Negotiation Strategies in a Multiple Offer Situation

      While many of the European countries are still struggling with staggeringly high unemployment rates and stagnant economy, the US economy is undergoing mild recovery largely due to the correct monetary policy set by the Federal Reserve System (FED). Along with the historically low interest rate, the housing market is blooming surprisingly well. We have seen many of the priced right homes received multiple offers and sold in less than 10 days. In this seller’s market, home buyers need a totally different set of strategies from those used in a buyer’s market. I will discuss in this article a series of strategies for serious home buyers to use in a seller’s market without making unreasonable sacrifice.


      When sellers receive multiple offers, they will pick the offer with the best price and terms. If you are a serious buyer, there are some strategies you can use to make your offer look much better than the others. First of all, you should examine your situation and choose the right time to submit your offer accordingly. Even in the seller’s market, there are some listing agents who do not preset an offer review date. In that case, you would want to be the first one to put your offer on the seller’s table. In other cases, a listing agent will preset an offer review date. In this situation, submitting your offer too early would simply encourage other buyers to raise their offer prices and to compete with you.

      Second, you can put down a significant amount of earnest money deposit and/or release it to the seller sooner than the typical time frame. The home sale transaction is a risk to both sellers and buyers. If the buyers walk away from the contract after mutual acceptance, the sellers lose valuable market time and potential buyers. By putting down a significant amount of earnest money and/or release it sooner, you demonstrate that you are a serious buyer. The sellers can then have more confidence in you finishing the transaction. Buying a home is a big decision and I encourage home buyers to think it through before making an offer. If you are serious about buying the property, you have to transfer your money to the sellers eventually. So why not show the sellers your sincerity to increase your chance of getting your dream home?

      Third, you can waive the sales contingencies. Typically, there are two contingencies used in a purchase and sale agreement, the financing contingency and the inspection contingency. We typically do not recommend waiving any of these contingencies, as these contingencies provide protection for home buyers. When the buyers are unable to close due to the inability to get a mortgage loan or when major problems are found in the home inspection, they can withdraw from the purchase and sale agreement and get their earnest money back. However, for some cases in a seller’s market, buyers may waive these contingencies and still have appropriate protection. For example, before you make an offer, you may ask the sellers to let you do a pre-inspection. If the results of the pre-inspection show only minor defects, you may consider waiving the inspection contingency and fix these minor problems yourself. Please remember that the inspector is hired to find problems for you. To make you feel that your money is well spent, they will find problems no matter how small it is. A good inspector will let you know if there is any major problem and you certainly should not overlook these major problems. If the inspector finds major problems in the house you plan on buying, we encourage you to think it twice before waiving the inspection contingency. Also, in the case that the sellers do not accept the offer and the buyers already did a pre-inspection, the inspection money will be wasted.

      A typical transaction with financing contingency usually closes in 30 to 45 days, depending on the lender’s underwriting and approval speed. When a transaction takes this long to close, there are many uncertainties and the sellers have to worry about buyers backing out using the financing contingency. The reasons that cash offers are appealing to home sellers are that the transaction can close a lot faster and that the buyers have one less excuse to back out from the sales. It usually takes about 1 to 2 weeks for a cash offer to close. If the buyers’ lender can approve the mortgage loan within hours and process the loan in 1 to 2 weeks, the buyers can then choose to waive the financing contingency and that offer is equivalent to a cash offer, which will be very appealing to sellers. There are not many mortgage lenders who can underwrite and process this fast. As far as I know, movement mortgage is the only lender with this efficiency.  

      Fourth, you may use the escalation clause in the purchase and sale agreement. The escalation clause is a term in a purchase and sell contract which allows for an escalated offer price up to a certain amount above a competing offer. In the event of a competing offer, the seller should provide proof of a competing purchase contract. For example, you may want to pay $500,000 for a home, but a competitor may offer to pay $520,000 for the same home. You may offer $500,000 using the escalation clause and say, “In the event of a competing offer, the buyers will pay $1,000 over the highest offer’s net up to a purchase price of $550,000.” In this case, your offer becomes $521,000. If you decide to waive all the contingencies, an increment of $500 in the escalation clause sounds good. However, if the escalation clause is the only strategy you use in a multiple office situation, an increment of $1,000 would give you more chance of winning the bid.

 

      Buying a home in the seller’s market could mean some frustration for buyers. In the case of a multiple offer situation, it is necessary to use some special strategies and to make some reasonable concessions. However, we encourage buyers to carefully evaluate your financial situation and the value of the home you plan on buying. At the end of the day, you want to feel that the purchase decision you make is a wise one. On the other hand, the home sales price in a seller’s market is in the direction of increasing. Buying the right home now at the price you can afford could mean savings on your rent and the house appreciation price for next month.