one offer on their properties and it gives birth to bidding wars. The highest bidder often takes the win home. In this case, taking the key home.
But there are ways you can make a viable offer and close the deal without breaking the bank. In this post, we’re going to learn what a seller’s market is and how you can win your dream home by utilizing simple techniques of negotiation.
What is a Seller’s Market?
Before you learn how to win in a seller’s market, you need to understand what it is.
The fact that someone is selling their house means that they’ve lived in it for quite some time. At least, in most cases. During this time, they’ve upgraded certain things, performed maintenance, and built equity over them.
So, it’s normal that they’ll want to sell their property at the best price possible.
In general, prices of properties are determined by the living cost in an area, the quality of the construction, the features it has, and most importantly, the comparison with similar properties in the vicinity.
A seller’s market is created when there are more interested buyers than prospective sellers. More people are looking for houses to buy than there are houses available to buy. It creates a clear difference between the numbers. And it’s a simple law of supply and demand.
When supply is limited, demand gets higher. And when demand gets higher, prices go up.
It means that all of the factors we talked about that determine the price of a property goes out the window. They only work as the baseline for how much a property should be worth.
In a seller’s market, the sellers are at an obvious advantage. The average time that it takes to sell a house goes down significantly under such circumstances. It takes as little as 3 weeks for a property to go off the list! In comparison, it was 11 weeks in the past!
Also, it causes the mortgage rates to go higher because the overall growth of the housing market shows better economic conditions for an area.
The bottom line is that a seller’s market is often not at all in favor of the buyers. Hence, the name. Otherwise, it would’ve been known as buyer’s market.
But you can take steps to mitigate the situation and make a competitive offer that gets accepted. That’s the whole agenda for this post!
How to Make a Competitive Offer in a Seller’s Market?
It’s all about the process. You need to complete all the steps we’re going to discuss. The goal is to make the seller as comfortable as possible. When you create a unique relationship with him/her and show your compassion for your goal, it’ll give you the advantage.
Preapproval is a Great Start
It’s safe to assume that you’re seeking out a loan to purchase the house. Very few individuals in America have the liquid assets to buy a home right off the market.
There are various housing loan programs designed for those in need. We have the FHA (Federal Housing Administration) loan, the VA (Veteran Affairs) Loan, the USDA (United States Department of Agriculture) loans, and conventional loans.
No matter what type of loan you’re going for, you’ll need preapproval from the lender if you want to convince the seller you’re serious about your offer.
A preapproval document says that the lender is willing to offer ‘X’ amount of money for the purpose of buying a residence. It can be anywhere between 80% to 96.5% of the property’s estimated price. If you’re going for USDA or VA loans, it can be up 100%!
Proof of Funds
The preapproval letter works as the soft proof of funds for the seller. By ‘soft’ it means that the lender is willing to give you the amount if every condition is met. And it works in most cases with the sellers.
However, some sellers might still not be convinced. So, what do you do?
You go for hard proof of funds! However, there is a catch.
To get hard proof of funds, also known as the approval of a loan by your lender requires a contract with the seller. But the seller won’t get into a contract unless you provide hard proof of funds.
In such cases, the contingencies of a contract come into play. You need to convince a prospective seller with the preapproval letter to enter into a contract with you. Your primary leverage is a clause in the contract that’ll give the seller an option to discard the contract.
Basically, you’re asking for additional time from the seller to get your loan approved which will work as the hard proof of funds. If you fail to get the approval within the specified time, the contract becomes null and void. No harm, no foul to any parties.
You can offer additional comfort to the seller by letting them keep the property on the market. In that case, you need to get the loan approved in 5-7 working days. Otherwise, there might be another keener buyer with a better offer and better proof of funds.
Offer a Hefty Earnest Deposit
In homebuying, the earnest money is offered as an initial deposit put in good faith. The more you can offer, the more comfortable the seller will become. It’ll definitely take a toll on your finances if you don’t prepare for it.
Our advice is that start preparing long before you’re ready to buy a house. Because it’s a seller’s market right now and it’s not going to change anytime soon.
The earnest money is secured by an Escrow account. It’s there as a compensation for the seller in case the deal fails to succeed. After you finalize the deal, the earnest money will be counted toward your down payment.
In a seller’s market, it’s extremely important that you calculate each of your steps. One wrong step can cost you a lot of money as well as your dream of buying a house.
So, if you’re willing to increase the earnest money offering, make sure that you’re absolutely in love with the property.
Increase Option Fee or Reduce Option Period
The option fee gives the buyers the ‘option’ to walk out of a deal if something goes wrong. This is quite similar to the earnest money but it’s secured with a contract.
Basically, you’re buying the ‘option’ to discard the deal from the seller if you’re not satisfied with the deal or its consequences. The contract is valid for a specified time period known as the option period.
You can gain the trust of a seller quickly by increasing your option fee. It’ll give the seller a sense of security that won’t walk out of the deal. Because let’s admit it, we all love money and hate to lose money.
Similarly, you can achieve the same results by reducing your option period. It makes that the proceedings on your end go quickly and securely. For some sellers, reducing the option period may not work. In such cases, you should offer to increase the fee or both.
Your real estate agent may not agree with you in this case. Because the home inspection takes place during the option period. If something comes up in the inspection that you didn’t realize could happen, it can cost you serious money.
To balance things out, we’d recommend that you offer a higher option fee for new properties. Newly built houses, condos, or apartments are less likely to have defaults that’ll cause the deal to break.
And if you’re dealing with an older property, stick to your regular option fee.
Add an Escalation Clause in Your Initial Contract
It might not be the most budget-friendly option for the buyers, but it’s one of the most effective ways of earning the seller’s trust and securing a deal.
An escalation clause says that the buyer’s offer price will automatically increase if there is competition. It means if another buyer sweeps in when you’re still finalizing the deal and offers a better price, your initial offer will increase.
To better understand the clause, let’s look at an example. If your offered price on a property is $400,000, the clause can say that you’ll outbid all other offers by $1,000/$2,000 until the price hits $450,000.
It can seriously increase your costs to buy your house but it secures the deal amazingly. Basically, the clause says that if any other buyer offers any price between $400,000 and $450,000, you’ll outbid them by $1,000/$2,000.
If a competition offers $410,000, you’ll outbid it with your new offer which would be $411,000/$412,000.
If you’re going this route, make sure that you can afford it. It’d very foolish to create an escalation clause in your contract in the spur of the moment. Talk to your real estate agent prior to deciding on an escalation value. The agent will better know how much more is worth for that particular property.
Increase Your Down Payment
Down payment can often be the factor to make or break the deal. The more you’re willing to offer upfront, the more likely it is that the sellers will be attracted to your offer.
But it can often be hard for buyers to come up with more down payment. That’s where down payment assistance programs come into play. Every local area has one. All you need to do is explore the possibilities.
If you manage to even increase 1%-2% in your down payment, the property can be yours! TSAHC is a great option if your area has a branch.
Send in a Personal Letter with the Soft Contract
As humans, we’re probably the most emotional beings on the planet. We easily get attached to things that are near and dear to us. When it comes to something as big as your own house, the emotion can be often overwhelming.
As a considerate person, you should empathize with the seller. Sending in a personal letter with acknowledgment of their feeling is a great start. It might sound like manipulation. But it’s not when you truly mean it.
The ‘mean it’ part is very important. If you don’t want to build a rapport with the seller, it’s totally up to you. And you shouldn’t send in words that you don’t mean just to get a better deal.
What we’re saying is, if you think you understand the emotion of letting one of your prized possessions, you can create a unique bond over it.
Buying a house can be very stressful. The decision-making process of buying a house can be even more stressful. And the fact that it’s a seller’s market now doesn’t help at all. So, what can you do?
Well, your best bet is to get your documentation on point. The next most important stage is to build a rapport with the seller. You’ll need to ease into the relationship by offering various ‘legal’ contingencies like a higher option fee, higher earnest money, higher down payment, etc.
The next step is to make a personal connection. If you’re not up to it, it’s completely fine. Just know that it can help tremendously to drive competition out of the water.
And lastly, act fast. As soon as you’re putting up a viable offer, you should try and fast-track the process as much as you can. In the end, it’ll all work out in your favor.