What Buyers Need to Know about Multiple Offer Situations

By Jon Miller, Realtor®

Seller’s Markets are tough for buyers. There are few homes to choose from and home buyers often find themselves competing for homes. Knowing what to expect when competing with other buyers will help you put together your best possible offer and give you the best opportunity to have the winning bid.

Before getting into the strategies, it’s helpful to put yourself into the seller’s shoes to understand their position. Most sellers want to sell for the highest possible price and the smoothest possible transaction. Sellers typically don’t want to negotiate repairs or reduce the price after inspections. They also don’t want their sale to fall through due to financing or inspection issues leaving them to start over and re-list their home. Sellers may also want a quick sale so they don’t have to keep paying the mortgage or they may want a flexible timeline because they may still have to find their next home. Understanding the seller’s position, wants, and needs can go a long way when crafting your offer.

Home buyers have to put their best offers forward when competing with other offers. In PA, seller’s agents are generally required to share the existence of other offers if asked by the buyer’s agent. However, the details of the offer are confidential between the buyers and the sellers. As a buyer it wouldn’t be typical to know any of the details of the competing offers unless the seller explicitly asked their agent to share the information. Most sellers would choose not to do this because offers may not come in as high as possible by sharing the information.

When a seller has multiple offers they often ask each potential buyer to submit their “highest and best” offer by a certain day. Once they have each buyers highest and best offer the sellers will choose the one that they want to proceed with and let the others know that they have selected another offer.

I’m often asked if there should be room to negotiate with the highest and best offer. The answer is ‘no.’ The seller expects that the offers are the best so they aren’t going to look to negotiate on price. Plus, any wiggle room could mean that someone else comes in at a slightly higher price and gets the house.  Highest and best offers should be exactly that. In fact, it’s generally best to put the highest and best in right away if there are other offers because the seller may simply choose the best one and not give the opportunity for a second round.

Below are some of the most important things that home buyers can do to increase their chances of having the winning bid when faced with a multiple offer situation.

Price

The selling price will be the most important piece for most sellers. As a general rule, homes that have been recently listed for sale and have multiple offers will sell for very close to, or even above, the asking price. Don’t be afraid to pay more than the asking price if it makes sense when compared to recent sales of similar, comparable, properties. It can be that the market is going up that quickly or that the seller could have asked more for the property. When determining your offer price be sure to look at comparable sales to come up with your number.

Speaking of price, it’s generally best to choose a price range that allows some flexibility. If you’re only looking at homes that are listed at the very top of the range and they’re selling for more than the asking price, it’s likely you’ll be competing with buyers who can spend a little more. By focusing the search a little bit below the top of the range you’ll have a bit of flexibility.

Escalation Clause

An escalation clause would increase the price by a certain amount and up to a certain amount. For example, an offer may be for $350,000 with an escalation clause that offers to beat any competing offer by $5,000. Of course, this can’t be unlimited so you’d want to be sure to have an upper limit so the clause may only be good up to $365,000. Among other things, you’d also want to include that the seller has to show proof of the competing offer.

Deposit

The deposit, or earnest money, is paid when the offer is accepted and will become a part of your down payment. The larger the deposit, the less likely a buyer is to walk away due to cold feet so a larger than normal deposit can be attractive to a seller.

Settlement Date

Having a flexible settlement date, or a settlement date that matches the seller’s needs, can be attractive. In PA, an offer will include a settlement date so it’s good to find out if there is a preferred settlement date for the seller before submitting the offer. If you have flexibility in the date, it can be good to mention that when submitting the offer. It’s not uncommon that a seller will need to find a new home so if you’re able to provide them with that time it can make an offer stronger.

Seller’s Assist toward Closing Costs

If you can avoid asking the seller to pay toward your closing costs it can make an offer much stronger because it will net the seller more money. Plus, many sellers prefer not to pay money toward buyer’s closing costs so if looking at two offers that net the seller the same amount but one with a higher price and money toward closing costs, the one without seller paid closing costs would be stronger (all other things being equal).

It may be that you have to have the seller pay money toward closing costs in order to purchase the house. If that’s the case, ask for what you need but ask for as little as possible.

Mortgages and Lenders

As sellers assess offers, they will likely seriously consider the funding. Cash makes for the strongest offers because without a mortgage company and loan requirements, there isn’t a chance that the financing can be denied at the last minute and cause the loan to fall through. But, most homes are purchased with a mortgage loan so it’s fairly likely that buyers will be competing with other buyers who are financing their purchase, as well.

When buying, you may not have much choice when it comes to the type of loan or your down payment amount, however, it is important to understand how attractive the loan that you’re using is compared to other types of loans. Conventional loans with high down payments of 20% or more have the fewest issues and lowest chance of falling through and not getting funded. These are the most attractive loans. After that, conventional loans with lower down payments are the next most attractive. After conventional loans are FHA and VA loans. These loans require longer to close and have more requirements for the condition of the property that the seller may need to address. Also, they have a higher fall through rate than conventional loans.

When it comes to loan types, price tends to overcome obstacles. This is important to keep in mind if you’re making an offer with a loan other than a 20% down conventional loan. I’ve had clients who’ve beat offers with conventional loans with FHA and VA loans by enticing the seller with a higher price.

Your choice of lender can also make a difference. Generally speaking, local lenders with a track record of success and knowledge of how things work in the area provide a smoother transaction. The national banks are easy to call to get the loan but tend to be more difficult to reach when there’s an issue that can delay settlement. Using a reputable local lender can definitely make an offer stronger. Given two nearly identical offers, the decision to use a local lender can be the piece that makes the decision.

Inspection Contingencies

Most home sales will include inspection contingencies. As an agent, I recommend that my clients get a home inspection but it is the buyer’s decision. More home sales fall apart because of inspections than for any other reason so inspections are a big risk for sellers since having a buyer walk away from a purchase means starting over. Some buyers may choose not to make inspection contingencies a part of the sale. This may happen if the buyer has expertise and/or resources to take care of issues. More likely, a buyer may choose to forego inspection contingencies if the seller has performed a pre-listing inspection and shared the report with potential buyers.

While few buyers would go to the extreme of not performing inspections, there is middle ground that may still be an option. For example, if a seller has had a pre-listing inspection and shared the reports with potential buyers, a buyer may choose to include inspections but to waive negotiation on items already noted in the reports. This can give the buyer the comfort of having their own inspector look at the property and give the ability to note issues that weren’t previously disclosed.

Home Sale Contingencies

A Home Sale Contingency means that the buyer can walk away from the purchase if their current home doesn’t sell. There are two ends of the spectrum of Home Sale Contingency. On one end, the home isn’t on the market yet. On the other end, it’s on the market but hasn’t gone to settlement. Unless the sale is close and the buyer’s buyer has performed and negotiated inspections and the appraisal results have been returned, an offer with a home sale contingency is very weak. When there are multiple offers few sellers would want to risk having their sale contingent on the sale of another property. However, if a buyer is in this situation they may consider increasing their offer price to account for the risk and/or providing a large deposit that’s non-refundable in the case that the buyer’s house doesn’t sell. While that may not be ideal, it may be worth considering since it may make sense in some situations.

Letter to the Seller

Some buyers will include a letter to the seller as part of their offer. The letter usually includes some information about the buyers and why they love the house. A family photo is often included, as well. While this approach won’t make a seller choose an offer for $10,000 less than another, it may make the difference with two similar offers so it’s worth a shot.

Keep in mind that with these letters not all sellers will want to see them. Some prefer not to look at them because they want to make a decision based solely on the numbers. I recommend that sellers ask their agent not to include these letters when offers are presented because having them can cause the accusation of violating fair housing laws. You can read more about that here . . . http://www.nolo.com/legal-encyclopedia/im-expecting-letters-multiple-buyers-wanting-home-does-reading-risk-lawsuit.html

Summary

Buying a home in a seller’s market is likely to lead to a multiple offer situation. If you find yourself in a multiple offer situation know that there are many things besides the price that can influence a seller’s decision. While price is often the main component, the terms can have a big impact. An experienced real estate agent can help you work through the options to help you make the best possible offer so you’ll have the best chance of having the winning bid and finding your home quickly.

If you’re considering buying or selling a home, please call me at 215-839-6034 for a no obligation consultation.

 

The Philadelphia area is a great place to live and work and I love sharing all that Philadelphia has to offer. From our unique neighborhoods and towns, great parks, amazing restaurants and nightlife, museums, and events there’s no shortage of things to do and see in, and near, Philadelphia. Since 2010, I’ve been helping people buy and sell their homes in the Philadelphia area specializing in Center City, Northwest Philadelphia, and the Montgomery County suburbs bordering the city. Outside of being a Realtor®, I’m a dad to an amazing little girl, husband to an amazing wife, and dog-dad to Frida. Together, we enjoy taking advantage of everything that Philadelphia has to offer and exploring the many parks, festivals, and events in the city. Since 2017, I’ve been supporting KenCrest through volunteer efforts including organizing cleaning and painting days at their community homes, decorating for the holidays at children’s transitional homes, and coordinating fundraising and toy drives to support their efforts.

Need to buy or sell a home in the Philadelphia area? I’ve been helping home buyers and sellers from the City to the Suburbs since 2010. Call me at 215-839-6034 and let’s talk!