Dissecting Multiple Offers- What Gives Buyers an Edge in Competition?

There are a lot of factors that are important to a seller when considering whether to accept a buyer's offer, especially when there are multiple offers to choose from. Here is a list of some of the most important factors a seller will look at:

1) Price- this is likely the first thing the seller will consider. Most people want the highest price possible for their home. If the buyer is asking for closing costs, the seller will subtract this amount from the offer price to figure what the net amount is. For example, let's say two buyers write offers for the same price of $150,000. However, one buyer is asking for the seller to pay $4,000 towards their closing costs, and the other is not asking for any. One offer is a net of $150k while the other is only a net of $146k. Obviously the higher net offer is usually more desirable to a seller.

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2) Closing Costs- Another thing to keep in mind about asking for seller paid closing costs is the appraisal. The appraiser is hired by the bank to value the house and substantiate the purchase price for the loan. Appraisers must use past sold comparable homes to justify value. When inventory is low and demand is high, the prices are increasing at a fast pace. The increasing prices make it harder for appraisers to substantiate values. Let's say there are two offers, one for $150k no seller concessions and one for $154k asking for $4000 seller paid closing costs. The net is about the same, but the first offer is better because the house only needs to appraise at $150k instead of $154k. A low appraisal can derail a loan and the transaction.

3) Loan Type- A conventional loan type is more desirable to a seller than FHA or VA. FHA/VA allow for low down payments and lower credit scores. If a buyer can qualify for conventional, they appear stronger in the seller's mind. FHA/VA loans also have more hoops to jump through. There are more strict requirements for property conditions. For example FHA/VA do not allow any peeling paint or missing handrails. There is a whole list of conditions, but the peeling paint and handrails are the most common issues I see. VA also has a stipulation where the seller is required to pay for a pest inspection for the buyer. In conventional vs FHA/VA, conventional wins every time.
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What about competing against a cash offer? A buyer needing to get financing is a typical, but large contingency in the purchase agreement for real estate. Cash removes a lot of uncertainty in the home buying and selling process. It is very difficult to compete against a cash offer, but you can focus on all other areas for improvement and go in with your best foot forward.

4) Down Payment- The higher the down payment the buyer has for financing, the stronger the buyer. The buyer with a large down payment will have more flexibility and options if issues turn up during the course of the transaction.

5) Who is the Lender?- Which bank will be processing the buyer's loan is another important consideration. Sellers prefer a lender who will hire competent appraisers and can meet contract deadlines. The local small banks have proven great customer service and fast processing. Since all of their underwriting is done locally, they have a lot more control over the loan process. There are many local lenders with excellent reputations. Avoid the big banks because they are slow. Often their underwriting is done in a completely different state. Closing weeks late is a huge issue.

6) Pre-Approval vs Pre-Qualification- A pre-qualification letter simply means the lender has checked the buyer's credit and asked a few preliminary questions. A pre-approval letter means the lender has already collected documentation and reviewed it. The pre-approval is more detailed and there is less of a chance of financing falling through. It also shows the buyer has provided documentation and is ready to fill out a loan application right away.

7) Possession- If a home is occupied, it is typical for a seller to request possession after closing. This means the seller gets to stay in the home a specified period of time after the purchase is completed. This gives the seller a chance to figure out where they are going to move. Sometimes they are trying to find another home or might be looking for a rental. Most commonly I am seeing 30 days after close right now, but this is completely negotiable. Possession can vary anywhere from 3 to 60 days after close. Usually the seller's preference is contained in the listing information.

8) Contingencies- Contingencies are things that need to happen prior to closing on a property. For example, inspections and financing are contingencies. Generally, the fewer the contingencies, the more attractive the offer. Eliminating the inspection contingency could give you a strong edge in a multiple offer situation. However, it is a huge risk and not a strategy that I would recommend. Without a home inspection, you could be buying problems with the house that could costs thousands of dollars.

9) Earnest Money- Earnest money is a deposit that shows the buyer will move forward with the purchase agreement in good faith. If a buyer follows the contract and isn't able to purchase the home due to financing or backs out due to inspections, the buyer gets their earnest money back. However, if the buyer were to back out at the last minute for no good reason, the seller would retain the buyer's earnest money since the buyer broke the contract. Sellers view a large earnest money amount as insurance and also shows the buyer has good intentions of completing the sale. A larger earnest money amount is attractive to sellers.

10) Escalation Clause- Let's say the buyer offers full price, but might be willing to go higher to beat another offer. An escalation clause basically states "buyer will beat any competing offer by x amount up to y capped amount." This can work to a buyer's advantage to secure the property in a multiple offer situation. It can backfire too though, because the buyer is essentially telling the seller the top price they are willing to pay. The seller may come back and counter you at your capped amount. Things become especially confusing if there are multiple escalation clauses.

11) Appeal to Emotion- On occasion, I recommend the buyer write a personal letter to the seller. This won't have a huge impact, but may provide a slight edge if two offers are very similar. In this letter, a buyer can describe why they love the house or neighborhood, etc. This technique is most effective when the seller has lived in the home for many years and has a strong emotional attachment to the property. *Update* This used to be a thing, but is no longer practiced due to potential fair housing violations. I leave this in here because many people ask about it.

Multiple offer situations are never ideal for buyers, however, it is the nature of the current market. No matter what the offer, it is normal for someone to second guess themselves. If a buyer wins the bid, they might think "Could I have offered less?" and if they don't win "Should I have offered more?" Every offer I have written over the last year has gone up against at least one other offer 80% of the time. Multiple offers are the norm right now. Expect them, and be prepared to write a good offer if you really love the house.