Multiple Offer Crash Course for Utah Home Buyers

10 Homebuyer Tips for Today’s Market

y is the real estate market so crazy?

1. Not enough homes for sale

• After the housing bubble collapse in 2008 – 2011, most home builders either stopped building or slowed way down.
• Construction workers left the field leaving shortage of labor.
• Financing for builder’s projects became scarce.
• City regulations have become stricter and more expensive.
• Homeowners hesitant to sell because they fear they can’t find a replacement home.
• New construction prices soaring due to lumber and steel prices and city impact fees.

2. More Home Buyers than ever before

• Millennials are now purchasing homes.
• Institutional investors (Wall Street) are purchasing homes for rental inventory (20% of all housing).
• International investors are purchasing U.S. property.
• In-migration has increased the number of home buyers.

3. Historically low interest rates and high stock market

• Low rates have allowed more potential buyers to qualify to purchase a home.
• The rise in the stock market has provided money to buy larger or second homes.

4. The coronavirus Pandemic

• People are fleeing the big cities to purchase a home in the suburbs.
• Work at home as created demand for a larger home with room for a home office.

This has created unprecedented buyer competition.

 How to Win a Multiple Offer

A reasonably-priced home can fetch 20 or more offers. You must be prepared if you hope to win.

1. Increase the Offer Price

• Sellers almost always accept the offer with or near the highest price.
• At this unprecedented time, nearly every home is selling above the asking price – anywhere from $5,000 to $100,000 higher.
• Virtually no sellers will agree to pay any of the Buyer’s closing costs.

2. Be Pre-approved for Financing

• You will need to be fully underwritten and pre-approved for a loan to be considered. This includes a credit check and verification of your employment, bank accounts, and other assets.
• To prove financial strength, sellers are looking for offers with a high down payment.
• Even with a low down payment, try to obtain a “conventional” loan as opposed to an FHA loan. There are fewer home improvement requirements and closing delays.
• Cash offers rule. Frequently, even if you are pre-approved for a mortgage, a cash offer with trump your offer.

3. Increase and/or Release Your Earnest Money Deposit

To demonstrate good faith, Buyers submit an “Earnest Money Deposit” when making an offer. The deposited amount is then credited back to the buyer and deducted from the down payment at closing. It is common for buyers to submit 1% or more of the sales price as earnest money, although in a balanced market it may be less. Your offer can be strengthened by increasing and/or promptly releasing your Earnest Money Deposit.

SELLER CONSIDERATIONS:

• A large Earnest Money Deposit demonstrates the commitment of the Buyer to successfully complete the transaction – the larger the better.
• Seller’s desire an immediate or early release of the Earnest Money Deposit as enticement to accept an offer.
• Sellers get an early, pre-closing windfall and are free to do with that money as they please.

BUYER RISKS:

• You may release a substantial amount of money to the sellers with no recourse for getting that money back.

4. Waive the Appraisal Condition

When purchasing a home with financing, the property will be used as collateral. Your lender will require an independent Appraiser to confirm its value prior to lending you hundreds of thousands of dollars. Appraisers are required to estimate the value of the property based on nearby recent sales of similar properties. When prices are rapidly rising, properties frequently appraise for less than the offered price.

SELLER CONSIDERATIONS:

• Most Sellers are afraid to accept an offer higher than the sales price only to be forced to settle for a lower price a couple of weeks later because of a low appraisal.
• Because properties are selling for higher than sales price, Seller’s often require the buyer to come-up with the difference instead of lowering the sales price.

 BUYER RISKS:

• You may pay higher than the house is worth. If the market does not continue to rise rapidly, it may take years for the neighborhood values to rise to your purchase price.
• You need enough cash to pay the difference between the “appraised value” and the purchase price.
• You may lose your deposit if you abandon the transaction and walk-away due to a low appraisal.

NOTE: The Utah Real Estate Purchase Contract allows you to cancel due to the “Financing Condition” (at your sole discretion) up to the “Financing and Appraisal Deadline” and still have your Earnest Money Deposit returned – if you have not waived the Financing Condition.

5. Use an Appraisal Gap Addendum

With an “Appraisal Gap Addendum,” you agree to cover any shortage between the offer price and the appraised value (the “gap”). The addendum may limit the amount you will go above the appraisal (“CAP”), not to exceed the purchase price. You may also choose not limit the gap amount and pay the entire difference between the appraisal and the purchase price.

SELLER CONSIDERATIONS:

• Seller is assured that the accepted purchase price is the actual amount they will receive, regardless of the appraised value.

BUYER RISKS:

• You may pay higher than the house is worth. If the market does not continue to rise rapidly, it may take years for the neighborhood values to rise to your purchase price.
• You need enough cash to pay the difference between the “appraised value” and the purchase price.

NOTE:  Most sellers will require “proof of funds” prior to accepting your appraisal gap addendum. Many will also ask that you remove the financing condition all together to remove any “outs”.

6. Waive the Financing Condition

The financing contingency protects the Buyer from losing their down payment deposit if you are unable to obtain a home loan for any reason. If you have a fully underwritten (bank approved) loan approval, you may feel confident of waiving the Financing Contingency in order to compete with cash offers.

 SELLER CONSIDERATIONS:

• The Seller may feel confident the transaction will close since the buyer is as good as a cash buyer.

BUYER RISKS:

• Interest rates may jump. You may be straddled with higher-than-expected payments or if you may no longer qualify for the increased house payment and you lose your Earnest Money Deposit.
• Your financial situation may unexpectedly change. As a result, you no longer qualify for the loan and lose your Earnest Money Deposit.
• The appraisal may come in low. If you also waived the appraisal condition and don’t have the cash to make up the difference, you lose your Earnest Money Deposit.
• HOA or Condo/Townhome may not qualify. Due to a high percentage of investors, lawsuits, or other considerations, your lender may not approve the property for financing and you lose your Earnest Money Deposit.

NOTE:  If you are turned down for a conventional mortgage and need to close quickly, a bridge loan through a hard money lender may be a last resort. The interest rate will be higher but the lending criteria are less strict than conventional banks. Usually, their prime concern is that the you are able to put a substantial down payment on the property. Immediately after the loan has closed, look to refinance out of it. It is much easier to refinance a property you already own than to seek a mortgage for one you wish to buy. Investigate thoroughly before obtaining a hard money loan.

7. Waive or Shorten the Due Diligence Contingency

Properties in Utah are sold “as-is”. A “Due Diligence” contingency allows the Buyer to inspect and investigate the property prior to making a final decision to purchase it. While Sellers are required to disclose any hidden defects of which they are aware, they may not know about some problems nor are they required to disclose obvious defects. Realtors routinely ask Homesellers to complete standardized “Seller’s Disclosure Statement” and most do. However, institutional owners, absentee owners, and some homeowners do not disclose the true condition of their property. Nearly every home, new or preowned, has some deficiencies. Almost always this results in a second wave of negotiations. Sellers are asked to make repairs, lower the price, or otherwise compensate the buyer.

 SELLER CONSIDERATIONS:

• Waiving the Due Diligence contingency assures the Seller that the Buyer is accepting the property “as-is” with no further negotiations.
• A short Due Diligence period allows the transaction to continue (or fail) in a hurry, allowing the Seller to move-on quickly.

BUYER RISKS:

• You may not discover a major defect until after you own the home resulting in extra costs. This may be mitigated by conducting an inspection prior to making an offer instead of after.
• The Seller may decline access to the home until after closing.

NOTE: The Utah Real Estate Purchase Contract allows you to cancel due to the “Financing Condition” (at your sole discretion) up to the “Financing and Appraisal Deadline” and still have your Earnest Money Deposit returned – if you have not waived the Financing Condition.

8. Waive Home-Sale Contingency

The home-sale contingency gives the buyer the opportunity to back out of the purchase if they can’t sell their current home with in a certain time. Some buyers want to be sure they have a place to move into prior to selling their current home.

 SELLER CONSIDERATIONS:

• Waiving the home-sale contingency gives the Seller assurance there won’t be extended delays of closing the transaction.

 BUYER RISKS:

• You may not qualify for two mortgages at the same time or want to pay two house payments simultaneously.
• If you sell your current home prior to locking down your next home, you may have to temporarily live with relatives or in a motel.

9. Comply with the Seller’s Time-lines

Offering the Seller a flexible timeline or even allowing them to rent-back the property temporarily after closing could be attractive and make the difference.

SELLER CONSIDERATIONS:

• Seller has the time to locate and purchase their next home.
• Seller can coordinate the closings.

BUYER RISKS:

• You may have to move twice to accommodate the Seller’s time-lines.
• You may have to make double payments for a time.

10. Pay All or a Portion of the Seller’s Closing Costs

 Homesellers have closing costs just like buyers do. Some common seller costs you may consider paying are:

• Title Insurance
• Escrow Fees
• Home Warranty

Go in with No Regrets

Consider carefully how you will feel if you when the offer. If you will not be completely happy with your decisions, don’t make the offer. Some homebuyers get caught up in the “auction” like environment and then truly regret their purchase. Decide now where your limits are.