I just gave the following presentation to our local Northern Colorado Real Estate Investor Group because our market is the strongest seller’s market I’ve even seen.
Here are the strategies for making strong offers that get accepted.
Negotiating Hard Versus Getting Offer Accepted
Before we get too far into talking about making strong offers, it is important to realize that we can make extremely strong offers, but they may have very little or no chance of being accepted.
This is especially true in the current hot market we are seeing in Northern Colorado in August 2015 (the time I am writing this).
The truly amazing offers are ones that get accepted and that you, as the Buyer, are happy with.
Ultimately, you, as the Buyer, decide if it is better to negotiate hard and not get the property or to negotiate smart to get a property.
Buyer Versus Seller Markets
To determine whether we are in a buyer’s or seller’s market, we typically look at months of inventory. This can also be called Absorption Rate Calculations.
For clients located in Northern Colorado, you can see my latest charts on months of inventory:
You can see images in the gallery below of the average absorption rates for 6 Northern Colorado cities as of the time I wrote this.
We normally consider 6 months of inventory a balanced market between buyers and sellers.
With less than 6 months of inventory, we consider that a Seller’s Market. That usually means we have more demand (Buyers) than inventory (Houses).
With more than 6 months of inventory we typically have a Buyer’s Market. In that case, more supply of houses than demand from Buyers.
Call Seller’s Agent Before Writing Offer
One of the most important things a Real Estate Agent representing a Buyer can do is to call the Seller’s Real Estate Agent and ask, “What would be your Seller’s perfect offer?” Yet, very few real estate agents do this simple thing.
Once we’ve found out what would be the ideal offer for the Seller, the Buyer’s Real Estate Agent should talk to their Buyer about meeting as many of those points as possible.
Of course, after you’ve written up the offer, the Buyer has signed it and you’ve sent it over to the Seller’s Real Estate Agent for them to present it to the Seller the Buyer’s Real Estate Agent should call the Seller’s Real Estate Agent and then talk up the strength of their Buyer and their offer. They should point out where the offer is ideal for the Seller and, if you ignored the Seller’s ideal, why you did that.
Consequences of Not Performing On Your Contract To Buy and Sell Real Estate
In Colorado, our Contract To Buy and Sell Real Estate is considered to be written very much in favor of the Buyer.
Especially as we consider making strong offers that get accepted in a very strong Seller’s market by removing contingencies, we should consider what the consequences are of not performing on the Contract to Buy and Sell Real Estate.
Section 21.1 of the Contract to Buy and Sell Real Estate covers what happens if you don’t perform and in most cases, we are not checking off “Specific Performance”.
The very basic difference between an Earnest Money contract (which is what we typically do here) and a Specific Performance contract (which we rarely do with Buyers) is that with Earnest Money contracts the Seller will keep the Earnest Money has liquidated damages if the Buyer does not perform.
With Specific Performance, both parties agree in advance (in the contract) that the Seller can force the Buyer to buy the house and/or pay damages if they do not perform as agreed.
In our current market, you should be prepared to make significantly above asking price offers.
Here are some charts showing the ratio of sold price to list price for a number of cities in Northern Colorado.
Here are two tables that show data from July, 2015 for attached properties like condos and townhomes and then a second table for detached, single family homes.
TIP ON READING CHART: In the chart directly below, in Fort Collins 80% of the offers sold for 102.6% of list price or less. That means that 4 our of 5 offers sold for less than 2.6% above asking price. That same cell also tells us that 20% (or 1 out of 5 offers) sold for above 102.6% of asking price. So, 1 in 5 properties in Fort Collins sold for more than 2.6% above asking price.
My wife Tammy is quick to point out that “Sold Price” is NOT the same as “Offer Price” and that you may need to offer even more than what the “Sold Price” data I’ve just shared with you suggests.
Especially in more balanced markets, discounts often occur from appraisal and inspection negotiations. This often means that a Buyer may have offered more than what the property ultimately shows it sold for. This is not happening as much in our current seller’s market, but it has happened with my clients and does still happen to others as well.
If we had data on “Offer Price” we could make charts showing how that relates. Unfortunately, data on Offer Price on a property is NOT publicly available and is really only known between the Buyer and Seller and their representation and other service providers for that transaction like a lender and title company.
Changing List Price to Match Offer Price
Furthermore, to make it even more challenging, some Real Estate Agents will change the List Price to match the Offer Price once the property has received an offer. We’ve speculated why they might do this and have some guesses, but each Seller’s Real Estate Agent probably has their own reason for doing this.
The result of changing the List Price to match the Offer Price could be that when the the property does finally sell, it may look like there was not a discount (or premium) at all.
Or, if they changed List Price to match the Offer Price and then, sometime while the property was under contract, the Buyer and Seller agreed to reduce the price, what was an above asking price offer now looks like a discounted price.
Here are three examples from the MLS showing three different scenarios.
This first one shows the list price being raised to match an above asking price offer and the property eventually selling for that price. This would show up in my stats as an offer that received 100% of list price and really the above asking price offer that it was.
This second one shows the list price was raised some when the offer was accepted and then it finally sold for even higher than the new, raised list price.
And finally, this third one shows that the price was raised up when the offer was accepted and then reduced (maybe due to a negotiation while it was under contract) and then closed as if the property sold for a discount from list price. Which, it really sold for significantly above list price.
A couple final points relating to price.
First, lower price ranges tend to go for high percentages above asking price. At many higher price ranges, the demand for properties is not as strong and so we’re not seeing as many multiple offer situations. This means that people are not having to bid significantly above asking price on many of those higher priced properties.
And secondly, some people will want to consider Escalation Clauses. I will not be teaching you about them now, but I have linked to an article on my website where I discuss them in much greater detail.
Conditional Sale Deadline
In strong seller’s markets it is challenging enough as a buyer to get an offer accepted without making an offer that is contingent on selling your home. In these types of markets, I recommend that you consider alternative solutions to making offers where it is contingent upon selling your home to strengthen your offer.
I’ve already mentioned that with these types of strong seller’s markets, you’re probably making above asking price offers. In some cases you’re making significantly above asking price offers. Expect the property not to appraise for your high offer price.
So, what happens when a property does not appraise?
Lenders will typically loan a percentage based on the lower of either the purchase price or the appraisal. So, if a property appraises for lower than your purchase price, the lender will only loan a percentage based on the lower appraised value.
As an example, let’s say you make an offer for $300,000. The property appraises for $290,000. You were planning to get a 95% loan by putting 5% down. The lender will loan you 95% of the lower of the offer price or appraised value. In this case, the lender will loan you 95% of the appraised value of $290,000.
So, what happens to the difference between the $290,000 appraised value and the $300,000 that you offered? If you waived your appraisal contingency, you’d need to pay the $10,000 difference in addition to the 5% of $290,000 for your down payment.
In many cases you will want to consider waiving the appraisal contingency and telling the seller that you’ll buy the property even if the property does not appraise.
In some cases you might make a slightly weaker offer and tell the seller in your offer that you’ll buy it as long as it appraises for their asking price.
In other cases you might make an offer that says you’ll pay up to $X above the appraised value. So, if they were asking $250,000 you might offer them $270,000 but only if it appraises for at least $260,000. Otherwise, you will adjust the price to be $10,000 above the appraised value.
Offers that are not contingent on financing are typically stronger offers. So, if it makes sense to do so and you can do it, consider making a cash offer. You might make the offer as a cash offer and put in additional provisions that you may get a loan.
Type of Financing
VA and FHA loans are harder to get accepted than conventional financing, so if you can get conventional financing you may want to make your offer with conventional financing.
Before you start looking at properties you should be pre-approved and go as far as possible toward getting the loan as possible. In many cases, that will mean that you get fully underwritten and are just waiting for a property to add to your file.
You’ll want a lender letter that is written as strongly as possible when you submit your offer and the time to get that lender is before you start looking so you’re not scrambling to get a lender letter at 8 PM to get in offer in last minute.
Great seller’s agents are calling the lenders on offers they’re receiving to make sure the buyer is qualified and can get the loan.
Great buyer’s agents are prepping their buyer’s lenders for these calls.
Down Payment Amount
A larger down payment is a sign that a buyer is better able to perform. So, the larger the down payment you include on your offer, the stronger the offer is in general.
Some appraisers may look harder at the property value if you’re putting less down to better protect the lender. The idea being that if a buyer is putting 20% down, the lender is better protected and so if they’re off a little on value it is not likely to cause hard to their lender. If you’re only putting 3.5% down, being off even a little could put their lender (or at least the private mortgage insurance) in a more risky situation.
Our contract asks if you have the funds you need to close ready and available for closing at the time you make the offer. Marking no here weakens your offer. If you’re marking no, you’d better have a great story and have your agent on the phone explaining why as you submit your offer.