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Finding a home

Creative ways to craft competitive offers in a hot market

By Zak Stoiber

August 2021

The housing market is scorching hot due to factors like a lack of homes available to purchase and the rising costs of building a house, so you’re going to have to get creative if you’re a buyer. In fact, you might be asking yourself whether you should even buy in a market like this. While I may have preferred to buy a year or 2 earlier when I would have saved thousands up front, today’s historically low interest rates help balance out total costs.  Also, our buy now vs. wait calculator had illustrated to me that buying a house would actually save me money in the long run – even in a competitive market like this.

Position yourself to craft a competitive offer

I can say with confidence that I would not have been able to craft such a compelling offer without the guidance and expertise of my real estate agent. However, I also didn’t realize that without his help I would also not have even had a chance at many listings, as they would have been off the market by the time they were on Zillow or other public real estate websites.

After meeting my agent and discussing what I was looking for, he created my profile in his MLS portal, which alerted me when listings matching my needs went live. Unavailable to the general public, this tool allowed me to see “delayed” listings that were not yet active, including the exact date they would hit the market or be available to tour. This was crucial in helping me stay ahead of the game, instead of being reactive. 

Here’s how it went with the home we won: Even though the house wasn’t on the market until Saturday, it was listed in the portal on Wednesday. We immediately scheduled a showing for that Saturday morning. After viewing the home and falling in love, we had an offer crafted and ready to go by the deadline of Sunday night.

To waive or not to waive the inspection contingency?

One of the most powerful and increasingly common ways to sweeten the pot when it comes to crafting a competitive offer on a home is to waive the inspection contingency. Until recently, this is something that many reputable sources would tell you to avoid. So why is it becoming a thing? Desperate times call for desperate measures! But why is an inspection contingency so important anyway, and why would waiving it improve your offer so significantly?

With an inspection contingency, your offer would be contingent on having a licensed professional inspect the house for any major or minor flaws. After all, when you’re making the biggest purchase of your life, you want to make sure you know exactly what you’re getting. If the inspection uncovers any issues, you’re then free to either renegotiate your offer or back out completely without penalty. 

By waiving the inspection contingency, you’re telling the seller that you’ll buy the house as-is. In effect, this transfers risk – and peace of mind – from the seller to the buyer, making the offer more compelling. Even if the seller isn’t aware of any major defects in the house, it’s always possible an inspector will discover one, which the seller would then have to disclose in any future transactions. Waiving the inspection is always going to benefit the seller and create a more compelling offer to consider.

Should you waive the contingency? You have to ask yourself whether you’re comfortable with shouldering that additional risk, and much of that will come down to your financial situation. If you move in and discover $20,000 in repairs in the first year of owning, will you be able to afford it?

Should you escalate?

Where offer strategies are concerned, real estate agents, buyers, and sellers will all have their own preferences. One technique my real estate agent doesn’t care for – but that my parents used successfully when they bought their home – is an escalation clause. This is kind of a like an automated eBay bid – it allows you to put in a base offer and specify that you’ll raise your offer a certain amount over any other higher offers, up to a ceiling. For example, you could offer $250,000 and say you’ll go $2,000 over any other offer up to a maximum of $300,000.

An escalation clause could cause you to lose leverage: if the seller knows you’re willing to go up to $300,000 but you offered $250,000, they can submit a counter-offer between $250,000 and $300,000 as they know how much you’ll pay. It may also start a bidding war with another buyer who had an escalation clause, driving up the price and making it harder to win.

While an escalation clause is something you may want to consider, my agent didn’t feel like it was especially useful in such a competitive market. When a market is this hot, it’s assumed that you’re going to start strong with your highest and best offer. 

Should you counteroffer your own offer?

It was Monday morning, and I had barely gotten any sleep after putting in our first offer – I completely waived the inspection contingency in my offer and was haunted by nightmares of cracks in the foundation, a leaking roof, and failing appliances. Did I let the excitement of buying a home get the best of me? 

My agent had scheduled a call with me the morning after the offer deadline, as he was able to contact the seller’s agent and discover how many offers had been submitted. Knowing how many other offers there are can be beneficial, as it can help you decide whether you want to keep your original offer or make it more competitive.

In my case, there were 5 other offers. I wanted to remain competitive, but I was no longer comfortable waiving the inspection completely. After voicing my concerns, my real estate agent presented me with a compromise: an inspection contingency with a threshold that would only trigger if costs exceeded $10,000. This was a newer technique he had been using in crafting offers and has seen it become more popular and successful throughout 2020.

An inspection contingency that only triggered after surpassing a specific threshold signaled that I was serious about buying the house and wasn’t going to use the inspection to negotiate the price down unless serious flaws were discovered. However, since I had already included an offer that waived the contingency entirely, I decided to increase my offer by a few thousand dollars to help offset some of the additional risk that the seller was taking on with the modified inspection contingency.

Mind the appraisal gap

After a morning of pacing and second-guessing my offer, I got the call from my real estate agent: they were countering my offer with an “appraisal gap” contingency! An appraisal contingency is common in most offers, and mine included one. Like an inspection contingency, an appraisal contingency allows the buyer to renegotiate the price of the home if the appraisal comes in below offer price. However, there’s one key difference: waiving the appraisal contingency entirely could cost you tens of thousands of dollars before you even close on the house.

In layman’s terms, the appraisal is something your bank orders to ensure the mortgage loan is worth the value of the house. If the appraisal comes in below your offer price, the bank will typically only provide a loan up to the appraisal amount. For example, if you offer $300,000, but the appraisal comes in at $250,000, you’ll need to make up the difference of $50,000 in cash – unless you have a contingency that would allow the buyer and seller to come to terms, usually by lowering the purchase price.

Most people, myself included, don’t have the option to waive the appraisal contingency simply because the amount of additional cash needed could be a huge hurdle. Which brings us back to the seller’s counteroffer: they wanted to add a clause to our appraisal contingency that stated we would make up the difference between appraisal and offer price up to $6,000. Effectively, this meant that if the appraisal came in up to $6,000 under my offer, I would have to make up the difference and pay the seller up to $6,000 in cash.

Do the math – including the worst-case scenario

I thought about the appraisal gap for a few moments, but at this point $6,000 wasn’t going to stop me from becoming a homeowner: I accepted their counteroffer! What I didn’t fully appreciate in the moment was a worst-case scenario: major repairs that came in at $10,000, and an appraisal that came in under $6,000. Simple math shows I would have been liable for an extra $16,000 cash on top of the down payment and closing costs. After anxiously waiting for what felt like an eternity, I was able to breathe a huge sigh of relief when the appraisal came in at exactly my purchase price, and the inspection only revealed repairs amounting to a few thousand dollars.

In a market where you may face an appraisal gap or end up waiving your home inspection and dealing with possible repairs, it’s important to remember that certain mortgage options allow you to put less down and retain more of your cash. I ended up putting down 5% on a conventional loan with private mortgage insurance. Keeping more cash on hand will allow me to make some much-needed repairs and enhancements.

Don’t forget the cherry on top

In addition to the modified inspection contingency and appraisal gap coverage, I also included a flexible closing date – something that may have factored in just as heavily as anything else! The truth is, it’s impossible to know what any given seller is going to find important, all you can do is try your best, know your means, and keep saving up in the meantime!

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Zak

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Zak Stoiber is a digital marketing program specialist at MGIC who enjoys reading books, some of which do not contain pictures. He recently became a homeowner mostly to house his board game collection.
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