The old adage buy low and sell high isn’t always applicable in the world of real estate. Sometimes even buying “high” winds up being buying “low” with the benefit of hindsight. As an investment you can actually live in, people often find themselves buying a home in a seller’s market. At the time of this article (May, 2021), many real estate markets across the United States are in extreme, hyper-competitive seller’s markets. We definitely are here in San Diego, California. Low inventory coupled with high demand has created a perfect storm for buyers seeking to purchase a home. As both a listing agent and as a buyer’s agent, I see firsthand what helps get offers accepted. Join me as I discuss 15 insider tips designed to maximize your chances of getting an offer accepted.
Buying a Home in a Seller’s Market – Disclaimer
First, a quick disclaimer. Market conditions can vary, as do typical real estate norms and best practices. These vary across markets, brokerages and even specific agents. What is a prudent technique in one market might be considered reckless in others. For some of the strategies listed below, you may be acting against the advice of your agent and/or broker. In hyper competitive markets, there tends to be a risk/reward tradeoff. Higher risk approaches can also be some of the most effective strategies for beating out other competing offers. That efficacy can come at a cost though.
Please do not rely on the information provided here without first consulting with a reputable agent and/or real estate attorney familiar with your local market. If you happen to be looking at the San Diego Real Estate market and are not already exclusively working with an agent, please reach out to me and I would be happy to discuss assisting you. With the disclaimer and my shameless plug out of the way, let’s dive into how to make your offer rise to the top in tough, highly competitive seller’s markets!
With the exception of the first tip, (Offer Price), I will try to rank these roughly in order of increasing risk. As you might expect, the riskier the strategy, the fewer buyers that use it (and, conversely, the more likely it may appeal to a seller).
High Offer Price
The overarching key factor in buying a home in a seller’s market (or any market) is offer price. In San Diego recently, I saw firsthand that even a cash offer $200k+ over list is not a guarantee of an acceptance. For many of the homes you might be considering in a hot seller’s market, it is possible there are few to no comparable sales to support current valuations and accepted offer prices.
In terms of risks, on the one hand the market could continue appreciating, though maybe not at the current extreme pace. Today’s prices could seem like bargains several years from now. Alternatively, the market could plateau or even have a major downturn. The latter could result in owning a home worth substantially less than you paid for it. The longer you plan to own the home, the less at risk you are from short term market dips. For the great recession, those that bought near the peak waited roughly seven years for values to recover here in San Diego.
Aside from a compelling offer price, the following offer strategies can help skew things in your favor in a hot seller’s market:
Proof of Funds / Preapproval
If you are financing your purchase, then hopefully you read my article on the importance of getting a preapproval before you are ready to make an offer. You should include a copy of this preapproval letter with your offer. You should also include account statement(s) showing adequate funds to cover at least your down payment and closing costs. Sometimes lenders say they verified those funds, but in a competitive market it is better to show than tell. Cash buyers should also include account statement(s) showing sufficient funds to cover their offer amount and closing costs. If you are passing along account statements, be sure to redact any sensitive information like account numbers.
Buyer Love Letters in a Hot Seller’s Market
Buyer love letters have become a controversial topic lately. Many brokerages are advising listing clients not to accept them, and advising buyers not to submit them. They have fallen out of favor with brokerages and Realtor associations due to the risk that buyers could be discriminated against based on their age, race, familial status, and other protected classes. Despite a trend toward discouraging them, they are still widespread at the time of this article.
Buyer love letters can lead sellers toward a specific buyer, and some agents consider them indispensable for buying a home in a seller’s market. Although they can be written in a way that doesn’t necessarily run afoul of fair housing laws, doing so can be a tricky balance. You should discuss with your agent / real estate attorney and weigh the risks and potential benefits of these letters before including one with your offer.
Avoid Specifying Various Inspections in the Offer
It’s not uncommon in San Diego for buyer’s agents to specify that either the buyer or seller pay for specific inspections such as a termite inspection, home inspection, etc. Although you can still order them (at your own expense) during the inspection phase of escrow, you might consider leaving them out of your offer in a highly competitive environment. Your offer looks cleaner, and specifying a number of inspections might make the offer look less certain. If you ask the seller to cover multiple inspections, that can be a deterrent to the them engaging with you.
Other terms being equal, cash offers almost always win out over financed offers. Cash is king is true whether you are buying a home in a seller’s market or a neutral or buyer’s market. However, cash is not a guaranteed acceptance either. Some sellers hold the “All offers are cash by the time escrow closes” philosophy. In other words, assuming a financed buyer still completes their purchase, the seller still gets “cash” at closing.
Most sellers and their agents know that cash deals are far less likely to fall out of escrow. That decreased risk is mainly because problems with a buyer’s financing are a common reason for deals falling apart. Cash offers have a major edge over financed competition, particularly when combined with a waived appraisal contingency (more on that below). Cash offers can also be more flexible with timeframes that might appeal to some sellers (more on that below, too).
3% Earnest Money Deposit
Buyers usually deposit the earnest money deposit shortly after an acceptance is reached. 1-3% is the typical range here in San Diego, with 2-3% looking more serious to many sellers, but also potentially putting more of your money at risk – especially once your contingencies are removed. Going in with a 3% earnest money deposit virtually eliminates the likelihood the seller issues a counter to increase your deposit. Aside from a reduced likelihood of a counter, 3% makes you look more solid, while 2% or certainly 1% can convey a timid buyer. For more details, check out my article on everything you ever wanted to know about earnest money deposits.
Waived Home Warranty
In San Diego, sellers commonly pick up the tab for a home warranty. These warranties are usually in the $400-$800 price range. Home warranties don’t cover everything, but they can be useful for covered issues that occur in the year after closing. If you’re comfortable paying for whatever issues might come up in the first year, waiving the home warranty can make your offer look cleaner when buying a home in a seller’s market. And, if you happen to be up against another similar offer that is asking for the seller to pay it, waiving the home warranty can give you an edge. You can always buy your own home warranty if you decide to do so. In fact, you can buy them during escrow, or even after escrow closes.
Clarifying Acceptance of As-Is Terms / Waiving Request for Repairs
In California residential home sales are generally “as-is.” This means that the seller is under no obligation to respond to or agree to buyer repair requests or credits in lieu of repairs. Even so, buyers in San Diego commonly make repair requests once they complete their buyer inspections. Sellers then have the option to decline the request, agree to a portion of it, or agree to all of it.
In the current intense seller’s market, sellers are much less motivated to agree to any request for repairs. They are also wary of buyers that attempt to renegotiate the purchase price via a request for repair. By clarifying the buyer intends to purchase completely as-is, you can set the seller more at ease and make your offer more appealing. Some buyers do this by including a waived “Request for Repair” form with their offer. As-is does NOT mean sellers are free to hide information from buyers. Sellers must still disclose all relevant / material property information to the buyer, regardless of whether the buyer is purchasing completely as-is.
Escalation Clauses for Hot Seller’s Markets
Not long ago, escalation clauses were almost unheard of in San Diego. In the current seller’s market, they are increasingly common. An escalation clause is added to an offer or counter offer stating that the buyer is willing to pay $X more than any other buyer’s offer. That escalation can be any amount, with $1,000 into tens of thousands not unheard of. There are a couple key challenges associated with escalation clauses.
Some escalation clauses include a cap where the buyer states they will beat any offer up to a certain dollar amount. By including a cap on the clause, the buyer has prevented the very real risk they are agreeing to beat an astronomical offer. However, they also tipped their hand to reveal what their “highest and best” offer is. Sellers and their agents can use this information against the buyer. They can do so either countering at that number if the other offers (if any) are lower, or by trying to get higher bids from other buyers.
The other concern is whether to include a base offer amount. This would look like, “$XYZ offer amount, or $XYZ higher than any other offer, whichever greater.” This approach has an actual offer amount (typically needed for a binding contract), but again creates a risk that the buyer pays more than they would have otherwise. If an escalation clause is used, it should definitely include a clause that requires the seller to provide a copy of the highest competing offer to verify it is bona fide.
There are a variety of risks with escalation clauses and their validity is sometimes questionable, Anyone considering escalation clauses should consult with an experienced real estate attorney prior to attempting to use them.
Shortened Contingency Timelines
There are several key contingencies here in San Diego (and in California generally). The two most common timeframes are 17 days for your inspection and appraisal contingencies, and 21 days for your loan contingency (if you have a loan). Shortening these is a common strategy to look more solid and appealing to sellers when buying a home in a seller’s market. Your lender should ideally determine the loan contingency timing. Some lenders are comfortable with a shorter loan contingency, while others might actually need more than 21 days.
Appraisal contingencies can be tricky depending on how quickly an appraisal is ordered and how available appraisers are. If your lender delays ordering your appraisal and/or if appraisers are in high demand, shortening the appraisal contingency can put you in a bind if you are missing a contractual deadline.
When buying a home in a sellers market, buyers commonly shoren the inspection contingency. Going from 17 to 12 or 10 days looks more appealing to most sellers. In most cases, a slightly shorter timeframe still allows a reasonable amount of time for most common inspections and due diligence.
Short Escrow Times (For Sellers That Want a Quick Close),- OR- Rent-backs Allowing the Seller to Stay in the Home (Usually at No Cost) for 1-2 Months After Closing
The trick here is the buyer’s agent actually asking the listing agent what the sellers want. Short escrow times are most feasible for cash buyers. If the home is vacant, the seller is more likely to prefer a short escrow timeframe. 10 to 14 days is not unheard of for cash deals.
Rent backs or lease backs can appeal to sellers wanting more time to move. They come in two varieties in our market. A “Seller In Possession” or “SIP” is for sellers remaining in the home up to 29 days after close of escrow. The agreement for this essentially creates a license for the seller to stay in the property during that period. For time periods 30 or days or longer, a “Residential Lease After Sale” or “RLAS” form is used. This is a full lease and provides the former owner with tenancy in the home.
Both have inherent risk ranging from the home being damaged or destroyed before the new owner even takes possession, to the former owner refusing to move out. There are also insurance implications and both the seller and buyer/new owner should consult with their insurance professional and make sure appropriate insurance is in place at all times. If the purchase is financed, some lenders do not allow longer lease-back periods, so talk with your lender as well.
Waived Appraisal Contingency
Some cash buyers remove this contingency with the offer when buying a home in a seller’s market. If you don’t feel the need to order an appraisal, you save roughly $500-$1000 on the appraisal and make the offer look stronger to the seller. Even if you waive your appraisal contingency, you can still order an appraisal. However, if that appraisal comes in below accepted price, you can’t cite the low appraisal as a reason to cancel the deal. One fundamental risk in waiving an appraisal is that you may be unaware you are “over paying” for a property. In hot seller’s markets, sometimes “over paying” relative to what an appraiser thinks can be what it takes to get an acceptance.
In rapidly appreciating seller’s markets, appraisals coming in low are quite common. This is in part because appraisals inherently look into the past. For financed buyers (especially those with minimal spare cash reserves), waiving the appraisal contingency can be more risky. They are basically agreeing to supplement any shortfall in appraised value with their own funds.
Listing agents in rapidly appreciating markets closely watch any appraisal, in part because they are known deal disruptors. If you are a cash buyer and willing to waive the appraisal contingency, or are a financed buyer with surplus cash and are comfortable potentially bringing more cash to the closing, waiving the appraisal contingency can be viewed very favorably by sellers and their agents.
Waived Inspection Contingency
This is a more extreme step from shortening your inspection timeframe. By waiving the inspection contingency up front, you are essentially saying no matter what issues come up in your home inspection and due diligence, none of them are grounds for cancellation. This can put your earnest money at risk earlier than it normally would be. If you find a major issue with the property, you could be in a position to either accept the major issue or forfeit your earnest money in a cancellation without the appropriate contingency in place.
Removing ALL Contingencies with Initial Offer
This is pretty common up in the San Francisco Bay Area. However, in the Bay Area the sellers typically provide a full disclosure package to any interested buyers up front. Here, most buyers don’t receive disclosures until in escrow. Even with disclosures provided up front, this is an extremely risky way to buy property. Your earnest money deposit is immediately and fully at risk if you decided to cancel for any reason. And without any contingencies, your grounds for cancelling don’t really exist to begin with.
This is a perilous course of action, but it can also be a highly effective technique for enticing sellers. With all contingencies waived, sellers know there is almost no chance a buyer backs out. This approach is deemed so risky that the California Residential Purchase Agreement (or RPA) has language in it saying any buyer that elects this option is acting against the advice of their broker. If you are considering this approach, or your agent is encouraging you to make a completely non-contingent offer, please consult with a real estate attorney familiar with your local market so they can adequately advise you of the risks involved.
Buying a Home in a Seller’s Market – Your Representation Matters
Lastly, one fundamental step surprisingly few buyer’s agents take is to leverage communication. Buyer’s agents should pick up the phone, call the listing agent, and ask them what would be the most appealing terms they want to see in any offer. Too many buyers write offers with assumptions about what the sellers want. Those assumed terms might actually be the opposite of what the seller wants. Regardless of how hot the market is, it is vital your agent is seeking out information from the listing side before you write your offer. That information coupled with adjustments made to your offer approach can be the difference between an acceptance on your dream home or missing out on it completely.
If you or someone you know might be buying or selling real estate in San Diego, regardless of location or price point, please let me know. I can also assist in connecting buyers and sellers outside San Diego with outstanding Sotheby’s International Realty agents via our 1000+ offices in over 60 countries. Please read my client reviews, and don’t hesitate to call, text or email me with any real estate questions or to schedule a no-obligation consultation.
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