How do I make sure my home purchase offer is the strongest?

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Question:

My husband and I are trying to buy our first house, and the local market has gone nuts. Sellers are receiving multiple offers, buyers are bidding far over the list price, and so on. We’ve already been outbid on three houses and are starting to panic that the market has passed us by. Short of doubling the list price, what can we do to make sure the sellers choose our offer?

Answer:

A little bit of luck will obviously help, but here are some potential strategies for competing in a hot market:

  • Make a realistic bid. This can feel like a moving target in a fast-improving market, but sometimes it takes a few offers before home buyers, and even their real estate agents, start to get a true sense of just how far over the list price the average buyer will go. Of course, that won’t help if one of the offerors loses perspective and makes a crazy-high offer; but at least you’ll be either in the upper tier of bidders, or you’ll avoid wasting your time making offers on a house that, despite the list price, you can’t actually afford. Don’t look only at list prices or recent sales – have your real estate agent look in the MLS for the prices accepted for pending offers that haven’t yet closed.
  • Borrow from friends so you can pay all cash. Sellers love all-cash offers, because they don’t come with a financing contingency, meaning there’s no chance that the deal will fall through because the buyer couldn’t get final approval on a bank loan. You don’t have to hit them up for a long-term loan – just one long enough to let you close the deal, after which you’d turn around and take out a traditional bank loan. (Besides, you can protect your family and friend lenders by setting this up legally so that if you can’t pay the loan back, they can foreclose and recoup their investment – which should be no trouble, in a market as hot as you describe). See Nolo’s article on “Borrowing From Family and Friends to Buy a House” for more information.
  • Make the largest possible down payment. This is the next best thing to paying all cash. A large down payment means one higher than the traditional 20%. The seller knows that the less you borrow from the bank or other lender, the more you are to gain approval of the loan. (With less money at stake, the lender knows that it can sell the house for enough to recoup its loan).
  • Get preapproval from a lender. Actually, this is a basic requirement that you and every other buyer should have fulfilled. But the point is to be prepared to provide as much proof as possible that your financial situation is strong enough to close the deal.
  • Find out what the seller’s individual needs are. That may mean offering the shortest closing period you can manage, if you discover that the seller has already bought another house and is eager to get the money out of this one; accommodating the seller if you know that he or she still needs to find a house to buy (for example by offering a rent-back or home purchase contingency); and even waiving the contingency allowing you to make the sale conditional on your satisfaction with the results of a home inspection (though this is risky; you’d want to at least get a friend in there with contracting skills to tell you what you might be getting into).
  • Write a letter. This may not set your offer apart – it’s becoming an “everyone is doing it” sort of thing. But the idea is to give the seller an idea of who you are, how much you appreciate the home, and why, all other things being equal, the seller should choose you to take over their beloved nest.

One last thing to remember: When competing against other bidders, you are unlikely to get a second bite at the apple; that is, a chance to negotiate or improve your offer. You’ll want to put your absolute best offer forward at the outset. For more information, see Nolo's section on "Making an Offer on a House."

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