As the housing market continues to tighten, buyers find themselves trying to outbid competitors to purchase their dream home. As it turns out, there are several ways to lose a bidding war. Here are a few things to consider before you inadvertently make a decision that could mean financial ruin.
Spending Every Penny
If you’re in the market for a new home, be sure you know how much you can afford—which includes more than just the sale price. You don’t want to put in the highest big only to end up without enough money to cover the inevitable expenses that come with home ownership.
Before you even move in, you’ll need some cash for closing costs, moving costs, utility hookup deposits, and maybe some minor repairs. Ideally, it’s nice to have enough cash to cover a couple of months’ worth of mortgage payments, too.
Bidding With Contingencies
When you submit an offer to buy a home, you’ll likely need a financing contingency. (Most people need a home loan.) While I recommend leaving this contingency in place, I also suggest you get pre-approved for a loan—not just prequalified—so the seller knows you’re a safe bet.
To assure a smooth transaction, secure your down payment early. Here’s why: 1. You don’t want to scramble around at the last minute to collect the money, because it may not be available. 2. Sellers are more likely to accept offers from buyers who can prove they have the money. 3. Lenders require proof of funds, and they sometimes ask how long you’ve held those funds, so a recent gift from Gr. Aunt Mathilda may not fly. Recent deposits make lenders nervous because they assume you’ve borrowed the cash.
To make your offer more attractive, it’s best to remove any contingencies you can without damaging your position. The more contingencies you include, the less desirable your offer is to the seller. It’s a poor idea to include unnecessary contingencies in any market, but in a market as competitive as this one, it is an especially bad call.
Bidding Without Contingencies
Of course, some contingencies are necessary. The last thing you want to do is make an offer without protecting yourself from unknowns. I recommend including contingencies based on the results from standard inspections, such as pest and fungus, septic, roof, well, and others. Also, if you need the proceeds from the sale of your current house to fund your new purchase, be sure to include a contingency about selling your current house.
If you list no contingencies and then something unexpected prevents you from completing the purchase, you’ll most likely lose your deposit and ruin your reputation as a reliable buyer. As long as there’s a liquidated damages clause in your offer that limits your liability, that’s probably the worst of it. So, if you don’t mind losing tens of thousands of dollars, by all means, skip the contingencies.
Assuming the Seller Will Negotiate
Another way to lose a bidding war is to assume the seller will counter your offer. Sometimes they do, sometimes they don’t. If your offer is too low, the seller may be insulted and opt not to respond. If someone else comes in with a better offer, the seller may just take that one. Finally, if the seller understands this to be your “best and final offer,” the seller may not counter with the small but essential concessions they need to make the transition work. Maybe they need two more weeks in the house before moving, but they believe you are not open to negotiation.
Not Knowing a Home’s True Value
Before you make an offer, decide what the home is worth to you. This can be a two-edged knife. First, you need to know the market value. Second, once you know what you can afford, you need to decide how much you are willing to pay. If the house is next door to your ailing mother, you may be willing to pay more. If it is next door to your annoying cousin, it may be worth less.
If you have questions about property management or real estate, please contact me at firstname.lastname@example.org or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.