7 Tips for Buying a Home with Multiple Offers in a Hot Market
The real estate market is in constant fluctuation. And since we’ve been facing a low inventory for the past few years, the market seems to be increasingly chaotic because there are a lot of potential buyers looking for homes but there aren’t many properties on the market. This is leading to multiple offer situations on most properties, and people are frequently losing out on places they’re putting offers on.
Although this can be super discouraging, there is a lot that can be learned from these kinds of situations. Most importantly - a hot market doesn’t mean it’s impossible to find the right home. It just means it’ll likely take more offers and some creative thinking.
To help you navigate the best option for you, we’ve put together a list of our top 7 tips for purchasing a home when you’re bidding against other people!
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7 Tips to Get Ahead in a Hot Market
1. Sales Price
Let’s start with one of the more common and widely known options - going above the asking price. If there are multiple bids on a home, more often than not, the seller is going to go with the highest offer. We never suggest going into a price realm you can’t afford, but in a hot market, it often helps to pick a home slightly under budget, so that you have a little extra financial wiggle room to go above the asking price if needed. Consider looking at homes that are 20%-25% lower than your max budget so you have room to offer more than asking price.
This is one of those instances where we highly suggest consulting with your lender to make sure what you are offering is feasible. Don’t just make a high offer on a home that could potentially leave you in a financially rough position. Always make smart offers, and offer above if it won’t break the bank.
Now if you’re on a budget, and are even considering going under asking price, just know that chances are you won’t get the home. It’s the tough reality of buying during any season that it might take you a couple tries and offers to find a home that you love in your price range.
2. Down Payment
After consulting with your lender, you’ll be able to figure out the down payment price range you can afford. In a non-hot market, you’ll often be told to pay a little on the lower side of your budget (unless you’re in the position to put 20% to avoid PMI) so that you’ll have extra money for closing costs, repairs, etc.
BUT sometimes, it helps to initially propose a higher down payment, and make it lower once you’ve won the bidding war and your offer is accepted. Now, why do that? We’ll explain in a brief scenario.
Let’s say you are bidding against 2 other parties, and all 3 of you offer an asking price of $400k. On paper, you all initially look identical. But you and party 2 say you’ll put down 5%, while party 3 offers 15%. Who do you think the seller will chose? They will pick party 3. Now you may be wondering why that matters, because the seller won’t be affected by your down payment - and yes that is true. However, the higher down payment suggests that party 3 has more money, thus making them the more secure option.
So, what can you do? If you are in a multiple offer situation, consult your lender and see if they’d recommend offering your highest possible down payment option. Let’s say this is 17% - you then beat out parties 2 and 3. After you win the bid, you can then readjust and change back to 5%. This is not a lie, because you can technically put down 17%, and your finances prove this. You’re just going back to a safer option for you so you have more money in the bank, and the seller is assured that you can afford future expenses.
3. Waiving Contingencies
In a multiple offer situation or bidding war, one way to make yourself more appealing to the seller and to set yourself apart from other buyers is waiving contingencies. Contingencies are basically safety nets that protect both the buyer and seller, and the sale cannot be finalized unless these contingencies are met. Waving contingencies includes getting an appraisal addendum/shortening or forgoing your financing contingencies and option period. These can be risky moves for numerous reasons, but first let’s explain what they are.
Firstly, what is an appraisal addendum? Appraisal addendum is an appraisal contingency waiver. The appraisal contingency is built into the contract that we use in Texas, and it means that if the house appraises for less than what the contract states, then you have the ability to re-negotiate or back out. This is a protection for you just in case it appraises for less. You don't want to pay more than what the house is worth in most cases, so you have the option to lower the price or exit the contract.
However, in multiple offer situations or competitive markets, people are waiving that contingency. It helps the confidence of the seller, because the buyer is promising to pay the contract price no matter what the appraisal is. Although this isn’t ideal, it can set you apart from other potential buyers. You do run the risk of having to pay a little out of pocket if it appraises for less, but that is why it’s so important to have a great agent by your side. They can help you figure out when this option is worth it and when it’s not.
You can also choose to waive your option period. The option period is a specified number of days when you have the right to have the property inspected. In this time you can back out of the contract for any reason without losing your earnest money deposit. In a multiple offer situation, waving the right to this option can increase your chances. However, this is risky in that if you waive this period, and then end up finding a huge issue and backing out - you will lose that earnest money. This is really only a decent idea if you are sure beyond reasonable doubt that you will stick with this home no matter what arises in your inspection.
If these options sound confusing, don’t worry! Your realtor will help you weigh the pros and cons in your specific situation. Sometimes the risk is worth it, but you should always be financially comfortable with the decision.
4. Increases to Seller’s Net
One way to increase the likelihood that a seller will pick your offer is by increasing the seller’s net. This means that you’re increasing the amount of money that the seller will make on your purchase. Yes, we already talked about going over asking, but in this instance we are talking about funds the seller would normally pay. You could take on some of the sellers costs as an incentive to choose your offer. These costs could include the survey, title, and even the sellers closing costs.
Offering to pay one, if not all of these categories, is definitely a great tactic in encouraging the seller to choose your offer - although it does mean more out-of-pocket costs for you. This is another example of a way to financially improve your chances, and we see a lot of buyers do this in a hot market.
5. Overlooked Homes
If you are buying in a competitive market and the thought of the past options terrify you (i.e. more money), then we highly suggest looking at overlooked homes. By this we mean looking at homes that have possibly been sitting on the market a little longer than most.
You may be thinking that means these homes aren’t great - and that’s not the case! Homes sit on the market for numerous reasons. One may be that this home is a fixer-upper and requires more work than most are willing to put in. But that could also mean that the price is negotiable if the seller is getting restless. It’s so crucial to have a good eye (or an agent with a good eye) so that you can see the potential many may overlook. Many people that do this end up finding the diamond in the rough, and they are able to get a home for a good price, do some work, and the value often rises pretty quickly!
If you’re looking for a deal in a hot market, it is also a good idea to see homes that don’t have the best photos. Sometimes people think they can get by without professional photos, fixing up little things in their home, or hiring a home stager. These things can deter other buyers because the home doesn’t look good online - thus they don’t want to even see it in person. This leaves a house sitting on the market that has a lot of potential. If you have an open mind, you could actually end up nabbing a really great place.
The home could also be sitting because the seller originally listed it way too high, and they’ve had to slowly keep lowering the price. These homes often end up being a really good deal, and you just happened to luck out that other people moved on while you caught the price at the right time.
6. Communicative Lender
Having a great lender helps you in so many ways - and you want to make sure the lender you pick is a skilled communicator. This isn’t only helpful in terms of interactions between yourself and your lender, but also in terms of your lender interacting with the listing agent.
When it comes to a competitive market, you want a lender that answers quickly and concisely, because you are operating under a bunch of deadlines. But your lender not only acts as a financial advisor/aide, they can also help you in a, for lack of a better word, hype-man role. They will talk you up to the seller agent, and show how qualified you are, and make you sound as good as possible.
Not all lenders are created equal, and that’s why we always suggest shopping around for a great lender. If you live in Austin, contact us for a list of our favorite lenders!
7. Additional Letter
Writing a letter can be a great way to put yourself above your competitors in a bidding war. If you really love a home, and aren’t able to use money to get ahead of the other buyers, a letter can be a great tool to pull at the seller’s heartstrings.
We do want to preface this by saying that this is more useful when you know who the seller is. If it’s a person that lives out of state and you know they care less about you and more about the money, it may not be worth your time. It really depends on the type of person you’re working with. It also depends on your location - there are some states that do not allow this tactic.
But there have been many cases where a well-written and heartfelt letter was the difference between getting the home and it going to someone else; especially if the seller has an emotional attachment to the home. If you are working with this kind of seller, chances are they’d prefer you over someone that wants to buy the home and bulldoze it.
One of our past Podcast guests, Nancy, actually wrote a letter when purchasing her first home that let the seller know she was a woman buying her first home, and she wanted to build a life there. The seller ended up choosing her over people with higher offers because they knew the home they loved was going to a person that would treat it well and cherish it. See y’all - a letter can really make a difference!
Final Thoughts
And there you have it! 7 tips that will help you win a bidding war in a hot market. Still want more information on getting ahead in this craziness?! During this time, for our Austin community, we will be hosting periodic “First Time Buyer Bootcamp” webinars to keep you all informed about what is happening locally with real estate.
Remember, whether you have questions around buying, selling, or investing, know that we are here for you! We understand how scary all of this can be and that’s exactly why we created Open House. Real estate education and empowerment is our bread and butter and we strive to continue to come up with ways to make real estate more accessible.
PS: Some of you may leave here wanting to dive even deeper into tactics to make your offer stronger in this market. Don’t worry you’re in luck! For all of our buyer clients we have created “21 ways to strengthen your offer” PDF which will dive even deeper into the best tactics to beat our competing offers. Want to talk to an Open House agent? Set up a call here!
