Can you get a home you’ll love on your terms? Here are the top strategies for success in the current seller’s market.
Oh, to be a seller in places like Phoenix, Columbus, Seattle, Los Angeles or Sacramento! Sellers in these areas can count on a slew of offers — with some buyers simply waiving all contingencies at the start.
If you’re committed to submitting a contingent offer in this market, your likely success depends on two issues:
- What type of contingency do you need to make? Is your bid contingent on a loan, or on a professional’s evaluation of the house?
- Just how hot is the area where you’re looking? Is it a major city, or a place that’s not quite so competitive?
Nothing is certain, and each seller has a different set of priorities. But generally, let’s discuss how contingent offers could play out in the months ahead.
The Standard Contingencies: When Your Offer Depends on a Loan, Appraisal or Inspection
Today, you could submit the highest offer for a home, and it just won’t matter. The seller could still expect you to waive your contingency for a loan, inspection, appraisal, or all of the above.
If this is the case, ask yourself: What do I really not mind waiving? For example…
The financing contingency.
If you’re making a down payment of 20% or higher, maybe you’re good with the loan approval. Ask your mortgage specialist to work with the underwriter so you can waive that contingency. The lender may balk at that risk. But then, can your mortgage specialist declare to the seller, in writing, that you have passed the underwriting phase, and that your approval is good for a specific length of time? What kind of letter could your CPA give your underwriter regarding your income security? Think outside the box, and see what your mortgage specialist can do to strengthen your position.
The inspection contingency.
Use caution when deciding whether to waive an inspection contingency. A home can have plenty of curb appeal. But it takes an expert to assess structural soundness, drainage and sloping, the roof and ductwork, the HVAC, washer and dryer hookups, and how the electrical and plumbing systems are put together.
If, after consultation with your real estate agent, you waive the contingency to have a snowball’s chance of getting the home, then at least request a pre-inspection before signing a contract. Expect that any existing home will need work, and have the money set aside for this.
The appraisal contingency.
Are you being asked to waive your appraisal contingency? You’re taking a major risk if you do, especially in areas where houses can be valued substantially over their listing prices. You’ll have to make up that difference at closing.
If you can’t stick to your contingency waiver, are you prepared to forfeit your earnest money? Speak with your agent about at least placing a limit in the agreement for the total unplanned cash you’ll have to produce in this scenario.
Pro tip: All of these contingencies are considered standard. If you’re shopping for a home outside of the hottest markets, keeping them in the deal should work out. But do keep the school district in mind when you settle on a certain area. If the school district is in demand, your home will offer value over time, even if the market cools.
A Trickier Task: When Your Purchase Depends on Selling Your Home
You might be asking: In this market, can I make a viable offer with a home sale contingency? If you waive your contingency, you may wind up holding two mortgages simultaneously. Juggling mortgages will become a fast money drain if your current home takes time to sell.
But perhaps you simply won’t qualify to take on two mortgages. So, you really can’t waive the contingency in good faith. In this common situation, what’s the best way to proceed? Several strategies could work:
Strategy 1. Use diplomacy.
If you’re serious about a specific home, ask your real estate agent to communicate your position to the seller’s agent. The seller needs to know how likely you are to go through with your offer, and being visibly keen on the home can’t hurt in this situation.
Strategy 2. Wait for a different house.
Will another home appear on the market that has everything you need, but for a somewhat lower price? If your agent thinks that’s likely, then maybe you could swing two overlapping home loans.
Strategy 3. Consider a bridge loan.
Another possibility, if your lender allows it, is applying for a bridge loan so you can qualify for the home you want before selling your current home. A short-term loan can fund the deal by drawing on the equity in your present home. Of course, you need a significant amount of equity built up in your home to make this strategy work.
Strategy 4. Sell your current house first, applying a rent-back contingency.
Yet another route is to sell your place first. This means you’ll hold just one title and mortgage at a time. Does this mean move out, and stay in temporary housing while you go through the home buying process? If you’re buying into a market where waiving contingencies is the order of the day, this might be necessary. But why not ask to rent your home for a little while after your deal goes through? A rent-back contingency allows you to rent the home you sell from your buyer for a month or a few months, as the parties agree. If you offer some perks to your buyer, and your buyer is not in a hurry to move, you just might be able to bargain for this valuable benefit.
Strategy 5. Bid, then list for less than market value.
Another possibility, if you can’t keep your contingency, is to put in your bids, find your willing seller, then market your home at a reduced price so your sale happens quickly. Maybe it’ll be bid up!
Strategy 6. Apply a seller home of choice contingency to your current home.
Another possibility, less frequently talked about but potentially powerful, is the seller home of choice contingency. In this market, you might easily find a buyer for your property before you have your new house. The seller home of choice contingency says you may keep seeking your new home for a certain time. If you can’t get the new home within that time frame, you can call off your sale. In a seller’s market, you might be able to find buyers who’ll agree to this.
As You Can See…
There are many ways to compete with other buyers and get the home you want. “Second cities” and areas where property values haven’t exploded still allow leeway for you to keep a contingent offer on your bid. This keeps your risk down.
In a particularly hot area, though, contingencies can work against your goal of buying a home. The seller might just move on to a more flexible buyer.
It’s understandable to want to keep your risk down. For many buyers, the best path ahead is just to hold onto their current homes and wait for the market to cool. That, too, carries risk — because you cannot predict the future. At the end of the day, only you can say how much risk you can afford to take to reach your home-buying goal. We wish you the best of success out there.
Tara Mastroeni for Forbes: The Most Useful Home Selling Contingencies Explained (Dec. 17, 2018).
Photo credits: Alena Darmel, via Pexels.