The Spring Market: Bidding Wars

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May 29, 2014
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So you’ve met with your lender, you’ve received a pre-approval letter, and now you’re ready to start looking at homes.  The first step is to find a real estate agent.  Some buyers think that they can conduct their own search and make an offer on a home by themselves, thinking that not hiring an agent will save them money.  In reality, buyer’s agents are experts in the field who work with you to get you the best deal and terms on a home purchase AND they should cost you no additional money.  They are paid through the seller’s agent from the commission they make on the sale.  The seller will most likely be working with a real estate agent, so by not hiring an agent of your own, you are putting yourself at an automatic disadvantage.  If you don’t know where to find a reliable agent, ask friends and family members who have recently gone through the process or check out our Directory of Resources.

Any agent who has done business in the past few months will tell you that the market is hot.  Very hot.  With the economy slowly improving and interest rates still very low, more households are ready to make the leap towards homeownership.  At the same time, the housing stock on the market in Massachusetts is very low.  As a result, any time a property is put on the market, the seller can expect multiple bids, leaving the potential buyers in a bidding war.  As a first-time buyer, this increases the importance of working with a good real estate agent.  Your agent can help you make your offer stand out to the seller in a few different ways depending on your personal situation.  Below we have highlighted a few good suggestions we have heard, as well as some suggestions to stay away from.

What Not to Do

What we are seeing in the current market is that some buyers are waiving contingencies to make their offers more attractive to the seller.  Everyone’s situation is different, but if you are a first-time homebuyer who will be getting a mortgage, this is a very risky proposition.  Two of the most important contingencies that protect the buyer are the Mortgage contingency and the Home Inspection contingency.  By waiving the Mortgage clause in your offer, you are putting yourself at risk of losing your down payment (3-5% of the purchase price) if you ultimately do not get approved for a loan.  If you waive the Home Inspection contingency, you lose all ability to renegotiate with the seller after the inspection, and could be stuck buying a home that needs tens of thousands of dollars in repairs.  A good agent will advise you not to waive these contingency clauses.

Suggestions to Consider

Speaking of the Home Inspection contingency, this is a clause that can be altered without being waived.  A typical inspection clause may state that the inspection must be to the buyer’s liking with less than $1,000 in necessary repairs.  This gives the buyer an easy fallback for renegotiating, as most homes could use more than that in repairs.  As Gary Dwyer of Buyer Agents of Boston suggested to us, if you are comfortable doing so, it may be a good idea to raise that number from $1,000 to $5,000 or even $10,000.  It all depends on your financial situation, but if the seller sees that you are willing to go through with the deal and take on a decent chunk of the repairs, they may be more inclined to accept your offer over someone else’s.  This still, however, gives you the ability to renegotiate or back out of the deal if the necessary repairs reach an amount that you are not comfortable paying.  Talk with your agent to figure out what makes sense for you.

Another suggestion is to write a higher down payment into your offer that you will put down at your purchase and sale agreement.  You should only put down what you are comfortable with, but a seller likes to see a higher down payment, as it makes you look like a more serious buyer.  This can also be accompanied by a higher deposit with the offer (the typical deposit is $1,000).  If you keep all of your contingencies in place, you still protect yourself from losing that money if the deal falls through.

There are other contingencies that are included in an offer that you may be comfortable waiving.  For example, if you do not have children under the age of six, it might make sense to waive the lead inspection clause.  Another option is to waive the radon contingency.  You still have the right to test for radon, but the onus will now be on you to pay for remediation if the radon levels are too high.  This is typically a $900 to $1,200 expense.

Remember that everything is relative to your personal situation.  If you are not comfortable waiving or altering any of your contingencies, then don’t do it.  Talk with your agent to see what makes sense for you, but keep in mind that YOU make the final decisions, and you shouldn’t feel forced into doing anything with which you are not comfortable.

Check out the Building a Competitive Edge as a Buyer article, written by Chris Kostopoulos of Keller Williams, in our 2014 Homeownership Resource Guide to get a few more tips on how to safely improve your offer.  And let us know what you think!