Strategies for creating a strong offer 15-20% below asking
Everyone usually wants to automate the process to make decisions more quickly and effectively to find elusive deals, but you are competing against institutions and iBuyers with capital reserves to buy out whole countries.
There is just no competition.
Your time would be better spent studying how to spot deals that data cannot ever reveal and how to turn marginal deals into fantastic ones.
I have never made an offer over asking, and I have had a very good conversion rate. My edge was in realizing that the offer price is not everything to the seller.
But mostly, you want to give the seller compelling reasons to consider you even at a lower price.
Many other variables make up the whole equation and today’s newsletter is all about that.
Here are some strategies for creating a strong offer 15-20% below asking (and one counter-intuitive tactic)
Please note this is not financial advice. Consider any risks before using any of these strategies.
Waive Home Inspection
In a competitive real estate market, including a house inspection contingency in a contract is typically a deal-breaker. Where there are fewer contingencies, the buyer is typically stronger.
You can still get a home inspection even after you waive the inspection contingency. It simply implies you won't be able to use inspection findings to negotiate solutions or price with the seller. But you still have the option to leave if the inspection reveals something that makes you want to do so.
It is usually less dreadful for some people to waive the home inspection contingency if their financial profile is strong because they can absorb any downsides of waiving an inspection.
I have never waived the home inspection contingency because the reward was never worth the risk for me. I used other tactics to get the offer over the line.
A waiver of the appraisal requirement might speed up the closing process and the faster the closing the better the offer is for the seller.
You will also save money with an appraisal waiver, which could be a couple of grand for smaller multifamily like 5-6 units.
Without an appraiser, the lenders utilize information produced by an automated underwriting system to calculate the house's worth based on data gathered from other recent home sales in the neighborhood.
The difficulty is that not every buyer and every home will be eligible for an appraisal waiver. And lenders are under no obligation to grant their buyers one. t borrowers can afford their new monthly mortgage payments.
Personally, an appraisal is unnecessary when I am highly confident in my assessment of the property's value. The confidence comes from knowing my geo really well. I'll especially forgo it when I know the seller has a problem with it and the property is attractive to me.
Appraisal Gap Contingencies.
If you want to keep the appraisal contingency, you can get more nuanced if the appraisal comes lower than the offer price. You can back out of the contract as one option if that happens. But the seller might not like that as they have spent weeks on this deal with you by then.
So as a tactic, you can stipulate in the contract that if the home does not appraise for at least the offer price, you will pay the difference between the offer price and the appraised value.
Or you can say you will pay half of the delta.
But if this bombs your return, I would not advise it unless it is an amazing deal from other angles.
Hard EMD Milestones
It is typical when certain milestones are reached, especially with larger properties, for the buyer to increase the amount of escrow deposit that is non-refundable. The reason is the closer it gets to closing and if the buyer backs out without any consequences, the seller loses the other buyers and has to start the process all over again.
Not a good look for the seller, especially if the market has cooled down now.
And as a buyer, you do not want a large amount becoming non-refundable until there is a high surety of close.
So it is not uncommon at all to use a milestone-based approach for your initial deposit to be irretrievable. But you have to decide WHEN the money goes hard(you can’t get it back)
The best scenario is for the EMD to stay soft until you have removed both your DD contingency(15 days for me) and your loan contingency(30-40 days after offer acceptance for me)
A more risky approach is for the EMD to go hard after DD period ends but before the loan contingency expires. If you don't get your loan and, as a result, you can't close, you lose the deposit. This risk may be acceptable if you can either switch to paying cash or you can come up with a lot more down so you can get a loan at a lower LTV (which can be easier to get).
The riskiest approach is to have hard money on day one. In a competitive market, this tactic is seen a lot. I recently lost a round for the same reason...another buyer was willing to put up $30K hard, and I wasn't.
I've done the hard money day one myself. It put me at a disadvantage, but I knew I was getting a good deal, and I studied it enough to feel 100% confident in the property and my offer….but I don't want to do it again (but probably will at some point).
Only you can reconcile the risk/reward equation for yourself...But, if this is your first deal (or even second), I strongly recommend against taking those kinds of risks unless the amount of your EMD is meaningless to you.
Cash offers are often more appealing to sellers because there is less chance of the buyer's financing falling through and generally a quicker closing time. Selling a home for cash has many advantages for both the seller and the buyer.
Making a cash offer on a home puts you in the driver’s seat when negotiating a deal with the seller.
The biggest pro is you can save money on a home's listing price by paying cash. In exchange for a quick sale without hassles, sellers are willing to accept a lower cash offer instead of going through the sometimes months-long traditional sale process.
My take: Many people buy cash to beat the competition and then get a loan to pull their cash out after closing. Unless you are not looking to use loans later, this could be a risky tactic if the rates were to jump in a volatile market. So analyze your numbers assuming a higher rate in a month or two when you get the loan.
Sellers love quick closing!
But it can be tough to buy a home in less than 30 days. However, plenty of buyers are doing it.
There are numerous circumstances outside of your control that may affect your wish to close on a deal quickly. For instance, you have no control over how quickly an appraisal is completed because it depends on the seller's assistance. You also have no control over how quickly a title firm carries out a title search.
Still, there are things you can do to ensure that your loan is granted as soon as humanly possible.
Most buyers also want to close quickly, but some sellers want to sell slowly because they might be looking to sell the property using the 1031 exchange tactic to buy another property.
If they do not have that property yet, they do not want to sell quickly, so the sellers appreciate it when the buyers are willing to play the waiting game to accommodate their timelines.
Rent Back Options
Along the same lines, if the seller is selling their home to move into a new home. It often helps when the buyer proposes to rent it to the seller after closing so they have time to find a new home.
If you can offer to let the seller live in the house for a month or so, it can be precisely the thing to tip the scale to your advantage. It could contribute to the seller finding the offer on the home more appealing.
Disposal of any "left behinds.”
This is straightforward. Who doesn’t like a little help? More than the work of disposing of any remaining items in the property the seller would have to dispose of, the proposal to help the seller itself will make you stand out, in my opinion.
Kindness is a powerful weapon more than people realize.
Ease of Sale
With every offer, include a cover letter about who you are and showcasing your ability to close in time and with a high level of professionalism.
A tactic I use
I have noticed many think that if the property has been sitting on the market for a long time, it is not a good thing.
Instead of passing on such a property, think of it as an opportunity.
Wait until a listing stagnates.
Once a seller goes a week or two with no offer, a little dread will set in.
You can offer much lower and see how the seller responds. But don’t reduce the difference from the purchase price when you make your offer.
E.g., If you want a $30k reduction, reduce the offer price by $10k and ask for $20k in seller-paid closing costs.
The idea is to reduce the psychological burden for the seller to accept the price you are offering. This will also increase your return because your leverage is higher.
That’s a wrap, folks.
Ultimately, it all just boils down to finding the seller's motivation and playing on that to make your not-so-competitive offer appealing.