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How to Win in a Multiple Offer Situation

The impact of COVID-19 has been a catalyst for real estate markets to heat up all over the country. Today’s real estate market has been called “nuts,” “crazy,” and “hot.” There is more demand for housing right now than the current supply facilitates. What does this mean if you are trying to buy a home in Hawaii right now? There are multiple offers on any given property, and there is only one winner. The last three offers I wrote for clients on Kauai were competing against 13, 12, and 13 other offers, respectively. And those were all in different areas and different price ranges.

How to Compete in a Seller’s Market

So what does it take to be successful as a bidder in today’s competitive market? Here are a few tips I have for you when considering your offer and offer presentation strategy.

Find a Skilled Real Estate Agent

First and foremost, align with a great real estate agent who can give you the best representation. There are varying levels of professionalism, competency, and negotiation skills among real estate agents. These skills can very much be the tipping point for Sellers when reviewing similar and otherwise comparable offers. Your agents’ level 0f involvement and first-hand knowledge of the local real estate market matters, as does their track record and reputation for smooth, successful closings. Are they able to communicate both orally and in written exchanges articulately? Do they respond quickly to texts and emails and answer their phone? Choose the agent who is representing you wisely.

Access Cash

Sellers will choose cash over financing every time. With interest rates being so low, it is understandable why you would want to keep your cash, but consider purchasing with cash and re-financing after closing to replenish your savings or investment accounts. Some hard-money lenders will offer cash with collateral, such as the property. That is a method I’ve most often seen used at the foreclosure auction steps, where you can only buy with cash, due and payable upon finalization of the auction. Still, it is handy to consider in today’s competitive markets. There are usually higher fees and rates associated with these types of loans, and you would want to make sure you are pre-approved for your own mortgage to pay off the hard-money lender after closing. Or, maybe you have a wealthy family member or friend you can work out your own arrangements with, knowing you’ll be able to re-finance after closing to get them paid back quickly? It may be worth exploring these options if you find yourself losing deal after deal to cash buyers. Every market is a little different.

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Show Sellers Your Financial Strength and Ability

It almost goes without saying that if you are getting financing, you will need a letter from a lender attesting to your financial qualifications, but do you know the difference between a Pre-Qualification letter and a Pre-Approval letter? When a lender Pre-Qualifies you, they often rely upon your representations, such as stated annual income and current debts. They may collect these documents from you, but until they submit your required documents to the underwriter, it is just a Pre-Qualification and not a Pre-Approval. A Pre-Approval letter is stronger and usually also means you can tighten up the closing timeframes, which is an advantage I will discuss next.

Make Contingency Periods Short, or Eliminate Them

There are many contingencies in a purchase contract that protect the Buyer and allow them to complete their due diligence before getting to settlement on a property and back out of the deal if the information they learn is unsatisfactory. A Buyer can shorten all of the time frames and contingencies in the Hawaii Purchase Contract to be advantageous for the Seller, but a quick closing and shortened inspection contingency are two of the most impactful time frames to alter.

In Hawaii, a typical home inspection contingency is 14 days. When markets get competitive, some people are waiving their home inspection contingency periods. That is a strong tactic that gets noticed. In reality, Buyers can use several other contingencies to get out of a contract if needed, but it can still be a risk. It is always a good idea to have a home inspection done, no matter if the contingency is waived or not. In the case of an offer with a waived home inspection contingency, Buyers can either have a home inspector check out the property before bids are due or schedule one after their offer is accepted. Just make sure the Seller is aware of their plans to do this and will provide access.

Show Sellers Your Commitment to Perform

Putting a sizable amount of earnest money down into escrow sends a message to the Sellers that the Buyers are committed to seeing the purchase contract through. Although earnest money is “typically” around 1% in Hawaii, it is continuously variable. Consider what you are contributing to your down payment, and think about depositing it into escrow early on in the game. Several contingencies protect it, and if the deal falls through, with a legal excuse, it is fully refundable. It is essentially a “token” of good faith placed into a trust or escrow account and can help Sellers feel more comfortable with an offer. This can be helpful even when you are not putting a substantial amount down, such as the case in a 0-down VA loan or a 3.5% FHA loan.

In this competitive real estate market, cash offers are often viewed as favorable, followed by high-down payment conventional loans. Typically, the more Buyers can put down, the more comfortable a Seller feels. When you don’t have a large down payment or the ability to pay cash, you have to do everything you can to make everything else that much more attractive to the Seller.

Go Big or Go Home

Right now, properties receiving multiple offers are selling well above the asking price. Now is not the time to come in low unless a property has been on the market for a while, which indicates it is probably overpriced in the first place because properties priced correctly in today’s market are selling fast. Think about how much you are willing to pay for the property you want and what number you are would feel okay walking away from. It can be very subjective, but with interest rates at under 3% in many cases, if you are getting financing, every $10,000 you go up is about an additional $35-$40 month. Consider your budget. Think of this as a long-term investment.

This approach is especially true for first-time buyers, who can be a little scared to enter the market. Think about this: financial wealth is often attained in our country through growth in real estate investments. A place to live is a need. You will either be paying your mortgage or someone else’s, which is subject to them raising your rent or selling the property at a later date and displacing you. Owning a home can give you freedom and control. You can also consider throwing in an “Escalation Clause”, which states you will bay X-amount above the highest bidder, with a cap of X-dollars. Just be careful with that – the Seller may give you a counteroffer at your cap.

Have the Ability to Put More Down if There Are Appraisal Issues

Nothing is more disappointing than getting through the inspection and due diligence periods and having the appraisal come in low. If Buyer and Seller do not come to terms, with either a reduction in the purchase price, Buyer bringing in more funds to satisfy lender, or somewhere in between, the deal is over, escrow will return the earnest money and Buyer walks away, while Seller puts the house back on the market.

In this market, however, most Sellers, or at least their Realtors, are savvy to this and maybe clear upfront that they expect the Buyer to make up the difference in the event the appraisal comes in low. After all, the multiple offers convey to them that they were priced at the correct market value, and there is a line of other ready and willing buyers who would gladly step in to purchase the property if given the opportunity. Just know that there could be an appraisal issue, as we have seen over the past year, and if you want to purchase the property, you may need to have resources for bringing in a larger down payment for the lender.

Make it Personal

Finally, it is okay to put some heart and soul behind your offer. Maybe you don’t have a lot of cash or can’t compete on every level for various reasons. Perhaps you are just starting with your first home purchase or are trying to buy a vacation home in honor of a loved one who has passed. Behind every property for sale is a human (besides bank-owned properties, in which case, are humans analyzing numbers and algorithms, so forget it) who may consider your story or situation and look upon you kindly. I have helped clients be successful with their offers by including a heartfelt personal letter and sometimes even their picture, letting the Seller know what they love about the property and a bit about them and who they are. Of course, we have laws in place that prohibit discriminatory practices, so we have to be careful about the kind of information we disclose. But at the end of the day, even though a real estate transaction is a business decision, Sellers can also make it with heart and soul.

Real Estate Markets are Cyclical

If all of these aggressive strategies leave you feeling unsettled and frustrated, this is probably not the best time for you to consider purchasing real estate. Real estate markets are cyclical, and the pendulum traditionally swings back and forth between Buyer and Seller markets. It will eventually change. Interest rates at historical lows and lack of inventory drive this market, but it is all relative. If you feel more comfortable taking your time and not engaging in a bidding war, then I suggest you wait, or you will be even more frustrated by riding the roller coaster of getting your hopes up and being let down. But if you know what you want and are prepared to do whatever it takes to get it, then get ready to pull out all the stops to make it happen, and good luck! You’ll need a little bit of that too.

*Disclaimer: All of the information in this article is a personal opinion. I encourage you also to seek guidance from tax professionals, attorneys, and other qualified professionals. Mahalo!
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Gabe Venturelli

June 10, 2021

Spot on Brenna!!!

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