Homebuyers in 2021 are facing one of the most challenging markets anyone has seen, says Larry “Boomer” Foster, president of Long & Foster Real Estate.
“Demand is through the roof, with buyers competing against 15 to 25 offers on properties that are priced right and show well,” Foster says. “When they’re competing against all-cash offers, they’re put in the unenviable spot of needing to waive contingencies and prove that they have the cash to complete the sale even if the property doesn’t appraise high enough.”
Buyers cannot be risk averse in today’s housing market, says Gary Scott, also president of Long & Foster Real Estate.
“You need to be ready to buy and ready to compete,” says Scott. “Buyers need to be aggressive and be willing to waive inspections, even financing and appraisal contingencies, if they really want the house. They also need to understand that they could still lose the house regardless of their offer.”
How to make a strong offer
In a market tilted heavily in favor of sellers, because of the limited number of homes for sale and the high level of buyer demand, buyers find themselves needing to make their offer stand out as strong and enticing to sellers. One common tactic is to provide an escalation clause that automatically increases your offer up by a percentage above the highest offer or incrementally by $5,000 or $10,000 up to a maximum amount, says Foster.
“With mortgage rates extremely low, buying power is increased right now,” says Foster. “Buyers are really buying a mortgage payment, not the price of the house.”
Besides offering an escalation clause, many buyers choose to waive contingencies that, if in place, would give them an opportunity to get out of the contract without losing their earnest money deposit. Among the common contingencies to waive are:
Home inspection. Foster recommends doing an “information-only” home inspection, which means that you won’t be asking the sellers to fix anything.
“Sometimes you can arrange a pre-offer inspection, but not all sellers allow them,” says Foster. “Most buyers ratify their contract with the sellers and then within three to seven days have a home inspection that allows them to void the offer or move forward.”
Foster says normally about 7% of contracts fallout over a home inspection finding.
“That rate is the same now, even though the buyers aren’t asking for repairs,” says Foster. “People just want a home so badly.”
To protect yourself from the lack of a fully negotiable home inspection, says Scott, spend more time during the site visit looking for signs of neglected maintenance and study the seller’s disclosure form.
Financing. Buyers today need a full loan commitment from their lender with all the underwriting done, says Foster. If they have that and are confident that nothing will change in their finances before the closing, then they can waive the financing contingency. Fonville Morisey partners at FM Lending Services, for example, offer the FM Lending Buyer Advantage. Through this program, qualified buyers obtain a commitment letter that puts them a step ahead of the competition.
“It’s almost impossible to compete against a cash offer with an offer contingent on obtaining a mortgage,” Foster says.
Appraisal. Buyers who waive an appraisal contingency are promising the sellers that they will make up the difference between the appraised value of the home and their maximum loan amount. Working with a real estate agent who knows the market well can minimize the likelihood of a low appraisal.
“We don’t recommend waiving the appraisal contingency, but we realize there’s no real choice for a lot of buyers who need to make as attractive an offer as possible,” says Foster. “If you waive the appraisal, you need to have the cash to make up the difference or, if you can’t fulfill the terms of the contract, you will lose your earnest money deposit.”
Foster says buyers today often provide a larger earnest money deposit than in the past, up from $1,000 to $4,000 to a more significant sum to be more attractive to sellers, but he recommends only doing that when you are sure of your financial power.
Every buyer needs to have cash available today to cover potential issues during the transaction such as cash to cover an appraisal gap and after the purchase to fix things that you can’t ask the sellers to repair, says Scott.
“If you’re spending $500,000 on a home, you should have at least $10,000 in cash beyond your down payment and moving funds,” he says.
Protections for buyers
While waiving contingencies adds risk to the buyers in a real estate transaction, there are some things buyers can do to protect their interests. First, suggests Scott, have a home inspection even if it’s just to get information on the property.
“Remember that if you are buying a condo or a home in a homeowner’s association, you have three days to review the documents when you receive them,” says Foster. “You can cancel your contract and get your deposit back if you don’t like something in those documents.”
Another protection is the advice of a professional real estate agent who can look for flaws in a property and help you understand home values in this volatile market.
“We’re seeing ‘offer fatigue’ among buyers who have lost three, four or more houses to other buyers and then their common sense goes out the window,” says Scott. “If you want a home badly enough and you’re tired of losing bids, then you must have an experienced, professional real estate agent at your side.”
Scott also recommends looking at properties with an ‘unofficial home inspector’ such as a friend who knows a lot about houses and will check on the ages of the appliances and systems.
“Buyers can also purchase a home warranty that covers some of the items in the house and can protect you from a $5,000 or $10,000 event during your first year in the property,” says Scott.
If you’ve made the decision to buy a home, Fonville Morisey Realty offers multiple divisions that can help you find, finance and insure your home. Representatives of FM Lending Services are available in most Fonville Morisey offices to assist prospective buyers with financing and to help you develop your homeownership plan. A professional Realtor can help you navigate the fast-paced housing market.