5 Elements of a Winning Offer in 2021
Let’s face it. The real estate market in 2021 is out performing any expectations that we had leading into the year. Here in Fort Collins, the supply is very limited and demand is still high following record low interest rates, which makes for a very competitive market for buyers to be successful. Here are the top 5 elements that I have seen in winning offers this year.
Purchase Price
This seems like a no brainer, but when you have multiple people competing for the same property, the first thing to happen is buyers offering to pay more than the listed price of a property. While most buyers in this market use trial and error to find out just how much they need to go above the list price, I’ve found that it is best to set expectations that you should be willing to pay 3% above the listed price at a minimum right now. Even 3% won’t get the job done in most circumstances, but the sooner you get that idea in your head as the new normal, the better off you will fare in the market.
I recently looked into the first quarter sales in Fort Collins for how much above list price homes in the $400-$500K range were going for and was surprised by what I saw. While there is still a small portion of inventory that is selling below it’s listed price (the blue pie), A majority of properties are selling at or above the listed price.
More than 60% of inventory listed between $400K-$500K in 2021 is selling at least 2% and up to 11% above list price
For buyers this means that when you see a property listed, you need to mentally think that it will actually sell for 3-7% above that value. The sooner you can get on board with this fact, the better off you will be in making winning offers. Until we see a major shift in supply or a huge drop in demand, this will be the case at some level this year.
Appraisal Gap Coverage
Next to purchase price, this is the #1 most important thing for buyers to address in their offers. Let me repeat that, THIS IS IMPORTANT IN THE CURRENT MARKET! Here’s why. When you get a loan to purchase a property, the lender that you are using (BTW, please use a local lender that understands urgency and is willing to communicate with all parties!) will need to have an appraisal done by a third party appraiser to establish the market value of the property. The lender will only lend you money based on the appraised value of a property. For example, if you have a contract to purchase a home at $400,000, and the appraiser only says that the home is worth $390,000, the bank will only lend you money towards a $390,000 purchase. That leaves a $10,000 gap between a contract price (what you said you would give the seller for their property) and the appraised value (what the bank says they will loan you to purchase said property). This causes problems and can make deals fall through.
The real problem with appraisals and the fast moving market is in how appraisals are conducted. By design, appraisers are looking at retro-active data to determine value IE, they are looking at all of the sales in the past 6 months within a miles distance from the target property. Right now, that means that appraisers are still using sales from the tail end of 2020 and the beginning of 2021…provided a property of similar style and size has sold in the neighborhood. Meanwhile, as illustrated above, the market is moving at an accelerated pace into the future as homes are frequently selling well above their listed price.
The solution to this problem is to provide appraisal gap coverage in your offer. If you want your offer to be put on the bottom of the stack of 5-10 offers on a property, don’t mention anything about what you will do when the home doesn’t appraise. If you want your offer to be considered at the top of the list, be prepared to back up your purchase price with funds that you can bring to the table to cover that gap in the event the property doesn’t appraise. This factor is so important that I’ve been telling buyers that they should plan on adjusting their downpayments to provide more funds in reserve to cover an appraisal gap….you never know, you might get lucky and the home actually appraises where you need it.
PS if you are fortunate enough to be a cash buyer, you just put yourself to the top of the offer list in competitive offers….no appraisals are needed on cash offers.
Timelines
Traditionally, most loans take around 30-40 days from the time of contract to closing. In our current market, it seems that preference is given to loans that can close sooner if possible. Again, this is where working with a local lender is huge as many big banks and online lenders don’t have that urgency to work at an accelerated pace. Your ability to close quickly, if needed, can be big in the market.
Just as important in being able to close fast is your willingness to give extra time in the home post closing, if needed. There are many circumstances where a seller may need to find a replacement property, or they might have a small gap between closing their home and moving into a new home. Did you know that you can offer up to 60 days rent free (or with some rental amount) for a seller post closing without having to sign a full on lease? The 60 day number is based on lending practices, as after 60 days, lenders look at your purchase as an investment and would be required to charge you investment interest rates and downpayments. If there is any inkling in your brain while looking at a property that the sellers may need more time in the home (think tons of stuff to move, kids in the home, elderly sellers) highly consider whether or not they need a post occupancy agreement as part of the sale.
Finally, I’ve found that the ability to be proactive with timelines can be a standout factor in winning offers. If you can keep your important deadlines like inspections and appraisals as close to the beginning of the contract period, the more likely you are to get an offer accepted. I’ve taken to calling my preferred inspector before writing offers to see what his availability is so that I can write my inspection dates ASAP in the contract. Remember, the seller is going through lots of stress during this process as well and likes to know that they can get through those important dates sooner than later in the contract.
“As Is” Purchases
Heres a secret not many people actually key in on. When you purchase a property in Colorado, the contract already states, that you are purchasing the property “As-Is”. No kidding, here is the actual language from the contract
“Except as otherwise provided in this contract, Seller is conveying the property to Buyer in an “As Is” condition “Where is” and “With All Faults” ”
So what’s the big deal if you are already purchasing something in “As-Is” Condition per the contract. The big deal really comes about because of 2 dates and deadlines that appear in the same contract: The Inspection Objection deadline, and the Inspection Resolution Deadline. There is one other important deadline in the contract that applies to the Inspection Period which is the Inspection Termination Deadline. When most people offer to purchase the property in “As-Is” condition, what they are really saying is that they are waiving their ability to objection to items that come up on an inspection (the Objection deadline) and they are not asking for any resolution to items that come up on an inspection (the Resolution deadline). In that case, a savvy agent will remove those 2 deadlines from the contract, but will still keep the Inspection Termination deadline in the contract to protect the buyers interests in case the inspection is just absolutely a nightmare. Keeping this deadline maintains the right for a buyer to conduct and inspection, as well as maintains their right to terminate based on the results of the inspection, but essentially makes it a GO/NO-GO decision following the inspection.
I’ve written quite a few offers in this manner, but I will say that not all homes are great candidates for this approach. Taking a bit more time during a showing to look at the major items that might cause concern on a property (roof condition, age of furnace/hot water heater, electrical panel, overall condition of the home) can save you stress down the line when you do finally get your inspection on an “as-is” offer. Remember, you are trying to see the forest through the trees, so keep in mind that just getting under contract is just the start of the process!
Speed to Act
The market is moving fast, with large percentages of the inventory going under contract in less than a week. Check out this graph from the first quarter in Fort Collins for homes priced between $400-$500K in Fort Collins. 80% of homes went under contract in less than a week (Wednesday/Thursday list - Under contract Sunday/Monday)
You may have seen or heard about offer deadlines on properties this year. Many agents will set a deadline for all offers to be due but will also say something like this:
“In the event of multiple offers, all offers due on Monday at 5:00 PM with an acceptance of Tuesday at 10:00 AM. Seller reserves a right to accept an offer prior to that day and time”
Talk about a dissonant message! “So you have an offer deadline, but you still could just change that whenever you want if something good comes along?” is what goes through my mind as soon as I see this. However, this can be an advantage to you as a buyer if you can be quick to act. I’ve found that the ability to go through a home, and make a strong offer (see above described methods) soon after your showing shows some real intent in the process. You may actually be the one whose offer is “accepted prior to that date and time”. If not, you can always resubmit an offer with even better terms and conditions that expires on their offer deadline, and I’ve found that being first to offer can be beneficial as you’ve showed real intent from the very start and have had more time to communicate your desire to secure the home over others offering.
While these aren’t the only tools that can be used to get under contract in this market, I’ve found that they are the most important factors to think about as a buyer to give yourself the best possible opportunity to purchase a home. These are based off of my experience in the market, but I’d love to hear about what things you have heard of in the market? Let me know what you think, I’m happy to chat about how to make you successful in the market as well!
