Play your cards right when you really want the house.
You’ve found it: The home of your dreams (cue the heavenly angel voices and “Happily Ever After” banner waving in the breeze). But reality can hit hard: Your dream home happens to occupy the same happy heart space within, oh, roughly 20 other homebuying challengers who want it just as badly as you do.
Welcome to your local seller’s market!
If you’re a first-time homebuyer, a competitive housing market can seem like a shark-filled ocean with 50-foot waves. However, with the right tools, timing, and team around you, those waters will quickly calm, creating promising opportunities to realize the American dream of homeownership and secure the future you envision.
Where do first-time homebuyers get help in a bidding war?
Loan Officer. Your expert loan officer (LO) is a key partner who supplies you with your most important tool in an intense seller’s market: the mortgage pre-approval letter. This document essentially speaks for itself, telling any potential seller that you are ready to buy, and that scrupulous underwriting has certified your financial circumstances and credit score for home loan authorization.
Real estate agent. Often, your LO will work with various real estate partners in different neighborhoods as they rely on each other to refer business. Agents act as an LO’s eyes and ears, and this is a crucial service in fluctuating housing markets. The mortgage loan process — from mortgage loan approval to the transaction closing table — is best when there’s a smooth hand-off, so having a two-person (or more) team is to your advantage as a first-time homebuyer. Once your finances are squared away, and the home loan pre-approval letter is in hand, your agent becomes your top general in the battle to come. Above all, your real estate professional must be responsive, because windows open and shut in the blink of an eye during a bidding war.
Yourself. Research is key, and information is available that could give you an early step up in the bidding war. Look at the strategies in the next section, but consider this: Avoiding a bidding war is the best option. Perhaps there’s a neighborhood out there that might not be the trendy place to live — for whatever reason — but could be your place to live. Perhaps there’s a home that’s less attractive to other buyers because it needs renovation (we have loans for that!). If you broaden your horizons you may have more choices.
What bidding war strategies can first-time homebuyers use?
There’s an old football adage (attributed to Vince Lombardi) that speaks to one’s behavior in a new and exciting situation: Act like you’ve been there before. In other words, carry yourself as a veteran of the homebuying game by making sound, well-thought-out decisions; not a rookie who makes impulsive mistakes.
Excitement will inevitably define your first foray into buying a new home, but this is not the time to be emotional. Be active but patient, and most importantly, be confident the right house is out there for you. Even if this one doesn’t work out.
- Set your limit and stick to it. One question that might keep popping up during a bidding war is “How much more can I afford?” The best approach is to set your maximum purchase limit, never waver from it, and never tell anyone what it is (other than your trusted real estate agent). When you make an offer, you can incorporate an escalation clause if you wish, which increases your original offer by set increments up to a maximum threshold when bids come in from other competitors. This, in essence, automatically keeps you in the bidding war up to your maximum, without you having to make new offers. The escalation clause takes the emotion out of the bidding process, and can potentially save you lots of money.
- Make a big offer without contingencies. If you want an early foot in the door to buy a home, make an offer at or over the asking price, and don’t include normal contingencies. For instance, when you remove the appraisal contingency, you’re offering to pay the shortfall if the house appraises low and your loan only covers the appraised amount. Though it’s never wise to skip the home inspection, if you really love the house, this is a contingency you could remove, but it carries huge risk. Consult your agent before you consider this step.
- Get personal. A common tool in an intense bidding war is a personal letter to the sellers. Often, a home sale is highly emotional, and sellers may have a notion to ‘leave the house in good hands.’ Painting a literary picture of the home under your care — family gatherings, summers in the garden, sunsets on the porch — could be just the thing to make you a front-runner.
- Be persistent. If a contract is negotiated between a homebuying competitor and the seller, don’t give up. Though most contracts go through to completion, if the seller wants to encourage a bidding war, chances are they have a kick-out clause worked in. This allows them to field other offers, even while under contract, in case the buyer can’t meet a contingency. If you make a back-up offer, you still may have a shot, especially if you have room to come in higher. Also, deals fall apart all the time, so stay in the game until the title changes hands.
What types of home loans are best for bidding wars?
Small home loans are best to bring to a bidding war, with the rest of the purchase capital coming from cash. Sellers love all-cash or mostly cash offers, because they remove potential hurdles involved with buyer financing. However, knowing that most buyers won’t show up at the front door with briefcase full of Ben Franklins, sellers want the next best thing, which is indication of smooth sailing through the home-selling process.
A conventional home loan, accompanied by a healthy down payment (20% or more), will usually demonstrate you’re ready, willing, and able to make a serious offer on the home. But don’t let this discourage you if you’re using a different type of loan with a lower down payment, for example. A solid pre-approval from CrossCountry Mortgage shows the seller – and their agent – you mean business.
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