How to Negotiate in a Seller's Market
When the pandemic first rocked the economy in March, a lot of prospective home buyers anticipated falling prices and an emerging buyer’s market. But the opposite has happened. While buyer demand has stayed sky-high, inventory has remained at historic lows, and many potential sellers have postponed their home sale until the economy emerges from its present uncertainty.
The result? A whole lot of people fighting over a few houses – a seller’s market like the industry hasn’t seen in a while. But don’t let that scare you away if you’ve targeted 2020 as the year you were going to buy a home. Plenty of people have bought a home in a seller’s market and gotten a great deal.
You just have to follow a few simple rules.
Don’t Lowball Your Offer
You know it’s a seller’s market, and so does the seller. So, don’t open with an insultingly low offer. That might work as a negotiating tactic in a buyer’s market, when you have all the leverage, but in a seller’s market the seller will just move on to the next bidder.
So, how low is too low? Well, that depends on the list price. If you’re looking at a $500,000 home, asking them to knock off $50,000 isn’t too outrageous. But make the same request on a $150,000 home, and you probably won’t even get a counteroffer — just the silent treatment. Whether you’re working with an agent or a transaction coordinator, they can definitely give you insight into the home’s market value and the range of prices you should consider offering.
And if you just can’t resist making a low offer? Just don’t get too aggressive. Even if you believe the home is overpriced, needs updates, or that you deserve a discount because you’re paying cash, that doesn’t mean the seller will be convinced. On the contrary — your aggression will probably just set them against you.
Forgo Contingencies Entirely
Contingencies are included in a sales contract to protect the buyer. But sellers often perceive them as obstacles or at least sources of anxiety.
When a seller accepts an offer, the buyer deposits their “earnest money,” which is usually around 5% of the home price. This deposit signals that they’re serious about the purchase and won’t back out. The only potential complications are the contingencies. A contingency can cover anything from the home inspection to financing — so if, let’s say, there’s an inspection contingency in the contract and the inspection finds serious problems with the home, the buyer can legally withdraw from the sales agreement and will receive their earnest money back.
In that same situation, with a no-contingency offer, the buyer would still be able to withdraw from the sales agreement, but they wouldn’t get their earnest money back. This is why a clean, no-contingencies offer appeals to sellers; they’ll either successfully sell their property, or they’ll get to keep the buyer’s earnest money as compensation for their time.
Just make sure you understand the protections you’re giving up by not including any contingencies.
Offer High — But Include an Inspection Contingency
If giving up all your protections with a no-contingencies offer makes you a little uncomfortable, consider keeping just the inspection contingency but submitting a high offer.
This can be an effective compromise because what you’re essentially saying is that you’ll buy the house as long as it’s actually as good as it looks — i.e., that there are no major hidden problems with it. If the seller turns down a high offer with only an inspection contingency attached, that should raise the buyer’s eyebrows. Maybe the seller received a similar offer with no contingencies at all — or maybe they’re hiding something.
So, what happens if the inspection uncovers problems? That depends. If they’re serious problems such as a crumbling foundation or leaking roof, you can walk away, earnest money in hand. But any problems uncovered could also give you some leverage. You can ask the seller to fix the problems before the close of the sale or give you a cash credit to perform the repairs yourself.
Expect a Bidding War
The essence of a seller’s market is that there are more buyers than sellers. That means that, if you love a home, there are probably several other buyers who do, too. So, when you put in an offer, you should assume that there are other offers coming in at the same time — which means you’re in a bidding war.
Bidding wars can be stressful and, when you lose out on the home, extremely frustrating. But there are some easy ways to improve your chances of winning. First, it’s been proven that all-cash offers nearly double your odds of beating other bidders. If you can swing it, make a cash offer.
Waiving your financing contingency — essentially taking the chance you’ll lose your earnest money if you can’t get a loan within a certain time frame — significantly improves your chances. And finally, a personal touch can go a long way; writing the seller a heartfelt personal letter, outlining exactly why their house is perfect for you, can often swing the bidding in your favor.
Bottom line: You’re trying to do whatever you can to stand out from the crowd and sweeten the pot for the seller. You may even want to consider offering to cover closing costs, paying for the seller’s title insurance, or helping to cover the seller’s moving costs.
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Get Pre-Approved for a Loan
It’s always a good idea to get a pre-approval letter from your lender before you put in any offers, but in a seller’s market, it’s a necessity. Without a pre-approval, you’re just someone who likes the house and has good intentions — but who knows what the bank will say? But with a pre-approval, you’re a serious, dependable candidate. And in a seller’s market, when you’ll be competing against multiple other buyers, only the serious candidates get considered.
A pre-approval letter typically takes 1-3 days to process, so plan accordingly. It’s valid for 60-90 days but can be renewed if the lender reverifies your information. Make sure your letter doesn’t have too many restrictions, as this could scare off the seller; your pre-approval shouldn’t be contingent on anything other than your level of income and the property appraisal.
Don’t Expect Many Concessions
If it was a buyer’s market, you’d likely be able to extract a good amount of concessions because the seller would just be glad to have an opportunity to sell. Even if it was a neutral market, there would probably be some feeling of “meeting in the middle” that would lead to a moderate number of concessions.
But in a seller’s market, the seller doesn’t have to give up anything — so they probably won’t. The reality is that if you make any demands they don’t like, there are multiple other buyers who will gladly step in. If there are things about the property that really bother you — say, if you want to keep the appliances or want the floors refinished — you can ask about them politely, but don’t issue any ultimatums.
It’s a Marathon, Not a Sprint
Being a buyer in a seller’s market comes down to one essential truth: the odds are against you. There are a lot more buyers out there than properties for sale, so prepare to lose out on homes that you’ve fallen in love with — maybe several times.
It can be maddening to lose out on half a dozen homes in a row, but don’t let frustration lead you to breaking your budget by overbidding on a home out of desperation. Figure out exactly how much you can afford, and don’t exceed that limit.
Manage expectations from the beginning — understand that some failure is built into the process, but in the end, if you’re persistent and disciplined, you’ll achieve your goal of homeownership.
From our collaborators at Clever Real Estate
Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.
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