Advanced Homebuyer Offer Strategies
Advanced offer strategies for home buyers trying to compete in a dynamic real estate market. Please note: I work in the Colorado real estate market; these strategies are directly related to how our contracts are written and executed. If you’d like to view copies of the Colorado Real Estate Contracts, go to the website for the Colorado Department of Regulatory Agency and search for real estate contracts. https://dre.colorado.gov/resources-supportlicensees/real-estate-broker-contracts-and-forms
These strategies are not intended to replace the advice of a licensed, professional and experienced real estate broker. Also, the clauses needed to execute some of these strategies must be written by a licensed attorney.
These strategies are intended for home buyers who are willing to take some calculated risks in order to improve the chances of having their offer accepted by the sellers. These are NOT for the faint of heart and may require the buyer to have extra funds available, in addition to down-payment and closing costs to successfully execute them.
- Make your earnest money non-refundable upon offer acceptance. This is often referred to in real estate as making your earnest money ‘hard’. This strategy means the seller can keep your full earnest money deposit if you do not successfully close on the purchase of the property. You can do variations of this strategy by giving different deadlines at which the earnest money becomes non-refundable, outside of the existing contract parameters.
- Limit inspection items. This strategy has become almost commonplace in this real estate market. Essentially the buyer agrees to only ‘object’, ask the seller to fix issues, if problems are found that directly affect the health, safety, habitability or insurability of the property. For example, roofing, non-functional heating source, structural damages, etc.
- Waive inspection objection. This is NOT waiving your right to a home inspection. This strategy states that the buyer will perform a home inspection and if any defects are found, unacceptable to the buyer, the buyer will simply terminate the contract and move on.
- Waive inspection completely. This is a VERY high-risk strategy and should only be used by experienced investors or home buyers who have the financial ability to make all repairs. For home buyers using a mortgage and depending on the severity of defects, the buyer may be at risk of not being able to secure home owner’s insurance for the property which could prevent you from getting a mortgage and potentially losing the earnest money deposit.
- Include an “escalation” clause. The escalation clause essentially says that the buyer’s purchase price offer will be increased by a certain amount over any competing offer, up to a certain limit. For example: Buyer’s offered purchase price will increase by $1000 over any competing price not to exceed a purchase price of $500,000. This clause is used in an attempt to not ‘overpay’ for a home, however it reveals the buyers ability to qualify and pay more for the property and may not achieve the desire result unless it is also paired with the next strategy.
- Offer appraisal ‘gap’ coverage. This is a very common strategy right now but it can be very complicated and should be thoroughly understood. This clause assumes the buyer is using a mortgage to purchase the property and has additional funds to invest over & above the amount needed for the down-payment and loan closing costs. The clause states that the buyer is willing to bring a specific amount of additional cash to closing to cover, if necessary, any ‘gap’ between the appraised value and the purchase price. Note: The amount the lender will loan is based on the appraised value NOT the offered purchase price. For example: The offered purchase price is $500,000 and the buyer is willing to pay up to additional $15,000 to cover any gap between the appraised value and the offered purchase price.
- If the appraised value is $485,000 the final purchase price is $500,000 and the buyer must bring an additional $15,000 in cash to cover the ‘gap’.
- If the appraised value is $495,000 the final purchase prices is $500,000 and the buyer must bring an additional $5000 in cash to cover the ‘gap’.
- If the appraised value is $475,000 the final purchase prices is $490,000 and the buyer must bring and additional $15,000 in cash to cover the ‘gap’ and the seller must agree to reduce the purchase price to $490,000.
- Waive appraisal. This strategy is commonly done when the buyer is paying 100% of the purchase price offered with cash. If the buyer is using a mortgage to purchase this means that no matter what the difference is between the offered purchase price and the appraised value the buyer agrees to cover the difference with cash.
As you can see each of these strategies comes with a different level of risk. If you choose to use one of these strategies it is imperative that you fully understand and are willing to take on the associated risks.
Feel free to reach out to me if you have questions about how to successfully use these strategies in efforts to purchase a home in a competitive and dynamic real estate market.