In this highly competitive seller’s market that we are currently experiencing, buyers are having to get more creative to make their real estate offer stand out. As your agent, I can help guide you in how to use the following strategies and the pros/cons of each. I recommend some mix of these options, as every transaction is on a case-by-case basis. It is not always the offer with the highest price that wins, it can be the offer with the best terms.
The strategies that we commonly utilize to make your real estate offer stand out are:
- Escalation Clauses
- Inspection Waivers
- Appraisal Gap Coverages
- Quick Closings
- Seller Rent Back
- Increasing Earnest Money
- Using a Trusted, Local and Professional Lender
#1: Escalation Clause:
One of the strategies I may recommend we utilize when offering on a home is the Escalation Clause. An escalation clause is where you offer a purchase price, but I write in: “Purchase price shall increase to $1,000 over the highest bonafide comparable offer up to a final purchase price of $XXX,XXX (your highest price). Seller to provide a copy of the competing offer that is being used to activate this escalation clause.”
The advantage to utilizing an escalation clause is that it may allow you to get the home by beating another offer by only $1,000. It is disappointing to find out you missed out on the home only by a few thousand when you could have utilized an escalation clause to close the deal.
The disadvantage to utilizing an escalation clause is that if all the offers were to have this wording in their offer, the benefit gets diluted down. It is also awkward disclosing your desired max purchase price to the seller within the escalation clause. If the seller doesn’t max your offer out, they will feel like they are leaving money on the table, while in reality, they are probably receiving a record high price for their home.
Overall, an escalation clause is not the strongest strategy to include in your offer, but it can be a very nice feature if the listing agent and seller are receptive to this. For more information about the details of an escalation clause, feel free to contact us at any time!
#2: Inspection Waiver:
One of the strategies I may recommend we utilize when offering on a home is including wording to limit what you can request during the inspection objection process. There are multiple options that can limit your inspection objection abilities in order to make your real estate offer stronger. (Ordered from strongest to weakest).
- Waive the inspection completely and not perform an inspection and you will buy the property in as-is condition. (I do not recommend this method).
- Perform a “sink or swim” inspection, which is where you have the right to inspect and the ability to terminate an inspection (and get your earnest money refunded), but you do not have the ability to object or ask for anything inspection related. This is my favorite because it protects your ability to inspect, but often when we threaten to terminate the seller will usually want to negotiate anyway.
- You can limit your inspection objection to “health and safety” items only. A good listing agent will know that this is not that effective because anything can really be construed into a health or safety item.
- Leave the inspection as written in the contract, which gives you full ability to inspect and object. This is not very effective in this market.
This strategy is very advantageous, it is very attractive to a seller to ease the concerns of future inspection issues upfront.
The disadvantages are that you are limiting your rights to a varying degree. If you decide to terminate the contract after the inspection, you can often times get your earnest money refunded but you will lose your money spent on the inspections you performed.
#3: Appraisal Gap Coverage:
Another one of the strategies I may recommend we utilize when offering on a home is called Appraisal Gap Coverage. Appraisal Gap Coverage is essentially wording to address any potential gap between the purchase price being offered and the appraised value of the home. The purpose of an appraisal is to prove to the lender that the home (collateral) is worth what is being paid for the home. The loan to value ratio is determined by dividing the loan amount by the purchase price or the appraised value * (whichever is less). If an appraised value comes in less than what you are contracted to pay for the home, that can cause an issue that would require either you having to bring more money to put down or switching loan types. In this quickly appreciating market it is becoming more common for the appraisal to come in low since almost every new sale is the new highest sale and the appraisal can only be based on historic closed homes. This is where Appraisal Gap Coverage comes in.
There are a few options when it comes to potential appraisal shortages. This is something that is agreed to at the time of the offer prior to the appraisal, so you need to be prepared to follow through with what you offer to cover (ordered from strongest to weakest).
- Full appraisal gap coverage without any limits. This is a very strong provision but it can be a slippery slope if the gap is huge. If the gap is too large for you to financially cover you can lose your earnest money. There is a way to terminate on the “loan termination” deadline, but that is not really negotiating in good faith and it could invoke an earnest money dispute.
- Appraisal Gap Coverage to a certain amount: This is my favorite because it shows strength but does not enter into bad faith. It would read like this: In the event the appraised value is lower than the purchase price in section 4. The buyers agree to pay the difference up to $5,000, not to exceed the purchase price. You will decide the amount of coverage, but just be prepared to actually cover it. This also does not bind the seller to have to sell it to you for that new amount if the new amount is less than the purchase price. If the seller does not agree, you will get your earnest money back.
- Leave the appraisal as written in the contract, which gives you the full ability to terminate due to any appraisal shortages. This is not very effective in this market.
The appraisal gap coverage can put you above the competition since the appraised price is often the great equalizer when comparing offers. Another buyer can offer $100,000 over the asking price, but if it does not appraise for that and the other buyer does not have the cash to cover the difference, the home will oftentimes only sell for what it appraised for.
#4: Quick Closing:
One of the strategies I may recommend we utilize when offering on a home is the ability to close quickly. The typical financed transaction will take about 30 days to close. If you are a cash buyer or if you have a lender with expedited processes, you can close sooner. Some sellers are very motivated by a quick closing, especially if the home is vacant. This strategy may not appeal to every seller as they may need time to move or time to find their new home. Which will lead to my next strategy which is a seller rent back. If we can couple a quick closing with an extended seller rent back post-closing that would be ideal for almost every seller, avoiding the need for an escalation clause, appraisal gap coverage, or any of the other strategies discussed above.
#5: Seller Rent Back
One of the strategies I may recommend we utilize when offering on a home is a seller rent back also known as a seller’s post-closing occupancy. In this current seller’s market, buyers are forced to be more flexible to the seller’s needs. Maybe that seller needs time to find a home but still wants to close quickly. Maybe they need to wait for their new build to finish construction. Or they may just simply want a few more days to move out after closing. Regardless of the reason, the willingness to let a seller stay in the home after closing may be close to priceless to them. It can help them avoid the hassle and costs of a double move or give them the comfort of a buffer in between the closing of their new home. There are many options when it comes to how to work the finances and logistics of a rent-back agreement. You get to agree on a rental price or a free rent back, decide how to handle utilities, and make sure every party has the proper insurance coverage since the arrangement is somewhat not traditional.
#6: Increasing the Earnest Money:
One of the strategies I may recommend we utilize when offering on a home is to increase the amount of earnest money you put down when you go under contract. Earnest money is money provided by the buyer to the title company as a form of deposit for the contract. The premise behind earnest money is that if you do not buy the home, the seller will get to keep your earnest money. But the reality is that Colorado is very buyer-friendly and there are numerous ways for me to protect your earnest money throughout the transaction. If you do end up purchasing the home, the earnest money is applied to your down payment or closing costs at closing. Earnest money is typically about 1% of the purchase price, but it can vary from home to home. If you want to make your real estate offer more competitive you can offer to increase the amount of earnest money you deposit with the title company. Doing so will illustrate your financial strength and dedication to the transaction. If you purchase the home, it won’t make a difference since the funds will be credited to you at closing. But if you terminate during a time when the earnest money is non-refundable, you will lose that money. It is a gamble, but if you have the ability to put more money down and us on your side to protect it, it can be a very good option.
#7: Using a Trusted, Local and Professional Lender:
One of the strategies I ALWAYS recommend we utilize when offering on a home is to use a trusted, local and professional lender. Many listing agents have experienced loan failures and it is well understood that if the buyer cannot get the loan then the home won’t sell regardless of the offer price. So many agents are placing a lot of weight on the idea of the likelihood to close. If you use my recommended lender you are backed by the best lender in the business and a long track record of success. It is very important for the lender to make contact with the listing agent to answer any questions, explain your strengths as a borrower and explain how their process will be smooth and hassle-free. This can really win over sellers and listing agents as it settles many of their concerns about the likelihood of you getting your loan.
If you would like a referral to the best lender, reach out and we will get you in touch with the best.
Brandon & Kara Lee
Douglas County Real Estate