BY MARSHAL MALONE
You have decided to buy your first house, and have already heard some good advice, which looks like this: begin saving early, know your budget, examine your credit, seek first-time home buyer assistance programs, compare mortgage rates/fees, get a preapproval letter and hire an experienced real estate agent. Before 2020, this was what you needed to know about preparing yourself financially before buying a home because in Vestavia Hills, homes sold nearly twice as fast at an 11 day average in contrast to 2020, which averaged in 28 days. Collectively, these homes sold for almost 9% more than they would have in the previous year, so this adds pressure on your lender, your appraisal and your wallet.
It’s a war zone in Birmingham real estate, and the cards are stacked against first-time home buyers. Homes are selling at lightning speed, and competing offers are coming out of the woodwork. So it is important when you send an offer to buy your next home that yours stands out above the rest.
So how can you bring your A-game? I’m going to be honest here; it’s money. Most sellers are looking to walk away with the most money and the least hassle. But here are a few tricks that can win you the house you want. While the higher offer carries a lot of weight, there are some things you can do to make your offer look better.
This assumes you have taken the opening advice. If you haven’t — stop here and come back to this when you do. This is how you need to truly compete:
When your Realtor hears the feared words, “this is a multiple offer situation…” you know that you are now eating at the adult table. It’s time to trigger your A-game because you are no longer holding all the cards.
Here are things you can do to make your contract worthy of a good hard look.
Offer over asking price
In the average scenario, you will probably be paying more than the list price. Your Realtor can give you an idea of what the house is worth in comparison to what the seller is asking, so that you can determine how far above asking price you can or should go. Have your Realtor do a comparative analysis to show you the top two or three highest priced similar houses. This should tell you what dollar amount the seller is trying to achieve. Often the seller has an inflated perspective on what their home is worth, and you need to identify your genuine stopping point so that you don’t go out of control. The past year was unprecedented in Birmingham for ridiculous offers, and 2022 is starting out in a similar fashion.
Think like a seller
There are many kinds of sellers, and you want to know where they are coming from. Have your Realtor investigate why they are selling. Are they downsizing to a smaller home, are they an investor who has just flipped the house or are they growing out of the house? Every buyer has their own objectives, and it is important to know what is important to them. If your offer caters to that seller’s needs, your chances increase. For example, a seller has just gotten a job offer out of state, and needs to move quickly. If your offer can expedite a quicker close, that might put you over the top with that seller. If you are not a cash buyer, going through the preapproval and underwriting process is one way to do that.
Go beyond preapproval
When a seller is looking at two offers, one from a cash buyer and one from a buyer with a preapproval letter from a national mortgage company, they will go with the cash buyer. Lenders that you hear about on TV or podcasts are on their own timeline, and often sabotage deals because they are not ready in time for closing. A local mortgage lender is hungrier for your business, and they know how to fight on your behalf. Most real estate agents know the good lenders from the bad and it is important to let them advise you to find the right one.
Choose a local mortgage lender who can go beyond preapproval, and take you through underwriting. Lenders need to take an in-depth look at your credit and financial background to determine if you're eligible for a loan, and being able to do this prior to making an offer goes a very long way. This insures the seller that you are no longer a financial risk, and you can probably close much faster.
VA and FHA loans
VA loans typically have lower interest rates than conventional loans and require no down payment. They also come without mortgage insurance costs, which limit your buying power.
FHA loans might be a good fit if you have less money set aside to fund your down payment and/or you have a below-average credit score. These have served a good purpose for a very long time, but it is important to know that a seller might frown on them because they either have ridiculous inspection criteria (FHA), or the program itself could run out of money at the most inconvenient time (VA). These details can lengthen the contract period, and can often throw mischief in an otherwise ordinary contract. FHA or VA might be your only option, but if it is possible to get a conventional loan, that will be more comforting to a seller who is looking at multiple offers.
Appraisal Gap Addendum
Recently a home in Forest Park went under contract for $25,000 over asking price, which was not a terrific surprise. The winning offer also included an appraisal gap addendum, which promised to cover the difference between the appraisal price and the price they chose to offer for the house. In this case the buyer knew they were offering more than appraisal value and wanted to insure the seller they would pay the difference, whatever that difference might be. This is what it looks like:
“In the event, the appraised value comes in below Purchase Price, then Buyer agrees to pay up to $__________ over appraised value not to exceed the purchase price. Any such cash differential shall be applied to Buyer’s required Cash at Closing.”
Some buyers will cap the amount of that difference they will pay, which is also wise. But your Realtor will be able to give you a good sense of what your competition looks like, and when this is an important thing to do.
Remove the inspection contingency with a pre-buy inspection
It is difficult for an agent to recommend that you avoid an inspection contingency on your offer, but every agent also knows that inspection addendums are often used for the buyer to have second thoughts, break the contract with no repercussions and leave the seller high and dry. More often the inspection is used to renegotiate the contract. These prospects make sellers jumpy.
A good agent really wants you to take time during the contract period to know the condition of the house you are buying. But if you know you are competing for the house of your dreams, you can hedge your bets by having an inspection done prior to your offer or offer deadline. This way, you can remove the inspection contingency from the contract and still know what it is you are buying. A home in Crestwood recently saw seven offers, and four of them removed the inspection contingency. The seller didn’t even look at the three remaining offers.
Beware; these pre-buy inspections do cost money so use this tactic sparingly. They are often not as thorough as a general inspection, but they can help you know what you are buying and give you the confidence to put your money on the table. Talk to your Realtor about where you can go to find an inspector that can do this.
Remove additional costs to seller
There are many things that a first-time home buyer will ask of a seller that should be reconsidered in the event that the seller is holding multiple offers. Home warranties, termite bonds and closing costs are things that often cost the seller money, depending on how the contract is written. The moment the listing agent says there are multiple offers, the burden of these things should shift to the buyer. The least amount of money a seller needs to pay to close their house, the more appealing that offer will look.
Write a letter
This is an old school option, but submitting a letter to the seller that describes the importance of their home to your future life can mean a lot. Mention how important it will be to you and your family or how you can walk to work from that location. Include anything that can connect the seller to you on an emotional level. If sellers are viewing two equivalent offers, they might just go with the buyer they like over the one they don’t know at all.
None of these will guarantee a win, but they will go a long way toward helping you compete in this unprecedented real estate market. It is important to remember that on average you will probably see eight homes over the next eight weeks, though probably more. Get your ducks in a row, and try to have fun. Hire a good agent who can guide you through these steps and be alert.
– Marshall Malone is a third-generation Realtor currently at ARC Realty in Mountain Brook.
