How to write a winning offer.
2021 was the strongest seller’s market on record in Marin. As a result, we saw a tremendous number of competitive offer deadlines “bidding wars” where multiple buyers were submitting offers on the same property in a blind auction.
And the winner was…….most likely all cash, no contingencies, fast close well over asking.
How can a buyer win if they don’t have the ability to make an all-cash offer*?
When a seller is reviewing offers they will be looking for the best price but also and importantly the best terms. A higher price is irrelevant if the contract doesn’t close or the price is negotiated down when in contract.
It is highly detrimental to the eventual selling price of a listing to go back on market after being in contract – not to mention time consuming and inconvenient, so once in contract the balance of power pivots quickly to the buyer if they have contingencies.
This is why the combination of cash & no contingencies is so compelling. The contract is almost certain to close at the offer price and quickly. No pesky underwriter to throw a curveball, or inspectors finding an overlooked defect.
If you can’t offer cash the next best thing you can do to be competitive is to remove all contingencies. As realtors have always advised against this as it comes with risks, however if you have found the property you are convinced is right for you and want to do everything you possibly can to make it yours, after careful consideration you may decide it’s worth the risks.
Should I remove contingencies to win?
There are three main contingencies. Appraisal, Loan, Inspection.
This is probably the most challenging contingency to remove & should only be done after consultation and on the advice of your lender.
In order to submit an offer, you will need to submit a preapproval letter which states the lender has reviewed your financials, etc. and you have preliminary approval for the loan (This should not be confused with a prequalification letter with less verification).
However even with pre-approval, once in contract your lender will submit the loan to the underwriting department who will trawl through your financial history searching for anything they can find to question your qualification for the loan. Even when you and your lender are certain your loan processing will be a simple affair, the underwriters can thwart your timeline adding great anxiety for everyone in the transaction.
You may after speaking with your lender feel comfortable submitting an offer without a loan contingency. If your loan application is rejected and you have no contingencies, you are at risk of losing some or all of your deposit, however, It is less risky if you have been fully underwritten, so getting ahead of this process is highly recommended to polish your credentials as an attractive buyer.
If you make a cash offer you may elect to get an appraisal done, but this will compromise the competitiveness of your offer. If you are getting a loan it will be required by your lender. They will use the appraisal value to determine the amount of your loan. If they will loan a maximum of 80% Loan to Value (LTV) and the property appraises at $1M they will lend you $800K max. If you offered $1.1M, you have an “appraisal gap”.
Appraisers usually know the contract price & it’s not unusual for the appraisal to mirror this price, but if you do have an appraisal gap and you have an appraisal contingency your choices are to make up the gap with extra down payment, negotiate a lower price or a blend of the two. If you don’t have a contingency, you need to cover the gap or risk losing your deposit.
Removing your appraisal contingency, therefore, tells the seller that you have the ability and willingness to cover an appraisal gap should it occur. Sellers like that!
You should discuss this with your lender – if your offer includes a larger down payment you may already cover any possible gap.
Removing this contingency is very dependent on what the sellers provide in the disclosures.
Inspections are essential to ensure that a buyer understands the property they are buying. However, in Marin, most sellers provide full and thorough inspections that include a Home Inspection and a Pest Inspection. A roof inspection may be included in the Home Inspection or e a separate report. In areas where septic systems are used, there may also be a Septic Inspection.
If the seller provides a full and thorough set of inspections from reputable companies, you may feel comfortable submitting an offer without an inspection contingency.
However, if the disclosures leave any unanswered questions you need to seriously consider if you want to take on the risk of purchasing without further investigation.
If you do decide you need an inspection contingency you should know what further inspections you plan to do and let the seller know why & when you plan to do these when submitting your offer.
If a seller has done what they feel are full and thorough inspections but you submit an offer with an inspection contingency & no explanation, they may be suspicious that you will use this merely as a device to negotiate a lower price in contract.
Finally, while price isn't the main subject I'm considering here, it is ultimately the most persuasive element of your offer when everything is considered.
The best way to determine what you should offer is to imagine yourself in the future as alternatively as the winner and the loser. As a winner do you feel overwhelming remorse or anxiety about what you offered. Or conversely, if you lost do you imagine seeing the closing price & realizing you could & should have won? Hopefully, you feel comfortable that the winner offered more for the property than you were willing or able to?
In summary, contingency-free offers have a higher risk, and take more homework but have a higher likelihood of acceptance. The more offers you are competing with the more likely there will be a contingency-free offer.
If you have any follow-up questions, please feel free to reach out.
*There are creative ways to make a cash offer and finance at or after the close. These inevitably involve extra costs, but over the long term, these costs may make sense. If you’d like to find out more about these options, please let me know.