3 Tips for Competing in a Multiple Offer Situation

Spring is coming, and, like many homebuyers in the D.C. area, Dee and Henry are looking to purchase their first home.

This Townhome had multiple offers

Dee and Henry’s favorite Townhome had multiple offers

We’ve already been out looking for homes for a couple of weekends, and finally, they have found a cute town home that they really, really like, plus it’s in their ideal school boundary.

As we’re getting ready to make an offer, the listing agent informs us that there are a couple of other offers coming in as well, so it’s a multiple offer situation.

Dee and Henry really want to buy this home

The issue is that they are now in a competitive situation so they need to make their offer as strong as possible.

One way to make the offer better, of course, is to offer more money.  But that’s not always the best approach (although it never hurts…).

Sometimes, even when offering more money, another contract wins out because it represents less risk to the seller.

How to minimize risk to the seller (while making sure you’re protected)

To the seller, more contingencies means more risk that their property will be off the market for several days or weeks with the potential that the contract may fall through.

Less buyer contingencies are better from the seller’s point of view

Buyer contingencies exist to protect the buyer.  So while relaxing buyer contingencies represents less risk for the seller, it represents more risk for the buyer.

For example, the three most common contingencies that we see in contracts in Fairfax County are:

  1. Home Inspection
  2. Appraisal, and
  3. Financing (unless it’s a cash offer)

How could Dee and Henry manage these contingencies so that they represent less risk to the Seller and give them an edge on the competitive offer situation?

1. Home Inspection Contingency

Waiving a Home Inspection Contingency is NEVER a good idea.

In most situations, and in the best case scenario, the home inspection comes back with minor issues to be corrected. But in the rare situation when the home requires extensive repairs, or it has structural issues, purchasing a home without an inspection can be a very expensive proposition.

One way to lower the risk to the seller while still keeping the Home Inspection Contingency is to waive the right of the purchaser to request repairs. If Dee and Henry chose to waive their ability to request any repairs, they would still have the option to cancel the contract if there were a major issue with the home.

And, if the home only required minor repairs, Dee and Henry could still figure out how much would it cost them to address the repairs themselves, and that would be the extent of their risk.  If they weren’t comfortable with that level of expense, they could cancel the contract.

Another option some purchasers use to minimize risk to the seller is to waive the appraisal contingency.

2. Appraisal Contingency

When the real estate market gets hot, one hears of purchasers waiving the appraisal contingency.  Essentially, what these purchasers are committing to do is to pay the difference between the sales price and the appraisal value (if the appraisal value is lower than the sales price).

In the case of Dee and Henry, if they chose to waive the appraisal contingency* to minimize the risk to the seller, they should do this knowing that they will have to cover the difference in value (if any), and that they should have the funds available for that purpose.

If Dee and Henry told me that they would be waiving the appraisal contingency, I would strongly suggest to order the appraisal as soon as the contract were ratified.  If the appraisal came in low, perhaps there would still be other contingencies in force (such as the home inspection contingency) that would allow Dee and Henry to exit the contract with no penalty.  But they should still be prepared to cover the difference in value, should the appraisal not be done before they removed their other contingencies.

The third most common contingency is the Financing contingency.

3. Financing Contingency

The Financing contingency exists to ensure that the purchaser can get approved for a loan before committing to purchasing a home.

Dee and Henry wanted to be sure they could get a loan, so they got throughly pre-approved by a lender prior to looking at homes.

Unfortunately, occasional bad things happen to good people, and if something occurred that prevented Dee and Henry from getting their loan (such as losing a job), the best thing for them would be to have the Financing contingency still in place.

There are also other, more common, unfortunate situations in which the purchaser is exposed. For example, if the lender doesn’t issue the loan on time for settlement (which is why it’s VERY important to select a lender you can trust!).

If Dee and Henry were to waive the Financing contingency or remove it, they would be exposed to defaulting on the contract should their loan not be granted in time for settlement.  And not only could they forfeit their Earnest Money Deposit, but they could also be sued by the seller for damages.

My recommendation on the Financing contingency is NOT to waive it, EVER. And, if you have one, not to remove it either, if at all possible.

Dee and Henry considered their options

Dee and Henry really, really, wanted this home so they considered their potential risk and made their offer as attractive to the seller as they were comfortable by:

  • Waiving repairs on the Home Inspection contingency,
  • Waiving the Appraisal contingency (because they have the funds to cover any potential difference in value), and
  • Keeping the Financing contingency in place

This is Dee and Henry’s particular situation

Your situation may be very different from Henry and Dee’s and you may choose to manage your contingencies differently.

However, it’s good to know how to make your offer stronger without exposing yourself to more risk than is necessary.

Next Step

If you are considering buying a home this Spring, contact us as soon as possible so that we can get you started on the right foot, with the best chances to compete in this hot market.

* It’s not possible to waive the appraisal contingency on VA or FHA loans.

Your turn, what do you think?

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