Category: Multiple offers

Should I Waive My Appraisal Contingency?


Should I Waive my Appraisal Contingency?

In competitive real estate markets where multiple offers are common and properties are selling for more than their asking price- sellers may sometimes ask buyers to remove their appraisal contingency before opening escrow in a multiple offer counter offer. 

This is asking a lot of a buyer, as the appraisal contingency is one of 3 contingencies the buyer gets and removing it before the appraisal is done can expose the buyer to some risk. This tough seller term only shows up in the most competitive multiple offers situations, with at least 5 offers or more. 

Why do sellers want to remove the appraisal contingency? 

The fewer contingencies (or no contingencies) and the shorter the contingency length the better the sale terms are for sellers so if they can improve the terms of the sale by eliminating or shortening contingencies they have an interest in doing that. For the appraisal contingency, if the price of a property gets bid up higher than the market value of the property, the seller would like to know that they will get the price they are offered even if the property is unlikely to appraise. 

This term can be a real gut check for buyers because it asks them the question- if the property doesn’t appraise for their offer price – are you willing to pay the difference in order to buy the property?

As part of your offer homework, you should have already reviewed the comps before writing an offer so you should have a good idea of the range that an appraisal will come in at. 

In hot markets, values can rise faster than appraisals can keep up with. Appraisers look at comparable sales from the past six months so they are looking backward into the past. In their appraisal reports, they will note the market direction, whether the market is increasing, in balance, or declining. However they have to find at least 3 or 4 comps to support value and if the market is racing to new highs, there may not be able to find any comps to justify a high price that won multiple offers. 

What are the risks for buyers of waiving my Appraisal Contingency?

The only time waiving your appraisal contingency becomes a problem is if the property appraisers for less than your offer price. If the property appraises low in a normal escrow with an appraisal contingency, you could either cancel the escrow or request the seller to lower the price. Most buyers I know don’t want to pay more than what their bank says the property is worth. What happens a lot is the buyer and seller renegotiate the price similar to a request for repairs. 

With no appraisal contingency, there is no price renegotiation for that reason. Confronted with a low appraisal, buyers can make a request to the appraiser for a reconsideration of value and attempt to get the appraisal value up. Sometimes real estate agents will try to do this to save a deal that might otherwise be lost. I have had some success in the past in getting appraisals up but not significant amounts. Most appraisers do hundreds of appraisals each year so they have got their job down to a science. They are still human and do make mistakes. I have found it best to approach them in their own terms and try to find ways to support a higher value while following their appraisal guidelines. If you can get the appraisal up higher that will bridge the gap.

If the appraisal is short, that is all the bank is willing to lend. Any difference beyond that has to be made up by adding cash to closing costs. 

Let me show a quick made-up example: let’s suppose property was listed for $500,000 got 4 offers and was bid up to $550,000. The winning bidder is a 20% down buyer. The appraisal comes back at $515,000. In this scenario, the buyer would be putting down $110,000, however since the property didn’t appraise that will change the downpayment amount. 20% of $515,000 is $103,000 plus $35,000 shortfall means the downpayment just went up to $138,000 to keep 20% down loan terms. If the buyer didn’t have the extra cash they could opt for a different loan, maybe 10% down or 15% down instead. 

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Win Multiple Offers

In strong seller’s markets, where prices are going up rapidly, and there are few houses for sale, Multiple offers are plentiful. It can be discouraging as a buyer when every new house that hits the market gets 3 or 4 offers right away, and then the listing agent drags the sale out ten to fourteen days while they hold Brokers Open Houses and Saturday and Sunday open houses collecting more and more offers. If you aren’t lucky enough to snag a home quickly, you will start to feel the impact of the rising home prices- that same $800,000 house from two or three months ago, might be an extra $20,000 or $30,000 now. Ouch!

The more offers, the more competition.  

With tough competition you need to go the extra mile to make your offer strong and to give yourself the best chance to win.  When buying houses, there is no prize for second place (although- ask for formal backup position #1), so make your offer count!

Here are a few things you can do improve your offer’s chances of winning in a multiple offers situation:

 1.) Offer the highest price. 

Duhhh! In multiple offers the #1 most important factor for sellers is price. It doesn’t matter if you have everything else in your favor- you will lose if your price is too low. Ask yourself: at what price would I not be disappointed if I didn’t get the property? Then, if you do lose, you won’t feel bad about it and kicking yourself afterwards thinking you should have offered more.

Let’s reverse the tables and assume you are the seller and you have received these six ‘best and final’ offers on your house that is listed for $749,000:

Offer 1-  $751,000 20% down
Offer 2- $650,000- all cash 15 day close
Offer 3- $735,000 10% down
Offer 4-$785,000 30% down
Offer 5- $766,500 5% down

Which of these offers would you choose?

2.) Introduce yourself! And don’t be a grump.  

Make sure you introduce yourself to the listing agent of the houses you plan to write offers on. It only takes a few minutes at an open house or showing- and if you are friendly and genuinely interested in the property, the agent will remember. Negotiations began long before an offer is ever written. Even before you walked through the door. It starts the moment you meet someone, and before. I have had buyers lose properties because they complained during showings, which lead the listing agent to believe they didn’t really want the property. I have also camped out with one of my buyers for an entire open house (yes three hours- it was boring as hell) just to show the listing agent he wanted the place (he got it, and it was a great deal). Anything you can do that is memorable, and makes you more familiar will help the listing agent feel confident about presenting your offer in a positive light. 

3.) Put your best “offer” foot forward

When you are writing your initial offer, I advise clients to make it pretty close to your best and final. Lets suppose there is a listing for $1,450,000 and you think it is going to sell for $1,600,000. And your willing to go to $1,580,000. I see buyers make this mistake that they write a low offer and plan to “go up a lot” and that that will get the sellers attention. They might write $1,475,000 in the scenario above, and are planning, when they get a counter to go to $1,580,000. However, there is one problem. You might not get even get a counter! Or your agent might have to beg the agent to send you one. The damage is already done. The seller will see the low offer and not take you seriously. It is far better to get the sellers attention right away with your first offer, and keep it. In this situation, write $1,550,000. When you get the counter, go up another $30,000 to your maximium- $1,580,000- this looks far better to the seller. 

4.) Write a cover letter to accompany your offer!  

Many buyers don’t bother to do this! If you want the property badly, make yourself standout and take the time to write a thoughtful coverletter to seller and tell them why they should sell their home to you.

5.) Put as much money down as you can.   

Sellers want to pick the strongest buyer they can. The larger the downpayment the more likely the deal will close. Buyers with more money in the bank are stronger. In rapidly appreciating markets appraisals commonly fall short of the contract price, as the market could take several must to readjust to new price levels. Sellers want to get the price that they were offered. If the appraisal does come short, the fact that you have extra cash to cover the difference, helps them rest at ease. 

6.) Write a complete offer that includes proof of funds and preapproval letter.   

Incomplete offers won’t be considered, they are thrown in the trash. If you don’t have all your ducks in a row yet, do it right away, because when the market is moving fast it doesn’t wait for you to talk with a lender and get preapproved or obtain a copy of your most recent bank statement.

7.) Find out if the seller wants any special terms and include them on your offer

Being flexible with any terms the sellers want (or dictates…) can push the bar in your favor. A lot of sellers in an rising market, will be moving- and they will be facing the same challenge of finding a new property as you do. Giving a seller a leaseback provides them time to purchase a replacement property. Usual seller leasebacks are 30-60 days, and terms are a small security deposit and monthly lease payments equal to your holding cost (mortgage, taxes, and insurance). Maybe the seller already bought a property and wants a quick close. Go to your lender and have them start working on your loan so you can close faster. Seller wants to keep the fridge? Take it! 

8.) Choose an ODD number to write for you best and final offer

Veteran agents who deal with multiple offer situations frequently know that you never write round numbers. Think of it like the game show, the price is right. There is nothing more frustrating than losing a property because another buyer with more experience in multiple offers chose to write an odd number offer price ever so slightly above yours! (I once had a client who lost multiples a few years back with a $1,700,000 offer to a $1,710,000 offer…neither of us were happy campers). Let’s say your best and final is $450,000- I’d recommend making it $453,632. Or maybe $451,105. What’s your lucky number? I hear 8’s are lucky- $452,888. What is the property address? 305 Mohawk Ln? 450,305. Whatever you do, just don’t make it the same number everyone else is going to pick. Make it an odd number that is slightly more and give yourself the best chance of being the highest.

9.) When the counter offers are sent out, wait until near the end of deadline to respond

When you ask the listing agent what the property is going to sell for- they don’t know, because it depends on what the buyers are going to do. When you wait for some of the responses to come in before submitting yours, you give yourself a chance to try and glean some information from the listing agent where you need to be at. I might tell the listing agent what offer we are going to make verbally and ask them if this is going to get the property, and gauge their reaction. If you have a relationship with the listing agent, they may give you some hints.

10.) Have your agent Present your offer in person

This goes a long way with real estate agents that come from the old school. Twenty to thirty years ago, before emails, cell phones, and fax machines, driving to the listing agents office and presenting your offer in person was the way everyone did it. When you go the extra mile, the listing agent will notice and know you are serious and want to close.

11.) Shorten your Inspection Contingency

The purchase agreement has a 17 day inspection contingency by default. In fast markets listing agents are usually countering buyers inspection contingencies down to 7-10 inspection periods. This can put a lot of pressure on your buyer’s agent to get all the inspections done. 7 Days is the minimum time required to do inspections, and 10 is a lot better. You can voluntarily cut down your inspection time from 17 days to strengthen your offer. Maybe to 14 or 12 days, or 10 if you want to be aggressive. 17 days is more time than you need so shaving a few days off won’t hurt you if you stay on your toes. 

 12.) Waive Contingency

There are three main contingencies in the purchase agreement- the loan, appraisal, and inspection. Waiving a contingency, or three, will significantly strengthen your offer. 

If you are a cash buyer, you have no problem waiving the loan contingency. For everybody else who is financing, this is not an option. 

The most common contingency to be waived by buyers in multiple offers is the Appraisal contingency. In strong seller’s markets, properties sell for more than their asking price, and sell for higher prices than the most recent comps. This can create problems with getting an appraisal at value. Sellers don’t want to accept an offer that is ‘only as good as the paper it is printed on’. By waiving the appraisal contingency, the buyer eliminates any doubt about the final sales price and cannot renegotiating the sales price if the appraisal falls short. But, if you do this, be ready to pick up the tab!

In fast markets, sometimes the Listing Agent will provide buyers with a pre-sale inspection report paid for by the seller. The reason sellers do a presale inspection is to find any serious problems with their property before they list it. The seller then has the opportunity to fix those problems or disclose them, instead of dealing with them in escrow.  The purpose of a presale inspection is to do an “as is” sale. The seller will demand a very short inspection contingency 10-7 days. 

If you know me, like a broken drum, I always recommend to get an inspection. I would strongly advise buyer’s against waiving the inspection contingency. The only time I would consider it, is with an off market property that you have no choice, or with a property you intend to complete rehab or tear down. The seller is trying to avoid granting any repair credits to the buyers. For liability purposes most listing agents and sellers do not want to force buyers to waive their inspection contingency- so you really don’t need to give this up. So hold on to it!

Keep in mind that having less or no contingencies as a buyer can be risky, because if you don’t close, you will lose your earnest money deposit– so be careful you understand what you are doing before you start waiving these contingencies right and left.

13. Set up to the plate

When you receive the sellers best and final counter offer- go up and pick a number that you think will actually win.  I have had client’s who dig in, and refuse to raise their offer. That’s fine if you don’t care whether you lose the property or not, but if you do want the property, make the winning bid. Sometimes the seller doesn’t always choose the highest price, but they are not foolish- there is a range that the best offers orbit, and you need to be in that ring. 

13.) Write an Escalator Clause 

This is a trendy new tactic buyers are using to win multiple offers in Los Angeles. In states like Michigan and Oregon, escalator clauses are common practice, but in California escalator clauses are not widely used. If you plan to use an escalator clause make sure the listing agent is open to it and understands it, because many listing agents will not have heard of it. 

Unlike a normal best and final response offering a specific price, with an escalator clause buyers offer some amount higher than the next highest offer so they cannot be overbid. The language for the counter offer response may be something like “buyer offers $5,000 above next highest offer”. This would be an example of $5,000 plus escalator clause. The amount you bid over the next offer depends on the price range, for $500,000 $5,000 over the next highest offer is probably appropriate, and for $1M $10,000 and so on. Don’t want to bid above a specific price? You can add a cap to the escalator as well- such as “price not to exceed $950,000” for example. I would also request the listing agent to produce a copy of the next highest offer so you have some proof. 

Some agents feel like escalator clause is an unfair practice and have negative response to it. That is why I say to check with the listing agent before writing one in to your counter offer. I can understand where those agents are coming from- if every buyer responded to a multiple offer counter offer with an escalator clause it wouldn’t work, and for buyers who lose out to an escalator clause, they may feel that the bidding was unfair. 

I think in certain situations it can be an excellent strategy but not right in every situation so check with the listing agent first. 

14.) Ask for the “Take it Off the Market Price”

In multiple offer markets, listing agents are really drawing things out, holding the house open for one or two weeks, and setting an offer deadline at the end, and collecting offers that come in, but not presenting them until the deadline, at which point they counter offer. Some buyers get really frustrated having to wait two weeks, then get countered, and have to wait another week, just to lose the property they want. This strategy wont get you the best price, however, in some situations I have seen it successfully take a property off the market before the offer deadline. You need an agent on the listing side who is receptive to it, some agents will refuse to present offers (even though they are suppose to) until the deadline no matter what price they are. However, as an agent myself, I can’t resist showing a seller a really good offer when I get it. Like in the Godfather movies, you have to “make an offer they can’t refuse”. If you are successful you can head the property off at the pass, and take it off the market before weeks go by. 

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Cover Letter

What is a Cover Letter?

A Cover Letters is a 1 page letter (write a letter, not a book!) that shows the seller that you have a strong motivation to buy their property. Cover letters are optional not required. Buyers can choose to include a cover letter to strengthen their offer. 

Should I write a Cover Letter?

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If you are in a multiple offer situation, writing a coverletter can improve the chances that your offer will be accepted. I strongly recommend cover letters in multiple offer situations. Sellers deepest fear is that they accept an offer that cancels and they fall out of escrow. Properties that come back on the market usually sell for less money because buyers are suspicious and some of the bidders may have moved on to other properties, lessening demand.

By demonstrating to the seller that you are strongly motivate to buy their property (Kids start school in a month and you need to be settled, You need to be within Walking distance to your hospital, etc) you reduce the risk in the sellers mind that you will fall out of escrow. 

However, if you don’t feel strongly about the house then skipping the cover letter is best. I have read cover letters from buyers who were under pressure to buy a property quickly and it wasn’t their first, second or even third choice, and you can tell that they don’t really care if they get the property or not. Writing a cover letter when you feel like this can actually hurt you, so just skip it if you don’t have strong feelings and save your writing for only the very special house that speaks to you.

I would not recommend writing a cover letter if you want to negotiate price. Cover letters may weaken your negotiating position because it informs the seller that you are strongly motivated to buy, and they can use this information to negotiate a higher sale price.

Does a cover letter improve my chances?

When the seller is reviewing a bunch of offers they received in multiple offers, your offer appears to the seller like just a name and a number- the purchase price. Most of the time the seller will have never met you in person because their agent showed you the property when they were not there. The cover letter is the only time you can communicate directly with the seller and share your story. Cover letters personalize your offer. You might be surprised but many buyers don’t bother to write a cover letter! Writing a coverletter can make your offer stand out– and believe me, the seller is going to read it.

In a multiple offer situation, the most important thing is price. If your offer price is much lower than the other offers don’t expect the cover letter to make up the difference. You still need to have a competitive offer price. Selling a house is an emotional decision and your cover letter might be the deciding factor for the seller if they are struggling to make a close decision.

Should I add my picture to my coverletter?

A picture is by no means mandatory, but sometimes it can be helpful put a “face” to a name and make your offer more memorable. Although, beware, including a picture can be a double edged sword. You never know where the seller is coming from, and sometimes including a photo can actually hurt you instead of help you if the seller is prejudice. Most of the time I recommend to let the buyer’s words stand on their own merits and forego a picture. Sometimes, if you know the seller has pets, and you have pets too, including a picture with a furry family member can be good. 

Faceless-Impersonal

What should I write in my coverletter?

Many buyers ask me what to write in their cover letter. I have saved some samples of great cover letters over the years and usually send a few to get the ideas flowing and to pull inspiration from. The best advice for writing a cover letter is Write From the Heart. Your most powerful message comes from speaking the truth about how you feel about the house and what the house means to you. This is your chance to tell your story.

Good writing is rewriting. Be as specific as you can. Try to focus on yourself and the property and avoid the seller and their agent.

Here are a few questions to get some ideas flowing:

-Why do you want to buy this property?

-Why do you want to live in this area?

-What is your reason for buying a property right now?

-Where have you lived in the past and how does that compare?

-How does being at the property make you feel?

-How will you live in the property once you own it?

I wrote a Cover Letter- now what?

I recommend to have someone review your cover letter before sending it. Having a second pair of eyes is always helpful when editing. Fresh eyes will be able to spot any grammar or spelling mistakes, confusing sentences, or places that could use elaboration or more specific detail. A family member or friend, or your real estate agent should be fine. 

When I am editing a client’s cover letter, I try to edit minimally because I want my client’s voice to be heard. I send the edited draft back for their final review and if they are happy- they give me their OK and I package it with their offer and send it and cross our fingers!!!

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