To say that the real estate market in Iowa is competitive right now would be somewhat of an understatement.
The combination of low interest rates, a strong housing market rebound in most areas and a continued decline in inventory has resulted in a competitive sellers’ market with more and more buyers competing for less available homes. Multiple offer situations, also known as bidding wars, are becoming more common for buyers in many markets. Recent data from the National Association of REALTORS® (NAR®) shows that agents across the country are reporting an average of three offers per house for sale and an increase in multiple offer situations.
The increase in demand from competitive buyers and a decrease in available homes for sale is also causing a steady increase in home values as bidding wars drive up the purchase prices. A recent market report from Danielle Hale, the Chief Economist at Realtor.com, notes that buyers, motivated by low mortgage rates and the certainty of homeownership in an uncertain time, are quickly putting in offers on homes for sale, driving the overall numbers of homes for sale lower and putting upward pressure on home prices.
What does all of this mean for buyers? Everyone should be prepared for a fast-moving and highly competitive environment. Read on to learn everything you need to know about how buyers can win in a multiple offer situation. You’ll learn how to make strong, competitive offers, how to write a personal letter and the negotiation tactics that can help you win.
Looking for a specific section? Click the links below to jump to a particular topic:
- Make sure your financing is strong
- Talk to your agent about what they can do for you
- How to be flexible and prepared to move fast
- How to write a personal letter to sellers
- The negotiation tactics you and your agent can use to win
5 Ways Buyers Can Win in a Multiple Offer Situation
If you’re thinking about buying, ready to start house hunting or have started looking for a home, it’s essential you know what to expect in a competitive market. You may be surprised to find how quickly the buying process is moving- homes in lower price points in Des Moines are selling in less than 24 hours!
Your agent should prepare you for the state of the market but you should also know what to expect during the negotiations, how to make a strong offer and what you might end up conceding to sellers.
1. Make sure your financing allows you to make a strong offer.
If you’re already working with an agent then you should already have a letter of pre-approval from a lender. A letter of pre-approval is essential because it shows you actually do have the financing to purchase a home and a lender trusts you.
According to a survey conducted by Realtor.com in June 2020, only 52 percent of buyers said they had a letter of pre-approval before they started house hunting. That’s not going to cut it! Many sellers in this market may not even show you their home if you don’t have pre-approval, let alone consider an offer.
Shop around for lenders and make sure you have the best financing so you can make offers backed by a trusted lender. If you want to set yourself up to make strong offers, you might consider:
- Increasing the amount of your downpayment
- Securing a better loan package
- Working with a local, well-respected lender
- Converting to a cash buyer
Increase the amount of your downpayment.
Even if this means holding off on the house hunt for a few more months, this can strengthen the loan package you get from a lender. Not only does it show sellers you have cash on hand, it helps you in the long run by shortening the life of your loan which increases the amount of equity you start with once you close.
Secure a better loan package.
This may be a little trickier since your loan package is determined by a number of factors, such as income, debt-to-income ratio, credit and your overall financial state. However, the financing you bring to the table may affect a seller’s confidence in your ability to buy the house. Sellers are allowed to choose offers based on the financing of the buyer, which may impact those using VA or FHA loans. Conventional loans are always going to look good to a seller, especially if you have a sizable downpayment to go along with it.
If getting a better loan package means working with a different lender who can help you, don’t be afraid to change lenders. You have a lot at stake here and it’s in your best interest to work with someone who can help you meet your financial goals.
Work with a local, well-respected lender.
There are so many quick options for home loans today. Apps and sites like Rocket Mortgage and Quicken Loans have made it easier than ever to apply for a home loan in just a few clicks. But just because these programs have made applying for home loans easier, doesn’t mean they’re appealing to local sellers.
When you work with a local lender, you’re tapping into the network of relationships lenders, appraisers, real estate agents and other real estate professionals are members of. Your agent can tell you which local lenders are trusted and respected by others in the market. A letter of pre-approval from them can go a lot further with sellers in a competitive market.
Working with someone local makes it easier to build a personal relationship with your lender and quickly resolve questions or issues.
Convert to a cash buyer.
This is dependent on your financial situation and how much cash you have on hand, so it’s not an option that will work for everyone. But if it’s possible for you to become a cash buyer, i.e. you don’t use a home loan, this will always look stronger to sellers. This means you must have enough money in your bank account to pay for a house outright without bankrupting yourself.
Why do sellers like a cash offer? It negates the need for contingencies that come from a buyer using a home loan, such as subject to appraisal and subject to financing. If you do make a cash offer, the seller can and will ask for proof of funds to make sure you actually have the money.
2. Talk to your agent about how they can help you.
Your agent is your biggest ally in a multiple offer situation. They should leverage their market knowledge and experience to get the best terms possible for you, even in a competitive environment. There are a few tactics your agent may use to help your offer stand out among other buyers.
Discuss negotiation tactics.
Before you get to the table with the sellers, you can also talk to your agent about common negotiation tactics used during a multiple offer situation, such as increasing earnest money and removing key contingencies from your offer. While you may not use some of them, it doesn’t hurt to be prepared and knowledgeable, especially because competitive markets move so quickly.
Another reason to discuss negotiations beforehand is because many of them will require you to bring more cash to the table. It’s better to discuss with your agent how financially flexible you can be upfront. We’ll outline many of the most common multiple offer negotiation tactics in the next section.
Your agent can call the listing agent.
They can call the listing agent before you ever present an offer to the seller. Agents don’t typically talk to each other directly before an offer is on the table which is why your agent calling the listing agent directly can be a game-changer.
A call to the listing agent by your agent not only establishes both of you as real people and not just numbers on paper, but it can also help your agent find out more about the sellers. If the price isn’t the only consideration that’s important to the seller (maybe they also need a late closing date), this is a great way for your agent to find out ahead of time so you can present an offer that more closely meets the seller’s needs.
3. Be flexible and prepared to move fast.
We can’t stress enough how quickly a competitive, low-inventory market moves. Before you start looking at homes, your agent should have a discussion with you about flexibility and availability. You should be prepared to see an available property at a moment’s notice. Literally, your agent may call you as soon as a home becomes available with only a few hours notice to get to a showing. Do you have the flexibility to leave work, find childcare or bring your children with you to a home? You might miss out if you can only look at homes after 5 p.m. during the week or set times on the weekend.
Once you see a home, if you decide it fits your needs and budget, your agent will likely advise you to make an offer immediately. This may feel high-pressure or rushed. After all, most people want a day or two to think about the house, talk to family members or friends, run the numbers again, etc. In a low-inventory market with homes selling so fast, you really don’t have the luxury of taking a few days to decide if you want to make an offer. You may find yourself losing out on every home you like!
Of course, don’t feel like you have to make an offer just to keep from missing out. But you (and whoever else is making this decision with you) should decide what your must-haves and deal-breakers are beforehand so you can make decisions quickly. Your agent will be a great resource for evaluating homes with you.
4. Write a personal letter to the sellers.
This is one of the most common tactics used by buying agents for one simple reason: it works! A personal letter is written by you to the seller so they can get to know you as a person, not just an offer on paper. A personal letter might include a brief autobiography, the reasons you love the home and could see yourself living there, and why the seller should choose you. Typically, your agent will recommend you do not include a photo, in case it leads to discrimination by the seller.
Your letter should be short, positive and to the point. Avoid cliché phrases and heavy-handed compliments. Don’t feel like you have to share every detail of your situation, the sellers don’t need to know every little thing about you. Make your case succinctly while developing a strong emotional connection
It’s not a foolproof tactic by any means. Sellers may not always read personal letters when they’re included with an offer, but it’s still a good tactic to use in a multiple offer situation.
A personal letter can give you an advantage over other buyers because it adds a personal touch to an otherwise numbers-dominated transaction. If you’re struggling with what to write, your agent can help you put together a strong personal letter.
5. Use these negotiation tactics to strengthen your offer.
We mentioned before that there are many negotiation tactics your agent can use in a multiple offer situation. In a balanced market where buyer demand and seller supply are more evenly matched, it’s not uncommon for the seller to offer to cover some buyer expenses or for the buyer to have the standing to ask for expenses to be covered. But in a low-inventory market, buyers have to let go of some of these expectations.
These are a few of the negotiation tactics you and your agent may use in a multiple offer situation:
Offer a higher purchase price.
This is the first step in making a strong offer to a seller. If you can afford it, and have the financing per your pre-approval, offer more than the listing price. Talk to your agent about pricing in the market for the type of house you’re trying to buy and establish what the top of your budget looks like. Ask yourself, “What number am I comfortable with so that if I don’t get this one, I won’t regret it?”
Consider using an escalation clause.
If you’re willing to offer more than the listing price, talk to your agent about using an escalation clause in your offer. This tells the seller you are willing to pay a certain amount over the best offer they receive, up to a certain amount. For example, if you’re willing to pay $5,000 over their best offer, up to a total purchase price of $275,000. The seller does have to provide proof of their best offer so you know for sure they did receive it. Talk to your agent beforehand about the limit of your budget.
Offer more earnest money or non-refundable earnest money.
Earnest money is a good-faith gesture that shows you are serious about your offer. Your agent can advise you on how much earnest money you should include with your offer. In this kind of market, it would ideally be 1-3 percent of the purchase price. If you have the cash on hand, you can increase the amount of earnest money you offer and make it non-refundable.
This looks great to a seller but earnest money is deposited as soon as your offer is accepted so be prepared for it to leave your account. The money will be held in a non-interest bearing trust account until closing when it will be credited back to you.
Your agent can write a strong offer with a short turnaround time.
This is a common tactic in multiple offer situations to try and “force” the sellers into a quick decision. Your agent can give the sellers a small window of time to respond to your offer so that they won’t be exposed to competing offers. Once they accept yours, they can’t negotiate with anyone else. However, sellers do not have to respond to offers they receive so if they’re determined to wait and receive multiple offers, this tactic may not work.
Don’t ask for buyer expenses to be covered.
In this market, your offer is stronger if you forgo asking for the seller to cover buyer expenses, such as closing costs or a home warranty. This is enticing to sellers, but make sure you have the savings to cover closing costs which typically range from $1,800-$2,500, depending on the purchase price of the home. You can pay closing costs in one lump sum at closing or some lenders will let you bundle it into your loan package.
Remove the “Subject to Inspection” contingency.
Talk to your agent about what this option means for you. Before you close on your new home, you typically have an inspection to find out if there are any issues, damage or problems that weren’t listed in the seller’s disclosure. If any problems are found by the inspector, you usually would bring this to the seller’s attention and potentially re-open negotiations. The offer your agent writes usually has a “subject to inspection” contingency which means if you find a big problem that the seller won’t fix or can’t afford to fix, you can walk away from the deal.
However, in a multiple offer situation, a seller will look more favorably on your offer if you remove the “subject to inspection” contingency. That doesn’t mean you can’t still have an inspection. You can have one “for buyer’s knowledge only” so you can still find out more about the condition of the home, but you should not be able to negotiate for the seller to make repairs or offer you credit at closing for repairs.
If you are knowledgeable about home maintenance or the home is newer and in relatively good condition, this tactic might not scare you. However, if you are a first-time buyer with little knowledge of home maintenance or you just don’t have the cash on hand to pay for repairs yourself, this tactic might not work for you.
Remove the “Subject to Appraisal” contingency.
A contingency is a clause that allows you to back out of the purchase agreement if certain conditions are not met. The subject to appraisal contingency is typically included when buyers are using a home loan to finance the purchase. Lenders use the appraisal to make sure the value of the home matches the home loan amount they are issuing to the buyer. If you offer above the purchase price and the appraisal comes back much lower than what you’re offering to the seller, your lender may not approve your home loan and the deal can fall through.
If you are a cash buyer or have the funds to make up the difference should the appraisal come in lower than the purchase price, this is a tactic you can use to strengthen your offer. It tells the seller you are serious about buying the house and it’s a win for the seller too. However, you must have the cash on hand to make up the difference. You should talk to your lender beforehand as well to make sure your loan package can be closed without an appraisal.
Remove the “Subject to Sale” contingency- if you can afford it.
The subject to sale contingency protects the buyer because it gives you time to sell your current house so you can use the proceeds to fund the purchase of your new home. It usually gives you the time and money you need to be able to find and buy another house. However, this slows the seller down as they are dependent on your timeline. In a competitive market, that is not ideal and can affect the strength of your offer.
If you are able to, consider removing the subject to sale contingency from your purchase agreement. Talk to your agent about other options like living in a short-term rental between homes. Moving twice is not ideal, but can save you money and stress in the long run.
You can also talk to your lender about a bridge loan if you need the proceeds from the sale of your first house. A bridge loan is a short-term loan taken out pending the closing of long-term financing. The terms are short (think two weeks to one year) and typically have higher interest rates than a conventional loan. You are borrowing against the equity in your current home in order to make the downpayment on the new home, so ideally you would have been in your old home for a while. Bridge loans can be an option if you have high credit and a low debt-to-income ratio.
Remove the seller tax credit.
This is an option for cash buyers and buyers using conventional loans. Iowa homeowners pay their property taxes in arrears, which means they pay for the previous year rather than the year ahead. Usually, when someone sells their home, they are still responsible for the taxes that accrued while they lived in the home and pay them out once the deal closes.
However, if you have enough cash on hand to cover the expense of property taxes, you can offer to forgo the seller tax credit that is usually included in the deal. If you decide to do this, you must be prepared to have cash on hand at closing to settle the property taxes.
If you are using a VA, FHA, USDA, or any other non-conventional loan, this might not be an option for you due to government requirements. Talk to your lender to find out if this is something you can do.
Submit a back-up offer.
If you find a home you really love, that fits your budget and all of your needs, but the seller accepts another offer first, you can ask if the seller is willing to keep your offer as a backup.. This means that if the seller’s first buyers fall through, your offer is next in line. Agents can tell you that deals fall through in real estate all the time, so it’s not unlikely that your back-up offer could end up being accepted.
If you submit a back-up offer, your earnest money, inspection date and closing date will all be set if and when the sellers notify you that their first offer fell through. It might feel like you’re living in limbo while you wait to hear if your offer is up to bat or not. Keep in mind, you can keep house hunting while you wait to find out if your back-up offer is accepted.
Your agent should write your back-up offer so that you have the right to rescind it at any point before the seller officially notifies you that their first deal fell through. So if you do end up finding another home you want to make an offer on, you can walk away from your back-up offer. Talk to your agent about including this language in your offer.
The housing market right now is fast-paced and competitive with sellers gaining an upper hand at the negotiating table due to low inventory. However, buyers benefit from low interest rates and rising home values- any home you purchase this year is still expected to increase in value for the next 12 months, according to Keeping Current Matters.
Use this guide to help you prepare for conversations with your agent about what to do if you are in a multiple offer situation while house hunting in this low-inventory market. Your agent is your best ally and resource as you prepare to hunt for the perfect home.
Looking for more information on buying a home? Check out our complete home buying guide! It covers everything you need to know about pre-approval, house hunting, negotiations, home inspections, the home loan process, closing and more. Whether it’s your first time buying a house or your fifth time, you’re sure to find useful information to help you navigate the process.