Note: This is my weekly post about the ABCs of real estate where I pick a letter (T this week) and write a fictional story around the letter. The story is fiction, but the advice is very real.
Thomas worked for the railroad company in a neighboring state for several years now. He had saved up the whole time in the hopes of getting the home of his dreams. His friend Percy was a real estate agent so the two of them worked together on getting a house. Percy took Thomas to several homes that the young train engineer really liked. They made offers on the houses, which turned into multioffer situations the same day, so they took the next step of submitting a final and best offer. They had done it at least five times. They had never won a bid. Thomas was frustrated with Percy. He called me one Friday afternoon, after reading my blog, to discuss what they could do differently. Thomas was sure Percy was doing all he could do to get a home for him, but there was something missing in the offers since he never seemed to get a home. Percy had gotten angry at Thomas for doubting him and they had been bad blood between them for about a week when Thomas called me. Thomas asked me what buyers need to be doing to get a home. What were some things his friend Percy might do differently.
This is what I told Thomas
I first told Thomas that I was not able to work with him on the actual process of looking for a home if he wanted to continue working with Percy. I have some very strict ethical guidelines, one of which is that I never go behind another agent’s back to get their client. I told Thomas that he really needed to bury the hatchet with his friend Percy and start searching for homes again. He agreed he would do so, but still wanted some advice from me on how to make their offers more strong. I told him advice I could give freely as long as I didn’t profit it from it. With this in mind, I reminded Thomas that markets are very tight everywhere. In my area, we are seeing historically low inventories of less than two months, which means that it would only take two months for the current inventory to sell out. We real estate experts agree that six is the optimum monthly inventory any market should have on hand. Tight inventories means really intense competition with other buyers to get a home. It is not uncommon for many homes to get multiple offers the first day of listing. There are many buyers exactly like Thomas who are feeling the same level of frustration. Thomas just needs to be patient and realize that it might take some time, good strong offers and some luck in order to get a home. Despite this, I did tell Thomas that there are three terrible ideas all home buyers must avoid.
1. Making outlandish high bids for a home – Buyers have gone a little bit crazy in this market. I have seen buyers put in offers $15K to $20K over asking. I have seen offers where they have paid out $25K in earnest funds. I have seen offers where there is no option period. All of these offers in normal times would not even be considered. However, in this tight seller’s market, some believe you have to take these drastic measures to get a home. I personally don’t recommend these actions. It is a idea I think all homes buyers must avoid. Why? Buyers need to make competitive offers in this market, but I would not be looking out for my client’s best interest from a long term perspective if they put in an offer that falls out of the norm. If you purchase a home for $20K over asking, how do you know it will appraise at that value? What happens in two to three years when the market turns downward? The client suddenly has a mortgage higher than the value of their home. No option period offers mean no inspection, which means the buyer could find out too late that the property has thousands of dollars of hidden damages. You have to look at it as a risk versus rewards. Does the short term reward of getting a home now mean that you risk hurting yourself financially for the long term? It is a question only the buyer can answer.
2. Make an offer that is too conservative – Thomas stopped me here since this second idea is a direct contradiction of the first idea. What did I mean by too conservative? By too conservative, I mean you are making offers like this is a buyer’s market versus a seller’s market? But, you said I shouldn’t make outlandish offers? Thomas retorted. I pointed out to him that the is a difference between a competitive offer and an unreasonable one. Offers that come in below asking is not smart in most cases. You don’t want to ask the seller to put down $5000 towards your closing costs, or put up $600 for a home buyer warranty. The trick in making offers is figuring out a happy medium between competitive and outlandish. I always tell my clients that you can make your offers more attractive by taking some of the fees off the table for the seller. You can offer to pay for the title insurance policy, or offer to pay for a new survey. Buyers can also put more money down for the seller. You can offer more funds in consideration for an option period. You can also double the earnest funds from 1% to 2%. Finally, make sure you have a very strong letter from your mortgage company, preapproval letters are always the best approach to take in making offers. Evidence that you can get a loan takes some of the worry off the seller as they feel more confident that you can purchase the house without delays.
3. Stop making offers out of frustration – My final idea that all home buyers must avoid centers on the buyer’s frustration level. Buying a home can be one of the most stressful things anybody can undertake in their lifetimes. You are putting a lot of your future earnings down on one item, your mortgage. It can be a breathtaking experience and not being able to get an offer accepted just adds to your stress levels. My advice for those buyers who are feeling overwhelmed by the process is to find ways to help with the stress. Whatever steps you take to relieve stress, double it during the home buying process. The one thing you do not want to do is stop making offers. You can’t get a home unless you put an offer into the seller. As bad as you feel when getting an offer turned down, think about how bad you would feel if you let the perfect home get away from you because you took a vacation on making offers. Don’t let regret add to your already huge stress level.
Thomas came to me asking me for some advice on how to make his offers more attractive to sellers. I answered his question by telling him that three ideas all home buyers must avoid in the home buying process. First, you don’t want to make outlandish offer to get a home if it means ruining your long term financial picture. You don’t want to make offers looking to get a deal or ask sellers to help you out with the purchase. Finally, don’t stop making offers. You can always find ways to combat stress, but you can’t buy a home if you don’t make an offer.