This article was updated on 3/27/17.
Buying a home in a competitive market is difficult. Inventory is low in hot sellers’ markets, attracting numerous buyers to the same handful of homes, and some buyers will pull out all the stops to get their offers accepted.
Popular homes can launch bidding wars between buyers. In addition, investors sometimes steal the show with all-cash offers, which appeal to sellers because they avoid the potential of the buyer running into financing hurdles at closing. Such scenarios greatly benefit sellers’ payouts and challenge buyers’ budgets.
Earlier this year, Zillow ranked the top 10 sellers’ and buyers’ markets, indicating the best areas for negotiating home price. Sellers have the upper hand in home sale negotiations along the West Coast and in Denver, Seattle, Portland and Boston. If you’re looking to buy in these locations, expect to have little negotiating power because homes move quickly and often sell above asking price.
Although much of the nation’s home values are leveling off after the recession, home values are still increasing in some top markets such as Denver, San Francisco, and Miami. Buyers shopping for deals may find better luck in less pricey or less competitive markets such as Philadelphia and Chicago.
Competitive markets can be especially intimidating for first-time buyers unaccustomed to the speed at which they must make such long-lasting and expensive decisions. Here are three considerations to keep in mind for buyers bidding on homes in competitive markets.
1. Price offers fairly for the market.
To feel confident about your offering price, understand the market in which you’re shopping. Local real estate agents are experts in their neighborhoods and can help clients gain perspective on property values by providing sale prices from comparable properties “comps” or nearby homes with similar features. Once you understand the going rate for homes, you can narrow your search to fit your budget and expectations.
Local agents often won’t tell you the exact price you should offer, but they can suggest ways to make a competitive offer and avoid wasted time. Typically, a low offer won’t appeal to sellers in a competitive market. On the other hand, you may regret an overpriced offer after purchase or run the risk of having a lender reject financing if the price is too far above the home’s appraised value .
2. Limit contingencies to close quickly.
You’ll need to move quickly in a sellers’ market , so beat the competition by structuring your offer to close fast. Part of a purchase offer can include financing contingencies to ensure you can secure a loan, inspection contingencies to confirm the home is in good condition, and appraisal contingencies to guarantee the purchase price is near market value.
Contingencies can be risky for sellers because each may increase the potential of losing the buyer. Either set a brief window for your appraisal and home inspection or waive them. To mitigate the risk of skipping a home inspection, consider hiring an inspector to visit during an open house, and then make your offer knowing the home’s condition without the need for the contingency.
3. Increase earnest money deposits.
As part of a home purchase offer, the buyer typically puts down 1 to 5 percent of the sale price of the home as earnest money. When the seller accepts the buyer’s offer, the earnest money is held in an escrow account or by the title company until closing. At closing, the money is applied toward the down payment. If the deal falls through, contingencies usually state that the cash is refundable to the buyer.
Serious buyers can appeal to sellers by offering at least 3 percent of the home’s sale price in earnest money. The extra upfront cash shows the seller that the buyer is financially ready to buy.
If you’re hoping to buy in a competitive market, it’s best to present the strongest offer possible. These three suggestions may help move the process along more quickly—and successfully.