If you’re a real estate agent in today’s market, it can feel like you’re up against a brick wall when you’re trying to help buyers who don’t have a lot of money for a down payment.
It’s not as bad as getting punched by Mike Tyson, but it’s still pretty frustrating for your buyers. And it means more work for you. After you’ve been knocked around a few times, you have to decide whether you’re going to give up or come up with a new plan.
Agents often think that it is very hard to beat a cash offer on a house, but there are some strategies that can help. By reducing the negative aspects of financing and creatively solving some of the other concerns a seller may have, it is possible to make a successful offer. Here are the top 10 strategies that have helped my team successfully beat out cash offers.
1. Use a Cash Lender
If you’re trying to compete with a cash offer on a home, one option is to use a cash lender. This type of lender will buy the property with cash and then let you refinance or purchase it after closing.
2. Submit Your Offer Early
If you’re worried about competing with cash offers, don’t be. Many listing agents today won’t look at offers for a few days after the property becomes active. This gives more buyers a chance to see the property and the seller may get more offers.
Some buyer’s agents think that it is best to submit an offer close to the deadline. However, we have found that it is better to submit offers early.
It’s awful when you realize that the seller has already accepted an offer, especially when you were so close to the deadline. If your buyer’s offer is still on the table, they at least have a chance, and if you follow my other suggestions, their offer might even win!
3. Offer a Signing Bonus
A common tactic that sellers use during negotiations is to wait until the weekend is over to present all offers that have been made. This allows the listing agent to make the buyers who are desperate for the property compete against each other, which in turn drives the price up. This technique also makes it more likely that a cash offer will be made, which would sweep away the competition.
Offering a “signing bonus” is the best way to overcome this. Your buyer must put their best offer forward for the “signing bonus” to be successful.
If the list price of a home is $400,000 and the buyer is willing to pay 10% more, they should structure the offer so the sales price is $420,000. If the seller accepts the offer within the next four hours, the sales price will be $440,000. This way, the seller gets a $20,000 bonus for accepting the offer sooner.
If you submit your offer early, you eliminate the competition and the seller gets to feel like they got a fair price. This is a true WIN-WIN! If the seller doesn’t accept the offer, it stays in the mix so your buyer can still have a chance to win.
To win against cash offers, you need to do more than just offer a signing bonus.
4. Be Memorable & Likable
To win an offer, you need to be memorable and likable. Here are two easy ways you can be more memorable and likable to the listing agent:
Leave Unique Feedback
When a buyer is interested in a property, the agent has an opportunity to set the tone by affirming how the buyer feels. This can be done by acknowledging that they love the home and can see themselves living there, as well as commenting on any positive aspects of the neighbourhood.
The feedback from buyers usually goes straight to the seller. This is the seller’s first impression of the buyer’s offer. Be careful not to mention anything about your client that could be seen as discriminatory under Fair Housing laws.
It’s like a short buyer love letter that doesn’t have the same potential problems as a love letter.
Send the Listing Agent an Introductory Video
Record a quick introductory video of yourself to the listing agent. Tell them you will be submitting an offer and that you would appreciate being kept up to date on any status changes.
Including small details in your listing can help your buyer’s offer be in first place.
5. Offer an Appraisal Gap
One of the reasons that cash is king in bidding wars is that an appraisal is required for mortgages. The bidding wars are causing sales prices to rise far beyond what agents or appraisers can realistically justify.
The appraisal gap is the difference between the sales price and the lower appraised value. A financed buyer who offers to cover the appraisal gap is putting up additional money for the down payment and closing costs. For example, if a property is marketed for $400,000 and it gets bid up to $420,000, the financed buyer may agree to bring in an additional $20,000 in the event the property doesn’t appraise.
Instruct your clients who cannot afford extra money for an appraisal difference to try to change their loan to a lower down payment choice. If that is not possible, have them request parents, grandparents, or even borrow from their 401(k) in order to make up the difference if the appraisal is lower than expected.
While this is a top strategy, today many buyers are offering appraisal gaps. So, to win your offer, you giving an appraisal gap may have to pull out the big guns.
6. Have Your Buyer Pay Your Commission
When you’re up against other offers that include cash, you may need to offer a higher commission to the seller’s agent. Commissions have always caused tension between buyers and sellers, with many sellers feeling that it’s unfair to have to pay commissions for both their agent and the buyer’s agent.
7. Add an Escalation Clause
While escalation clauses often have a negative connotation, they can be powerful tools used to allow buyers to make their strongest offers without the risk of overpaying compared to other competing offers, if used correctly.
For example, a home that was sold had six offers. This beautiful four-bedroom, three-bathroom home in a small rural town east of Denver was listed for $460,000.
There were six offers on the home, three of which were under $470,000, two at $480,000, and one for $500,000. The highest bidder had already sold their home and was in need of finding a new one quickly, or they would have to resort to renting.
They were in a pinch and because of their situation, they made an offer that was significantly higher than the others to ensure they would win. What they didn’t know is that the other offers were $20,000 less than their offer.
8. Pay the Seller’s Closing Costs
This next tip will give you an advantage when the offers are similar, but sellers today feel like they are being offered too little. That may sound funny when they are getting offers 10%+ over their asking price, but ask a home seller and they’ll tell you that’s how they feel.
There isn’t a requirement for the seller to pay for title insurance, escrow, and homeowner association (HOA) fees, although it is common practice for the seller to do so. These fees can range from $1,000 to $5,000, depending on the location, HOA, and the price of the home.
The buyer is able to select the title company in most cases when they pay for the title policy. If your buyer wants this option, you should make this clear in your offer. You should also get estimates of the fees before having your offer accepted or place a limit on the costs your buyer is willing to pay.
9. Give the Seller a Flexible Possession Time
Many homeowners are also looking to buy a new home, so they understand the seller’s nerves about finding an affordable home that they actually want to buy. Your buyer can be flexible with the seller’s timeline for moving out of the home after the sale is complete.
When it comes to flexible possession dates, buyers who offer cash have an advantage. However, there are two main strategies buyers with financing can use to give the seller more time to move. Each has benefits and drawbacks for both the buyer and the seller. The key is finding the right solution for both parties.
The seller can stay in the home for an extended period of time if a no-cost rent-back is arranged.
The main challenge with this strategy is that the buyer may need an investment loan if they are not able to occupy the property within 60 days of ownership.
For example, there was a seller who was waiting for their new home to be built. The winning buyer agreed to get an investment loan so they could allow the seller to rent back the home for up to six months after closing. This saved the seller from the cost and inconvenience of having to move twice. Once moved in, the buyer plans to refinance the home to a lower interest rate owner-occupant loan.
If your state doesn’t provide a post-occupancy form, tell your client to get a lease from a local real estate attorney.
Replacement Home Contingency
The seller may extend the time period or the buyer or the seller may terminate the contract if the seller is unable to find, contract, and inspect a replacement home within the two- to four-week contingency period.
The technique described in the text has the advantage that you will not have to meet the 60-day occupancy requirement that would come with other options, as the closing and possession will be planned around the seller’s purchase of their new home.
The disadvantage is that if the seller can’t find a new home, they can end the contract and stay in their current home. In this case, the buyer might lose any money they spent on inspections and appraisals.
It is important to have good communication with the listing agent and to understand the seller’s needs in order to make deals like this work.
It is important to make sure that the listing agent understands what the seller’s situation is so that the offer can be drafted to meet their specific needs. This can be done by calling the listing agent and having a conversation.
Having all the details when you’re presenting offers to your sellers. Write a cover letter with bullet points of key features of the offer and how the buyer’s offer takes into account the needs of the seller. If necessary, explain the buyer’s situation and their financing.
Then contact the listing agent via call or text, informing them that you have submitted an offer, and requesting confirmation of receipt. This demonstrates your initiative and ability to communicate effectively.
The best way to win a bidding war against cash buyers is to reduce the seller’s stress and eliminate their fears. You can do this by making your offer less hassle to finance and taking into account the seller’s other concerns.