You might not have the all-cash trump card that lots of investors play, but that doesn’t mean being a homebuyer doesn’t come with its own set of advantages.
Competing with real estate investors can be tough, but you can do it — and you can even win. Real estate investors are focused on trying to score a great deal (not finding their dream home), so although they frequently make those superattractive all-cash proposals, they may also come in with a lowball bid. By putting in a strong (and realistic) offer, getting a preapproval, and showing your personal side (after all, you’re going to live in the house, not flip or rent it!), you can go toe-to-toe with the big guys and score the house you want.
Here are seven proven ways to beat out the investors — and land that home for sale in Denver, CO.
1. Put in a strong offer
The most basic way to win a bidding war is to offer more money. “Cash buyers are always looking to get into a property at lower-than-asking prices,” says Arvin Sahakian, a California real estate broker and vice president of BeSmartee, an online mortgage broker. “Buyers competing with cash investors have to come in with strong offers at asking price, and perhaps slightly over asking price.”
2. Don’t skimp on the earnest money
“Earnest” might be an old-fashioned way of saying “serious,” but the concept it represents — of putting your money where your mouth is — is timeless. Earnest money, which you put into an escrow account right after signing the purchase agreement, signals to the seller that you’re serious about buying the house — and that you won’t back out. Investors often don’t put down earnest money; they hate tying up funds because they’re likely to have lots of deals happening at once. So how much earnest money puts you ahead? “Generally, the safe bet is 1% of the purchase price; $500 sends the message you don’t have [much] money,” says Joshua Jarvis, a Georgia agent. Many buyers offer up to 3%, depending on the area.
3. Get a preapproval or (even better) a pre-underwriting letter
Being preapproved for a loan, if you’re competing with an all-cash buyer, is practically a requirement if you want the seller to consider your bid. A preapproval letter is a statement from your lender that you are approved to borrow a certain amount of money. But you can kick up the preapproval a notch by presenting a personalized letter instead of boilerplate, says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage. “This means that the mortgage adviser talks about what great folks you are and includes information that would not apply to other buyers.”
There’s also a way to take this process to Buzz Lightyear’s favorite place: infinity and beyond! Do so by getting a pre-underwriting letter (or a conditional approval), a more thorough vetting process than preapproval. While preapproval involves checking income, bank statements, proof of down payment funds, and credit history, pre-underwriting also reviews all the documentation required to get the deal done.
“A conditional approval is the closest offer to cash. If you’re a poker player, it’s the second-best hand to have,” says Nicole R. Wilhelm, an agent in the San Francisco, CA, Bay Area. Buyers with a pre-underwriting approval are in the same position as all-cash buyers as far as the seller is concerned, including being able to close fast, since they’ve already gone through the detailed mortgage process. “What attracts sellers to an all-cash offer is the speed to close. At the end of the day, the seller receives a wire transfer in their bank account. There’s no duffle bag of cash with an all-cash offer,” says Wilhelm.
4. Personalize your offer
This move falls under the category of it couldn’t hurt. And since this strategy costs you nothing, go ahead and tap into the seller’s emotional ties to the house. “Many sellers are very sentimental about their homes,” says Christy Edgar, a Virginia agent. “They raise their families there, they fix it up, and they love it.” So bring out your inner Hemingway and let the seller know how you and your family will enjoy the home. “A well-written narrative can put you ahead of other offers in many circumstances.”
5. Waive the financing-contingency clause
This clause allows buyers to walk away from the deal if they don’t get the loan or if the appraisal comes in below the offer. If you waive the financing clause, you’ll grab a seller’s attention. Getting a preapproval or pre-underwriting letter helps you “be more confident in your financing terms,” says Daniel Blatman, a New York broker. “All the risk [would then be] on the appraisal only.” Be prepared to lose money with this option, though. Choose it only if you don’t mind losing your deposit or paying more — possibly much more than the home is worth.
6. Remove (or at least reduce) the inspection contingency
Cash investors often buy a property as-is. That’s because they’ve probably bought homes before — lots of times. They know what to look for, and if they’re planning to buy a fixer-upper to flip as an investment, they’ve already budgeted for repairs. “[Removing the inspection] tells the seller that the accepted offer from the buyer will go into escrow and, therefore, close escrow quicker,” says Arvin Sahakian. To compete with that, work with your agent to shorten the inspection period. “If an agent has an inspector that they use a lot, they may get an appointment lined up while writing the offer,” says Mark Charlesworth, a Portland, OR, agent. But don’t waive the inspection altogether. It’s just not worth the risk.
7. Be flexible with the possession date
When an investor wants a property, they usually want it right away. But you can be more flexible. “Sellers are often nervous about where, when, and how they will find a replacement property,” says Charlesworth. “Give them some time to rent back the property so that they can find a new home. Investors hate that!”
Have you gone toe-to-toe with an investor on a home sale? Share your experiences in the comments!