A GUIDE TO MAKING A COMPETITIVE OFFER FOR A HOME PURCHASE

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A GUIDE TO MAKING A

COMPETITIVE OFFER FOR

A HOME PURCHASE

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Introduction

Understanding the housing market

Prequalifying for a mortgage

Working with a real estate agent

Connecting with sellers

Knowing when to walk away

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Embarking on a home purchase requires an understanding of how to make a competitive offer, as the market can become saturated with buyers. When demand is high and supply is low, consumers can find themselves locked in intense bidding wars, which they can lose if they don’t approach the situation strategically. Competitive offers are a mix of research,

planning and the appropriate finances. The goal is to make the most attractive offer and win the home while staying within budget, as securing the property isn’t worthwhile if doing so means exhausting all funds.

The first step to making a competitive offer begins before buyers start examining mortgages and homes that are right for them.

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UNDERSTANDING THE HOUSING MARKET

The current state of the real estate market at various levels determines how buyers approach their offers. If conditions are favorable—many available properties, few buyers and affordable prices, for instance—the endeavor may be simple. A crowded market with tight inventory, on the other hand, may not be as lucrative. Buyers should research the market at national and local levels and pay attention to the following factors:

BUYER LEVERAGE:

In real estate, there are two terms used to describe the market: a buyer’s market and a seller’s market. Each one indicates who has more power to negotiate during a home sale. Various factors—some of which are to follow—determine which party has the upper hand, and tracking these variables gives buyers an idea of whether they can afford to aggressively negotiate. Seller’s markets are typically characterized by tight inventory and high demand. Buyer’s markets have high inventory and low demand.

HOME PRICES:

The trajectory of home sale prices informs buyers of whether their offers are likely to be higher or lower than expected. If data shows a rise in closing prices, sellers may be less willing to accept offers that are less than their asking prices. Information on home prices can be found from several credible sources, including the U.S. Federal Housing

Finance Agency, CoreLogic, Trulia and the Standard & Poors/Case-Shiller home price indices.

INVENTORY:

This term refers to the supply of homes available for sale on the market. Inventory is dependent on homeowners putting their properties on the market and new home construction. It is denoted as the number of months the amount of homes on the market would last at the current sales pace.

DEMAND:

Consumer interest in home purchases can be indicated by several trends, including the pace of home sales, the average time properties spend on the market and inventory. Higher demand increases competition. and spring and summer tend to be busier seasons for homebuying compared to autumn and winter.

INSTITUTIONAL INVESTORS:

These entities are buyers that purchase 10 or more homes in a calendar year. They typically pay in cash, which is more attractive to sellers. Institutional investors present stiffer competition for first-time and mortgage-dependent buyers.

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PREQUALIFYING FOR A MORTGAGE

After reviewing market trends, buyers need to secure financing and provide proof of those funds. All-cash offers garner more seller interest because cash appears more secure than

home loans. Sellers know cash buyers have the appropriate finances on hand, whereas mortgage-dependent buyers don’t have the funds in their checking accounts or savings. The down payment amount may be available,

but that doesn’t provide sellers with enough assurance that buyers can provide the full sale price when the time comes.

Prequalifying for a mortgage is one way for buyers who need real estate loans to show they have the financing to back up their offer. Rather than giving a promise to secure the funds, buyers can provide a notification showing they have prequalified for a loan.

Here’s what the process entails:

Buyers meet with a

loan officer and provide

information about their

current financial standing.

The buyers’ materials will

be assessed, and the loan

officer will provide an

estimate for the financing

they can receive.

These details include assets,

income documents, debts

and other information.

There will be an

explanation of loan

programs for which buyers

qualify so they can make

an informed decision about

which mortgage to choose.

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WORKING WITH A REAL ESTATE AGENT

Loan officers aren’t the only experts who help buyers make a competitive offer. Consumers can also look to real estate agents.

These professionals do more than help buyers find suitable properties. They also keep an eye on market trends to locate properties within their clients’ budgets and advise those clients during the process of negotiating with sellers.

Most buyers benefit by working with an agent. Here are some of the advantages:

In addition to providing expertise in a competitive housing market, working with an agent also helps a buyer save time. If sellers are fielding multiple offers, a buyer has to be prepared to immediately place a counter offer on the table before the sellers get tired of waiting and accept another offer. Clients can tell agents their maximum bid as well as increments for increasing the bid, allowing the buyers to handle their day-to-day tasks while still defending their interests in the home.

Agents know which way the market is moving, particularly at the local

level. They know the sales prices of comparable properties that have sold

in the area to best advise buyers whether the offer needs to go up or some

contingencies need to be waived.

With the knowledge of market trends comes the ability to negotiate. Agents

are a middle ground between buyers and sellers, and their knowledge

provides leverage when trying to convince sellers to accept an offer.

Agents can talk the talk. Negotiating is also about charisma and maintaining

a professional tone, which is something that can be difficult for a buyer who

becomes frustrated after multiple rounds of negotiations in a bidding war.

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CONNECTING WITH SELLERS

At times, the only way to win a home is to get to know the sellers. There are instances where two buyers are going back and forth with competitive offers and neither party can close the deal. In situations where the outcome appears bleak, real estate agents typically advise that buyers send a personal letter to sellers. These letters include details about the buyers, their families and their reasons for wanting to move into the home. The goal is to create a sentimental connection that could be the winning edge. However, it is important that buyers don’t divulge too much financial information. If sellers know how much buyers can afford, for example, they may raise their asking price to the latter’s maximum price.

Buyers can also inquire about the seller’s reasons for moving. Again, this creates a sentimental connection, and the action also provides critical insight for bidding. Sellers who need to move in a short time for a new job, for example, may not present as many counter offers because they need to sell quickly. Additionally, sellers who are looking to trade up to a more expensive home may be less willing to lower their asking price.

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KNOWING WHEN TO WALK AWAY

Possibly the most crucial part of making a competitive offer for a home purchase is understanding when it’s time to fold. Before buyers begin shopping for a house, they must create a budget to set limits for what they can afford. This process should include determining a maximum bid that includes extra room for closing costs, the down payment and other expenses.

To stay within budget, buyers can follow these three tips:

Purchasing a home is a business transaction. Gaining a

sentimental attachment to one property can lead to reckless

offers. It is not wise to break the bank for a home simply because

it has some desired aesthetic features. If the house is not within

budget, it can be tough be find additional funds to back up an

offer that exceeds a buyer’s financing and down payment.

Getting caught up in the idea of winning can also cause a buyer

to make an unrewarding offer. Some individuals are competitive

by nature, but trying to outbid other interested parties at all

cost is not the best strategy.

To avoid becoming too invested in one house, buyers can keep a

few options on their roster. If the bidding becomes too intense

for one property, there’s no need to place everything on the

table. Of course, demand and inventory will factor into how

many homes a buyer can consider at one time.

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The expertise of home loan officers and real estate agents is helpful for all aspects of making a competitive offer. At the heart of each guideline is having knowledge and funds to back up whatever offers are given, and there will be times when it is necessary to compromise on certain amenities or contingencies to beat the competition. Flexibility with the seller’s demands can be as effective as aggressive counter offers.

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Landmark Bank 801 E. Broadway Columbia, MO 65201 (800) 618-5503

A GUIDE TO MAKING A COMPETITIVE OFFER FOR A HOME PURCHASE