In a hot real estate market, buying a home is rarely as simple as finding one you like, getting financing and receiving the keys. Sellers are often fielding multiple offers, so you may find yourself involved in a bidding war, or even more than one.
You’ll be far more likely to score your dream home in a fast-paced market if you understand how to craft a competitive real estate offer. Here’s a closer look at what you need to know.
Key Takeaways:
- Before jumping into a hot real estate market, you should understand how tight housing supply leads to frequent bidding wars.
- When you understand trends in your local market, you’ll be better equipped to make an enticing offer.
- Mortgage preapproval, a higher earnest money deposit, an escalation clause and minimal contingencies can all make your offer more competitive.
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Understand The Current Real Estate Market In Your Area
Buying a home is a multistep process, and one of the first steps is taking the time to understand your local real estate market. Real estate listing websites will show you the prices of homes for sale near you. You may also be able to find historical pricing for homes in the area that sold recently.
In many parts of the country, there’s a strong demand for homes and a limited supply. This is especially true in the hottest real estate markets. Most people understand that this dynamic drives up prices. However, it also increases competition between buyers.
When multiple people want a house and are determined to get it, a fierce bidding war can ensue. For sellers, this is a great thing. For buyers, this level of competition may make the process of buying a home more stressful than they anticipated. If you don’t plan ahead and set a firm price range, getting pulled into a bidding war may lead you to spend more than you intended to.
You might understandably want to wait for a slower season to buy a home so the competition is less intense. Generally speaking, the best time to buy a house is in the late summer and early fall. However, when you’re in a hot real estate market, even the “slow” season can be incredibly competitive.
Doing your own market research is a great place to start. Navigating a highly competitive real estate market can be overwhelming at times, but fortunately, you don’t have to do it alone. Before you start actively shopping for homes, you should consider teaming up with an experienced real estate agent.
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Work With An Experienced REALTOR®
Your real estate agent isn’t just a salesperson. They’re also your guide through the process of buying a home. Having the assistance of a seasoned agent is always wise when you’re buying a home, but it’s even more critical in a hot real estate market.
If you haven’t bought or sold real estate before, you may wonder about the difference between a REALTOR® and a real estate agent. A real estate agent is someone who holds a license to represent buyers and sellers in real estate transactions. A REALTOR® is a real estate agent who is also a member of the National Association of REALTORS® (NAR). Most real estate agents are REALTORS®, but not all of them are.
A REALTOR® has access to tools and networks that help them achieve great results, and they also must adhere to the NAR Code of Ethics.
Take your time and choose your agent wisely before you continue. You want to work with someone who has a proven record of success, but it’s also important that you feel comfortable working with them.
The right REALTOR® or real estate agent can help you make a competitive offer in a few different ways.
Researching Comparable Properties
No one understands the real estate market better than real estate agents. Your agent will be able to offer valuable insight into your local market and help you form an idea of what constitutes a reasonable offer.
If your offer is too low, the seller likely won’t even entertain it. If it’s too high, you might get the property but spend more than you need to. Your real estate agent can help you find the ideal middle ground.
Adding An Escalation Clause
An escalation clause automatically increases the amount of your offer if another bid comes in. Typically, these clauses will specify the increments by which your bid will increase. They also generally include a maximum bid.
This process is somewhat similar to bidding on eBay. If you see an item you want, you enter your maximum bid. However, to win the auction, you only need to exceed the next bidder’s maximum by a certain amount.
Waiving Certain Contingencies
The dollar amount of your offer isn’t the only way to stand out to sellers. Your real estate agent may be able to recommend waiving certain contingencies. This makes for a faster, less complicated sale, but you should weigh the pros and cons carefully before deciding to waive any contingencies.
For example, some buyers are willing to waive the inspection contingency. Doing so speeds up the sale and makes it less of a hassle for the seller. However, while waiving this contingency may make it more likely that you’ll get the house, it also opens you up to financial risk. If the home isn’t inspected before you buy it, you may later discover serious issues, like undisclosed plumbing problems, property line disputes, or easements that provide neighbors the right to use a shared driveway.
Being More Flexible
A seller may be more likely to accept your offer if you can work with them on closing dates. For instance, if the seller wants more time to transition to their new home, you might consider a lease-back option. This is where you allow the seller to stay in the house for a specific period before you move in, typically arranged at no cost to the seller. Alternatively, if a rapid sale is important to the seller, you may be able to offer a shorter escrow period.
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Craft A Strong Offer
When you’re making an offer in a hot real estate market, every little detail matters. If you want your real estate offer to stand out from the rest, consider taking some or all of the following steps:
- Get a mortgage preapproval.
- Increase your earnest money deposit.
- Offer to cover the seller’s closing costs.
- Make an offer in cash.
Here’s a closer look at each of these elements and how they can contribute to a solid real estate offer.
Get A Mortgage Preapproval
Most home sales come with financing contingencies that allow the buyer to back out if they can’t secure financing. When a seller sees that you’ve taken the time to gather the necessary documents, research mortgage lenders and get a mortgage preapproval, they’ll know that you’re serious. They’ll also know you’re unlikely to back out at the last minute.
Increase Your Earnest Money Deposit
An earnest money deposit is a sum you pay to the seller to show how serious you are about the home. The standard earnest money deposit is anywhere from 1% – 3% of the home’s value.
However, if you can up that to 5% or even more, the seller may be more inclined to accept your offer. An earnest money deposit is applied to your funds at closing. If the sale does not go through because a contingency isn’t met (like an unsatisfactory inspection), it can be refunded to the buyer, but if the buyer backs out of the sale for reasons not outlined in the contract as contingencies, the seller would typically be able to keep the earnest money deposit.
Offer To Cover The Seller’s Closing Costs
Offering to cover the seller’s closing costs might seem like a small gesture, but it can make a big difference. The seller gets immediate financial relief, and you’re more likely to get the home you want. Note that some states may limit buyers from paying seller closing costs.
Make An Offer In Cash
It’s not always possible to make an offer in cash, especially when real estate prices are high. However, because cash offers tend to close much faster than financed sales, the seller is more likely to accept the purchase price offered in cash.
Prepare For Competing Bids
In a competitive market, your real estate offer likely isn’t the only one the seller will receive. When homes are selling quickly, it could be wise to start with your best offer.
Before you make your offer, consider asking your real estate agent to contact the seller’s agent and find out what terms matter most to them. For instance, if you learn that the seller wants someone to cover their closing costs, offering to do so may increase the strength of your bid.
Offering more than the purchase price is another way to stand out, but be aware: Banks often won’t finance more than the appraisal price, so you may need to cover the difference yourself.
Be Ready To Make Quick Decisions
Homes move fast in a hot real estate market. Before you make an offer, plan how you’ll respond to a counteroffer and know when to walk away.
You should also gather your mortgage preapproval paperwork, proof of income, bank statements and other necessary documents early on so you can secure a mortgage quickly.
The Bottom Line
Buying a home can always be challenging, even more so in a hot market. Having a game plan and a knowledgeable real estate agent by your side can improve your chances of landing the house you want.
If you’re looking for a mortgage preapproval, Quicken Loans can help. We match homebuyers like you with multiple lenders so you can find the best rate. Contact us today to get started.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
