In recent weeks, Realtors in the Chattanooga area have seen a noticeable increase in the number of listings getting multiple offers within a period of days or sometimes even hours. It probably goes without saying that this is great news for sellers. As I have consulted several buyer clients in this situation in the past couple of weeks, I thought it might be useful to share my insight on the topic. If a home has gotten multiple offers in a short period of time, it is fair to assume that it’s in a desirable location and priced appropriately. As a prospective buyer who has decided you like a home enough to make an offer, and then learn there may be others at play, what next?

Multiple-Offer-Blue-Hands-House-Key

Back Off or Jump In?

Before you present an offer, your experienced Realtor will know, especially if it’s a great property in a hot location, if there is a chance of multiple offers, and will most likely call the listing agent to find out. If the listing agent discloses that another offer has already been presented, or that they anticipate one (or more) soon, that knowledge will inform your offer strategy. At this early stage, I have had first-time buyers feel so overwhelmed that they were scared to jump in the mix with an offer themselves. Of course no one wants to enter a bidding war and risk paying more than a home is worth. Keep in mind, this is where you rely on the expertise of your agent who, by this point, has carefully studied the comparable sales and probably given you an idea of what the home will likely sell for. If this is outside of your budget and you were hoping for a steal, it might be appropriate to exit the race. If, however, you like the home and it’s within budget, there are some strategies that can help you ‘win’ the situation WITHOUT overpaying. Game on! Now what?

1: Pre-approval of Proof of Funds

Paying cash? Good for you. Whip out a bank statement so that sellers know you can put your money where your mouth is. Getting a mortgage loan? No problem, but you better have a pre-approval letter from a reputable lender to present with your offer. Your agent has likely already walked you through this process.

2: Purchase Price

When you know you are up against other offers, now is not the time to low-ball the seller “just to see what they say”. What they will say (when there’s a reasonable offer to consider next to your lowball) is “No” or “Next”. This is the time when you lean on your agent to guide you towards the actual market value of the property, and you may even go ahead and lead with your best offer. In some cases, the seller will have already asked the listing agent to request all buyers bring their ‘highest and best’ offer. In this case, it is unlikely that seller is going to be giving you a counter offer; everybody offers their best and seller typically chooses one to accept.

In this event, I ask buyers to consider the price at which, if they lose the house, they feel OK knowing they did their best. You don’t want to lose it and think “well I wish I had offered $1,000 more.”

Keep in mind that ‘cash is king’. If you are competing against cash offers (which can close sooner and are less likely to fall through due to buyer qualification), the cash offers will be more attractive than yours. In the event you are getting a loan but know you are competing against cash, your offer price will need to be higher (or the offer stronger in some other way) in order to keep you in the game.

3: Other Offer Components

Closing Costs: Are you asking that the seller pay for some part of your closing costs? Keep in mind that closing assistance to buyer affects the seller’s bottom line the same as a reduction in price (i.e. $2,000 of seller paid closing costs is the same as $2,000 off purchase price to seller). Your smart Realtor has already advised you of this when you formulated your offer price. It does no good to have a competitive offer price which is negated by a big request in closing assistance. You can certainly still ask for help with your closing costs, but your offer price better reflect it accordingly or you will be tossed out.

Earnest Money: As a general guideline, 1% of the purchase price is a good ballpark figure for earnest money. If you are offering $500 Earnest Money on a $400,000 property, the seller will not view that very seriously. If multiple offers are at play, it can’t hurt to increase the earnest money to whatever you are willing to put down. If you know you want the house and have a little money in the bank, it is a good idea to increase it. Your Earnest Money goes towards whatever cash you bring to closing, so you will get full credit for it. Keep in mind you get this back if contingencies of the offer are not satisfied. However, if you simply get cold feet the day before closing, that earnest money is the seller’s to keep (and, in Tennessee, they can actually sue to enforce the purchase and sale contract, or make you buy it in other words- buyer beware!). If you love the home and multiple offers are present, 2% earnest money is probably wise if you are able.

Contingencies: If you are getting a loan, your lender likely requires an appraisal, so you will have a financing contingency and an appraisal contingency. If cash, you don’t need the financing contingency and the appraisal contingency is a judgement call. If you have a good idea of the value, you may not care about having it appraised. If it will help you sleep better, go for it (but remember more contingencies may be less attractive to seller). I highly recommend my buyers get a home inspection, so I almost always include an inspection contingency. Unless you are a contractor buying a fixer-upper and feel confident you can deal with any unexpected surprises, get a home inspection, and make your offer contingent upon that inspection. Termite inspection is also wise (and will almost always be required by your lender anyway if getting a loan). Other types of inspections (think perc test, etc.) are also covered by your inspection contingency. Another possibility is doing a pre-inspection before you make your offer. This will enable you make an offer that does not have an inspection contingency. However, this can be a gamble as the inspection will cost money and this is not a guarantee that your offer will be accepted.

Another option that lets you keep your inspection contingency but make your offer more appealing is to shorten the inspection period. While 10-days is the accepted ‘norm’, you could shorten yours to 5 days, letting seller know you are serious and will do your inspections quickly.

Closing Date: Most sellers want to close ASAP, but your agent can find out if special circumstances may dictate otherwise (i.e. seller needs time before their next move, etc.). A cash offer can close in two weeks or less, but if you are getting a conventional mortgage, you will realistically need more like 4-5 weeks; for other types of loans, such as USDA, you could be out 6 weeks or more from closing. Lean on your agent and their knowledge of the situation to inform a realistic closing date for your offer.

Response Time: This can be tricky. You want to be courteous, but if there’s a chance of multiple offers, you want seller to see and respond to yours before others land in front of them. This is when shorter deadlines are called for. That said, seller probably knows you still want the home even if they fail to respond in the 4-hour window you provided, so you better hope the other pieces of your offer keep it at play.

4. Make it Personal

This is a home you have decided you love enough that you could see yourself actually living there. Tell the seller! Write a personal letter explaining that you love their kitchen updates or decorating style. Tell them you can see yourself in the garden or reading in the sunroom. If you have children talk about watching them grow up in the home. It’s ok to be honest and personal (within reason). Sellers are human too, and chances are, they have loved the home for some time. They will feel good knowing they are selling to someone who will love it as much as they have. Tug on those heartstrings!

Good luck!

Rely on your Realtor’s guidance and formulate a game plan. Sure, it always comes down to price to a large extent, but being strategic in how you play in a multiple-offer scenario can be the difference between winning the home you love or continuing your house hunt.