"It's brutal out there."
These four words from Victoria Macaskill, an independent broker and co-owner of Denver Homes, neatly sum up the crazy real estate scene in the Mile High City. Prices for detached homes have climbed at a dizzying pace during the pandemic, with the $674,990 metro average for a detached dwelling in March establishing a new record that exceeded the previous month's mark by more than $40,000. Because of demand far outstripping supply, the majority of properties are being sold in days, not weeks, often for more than list price.
Macaskill frequently works with first-time home buyers and people on a tight budget, and she's seen for herself the frustration they feel when they're thrust into bidding wars with deep-pocketed investors able to put forward cash offers. Still, she says there are things the average person can do to compete. Some of them carry a certain degree of risk, but all of them improve a house hunter's shot at winding up on top.
Here are eight tips:
1. DON'T TRY TO BUY MORE HOUSE THAN YOU CAN AFFORD
"What's really important is that buyers set realistic expectations about what price point they're searching in. If you qualify for $500,000, you should look at homes priced at $425,000 or $450,000. You can't compete at $500,000 anymore, because everything's going over. You can make an offer for a $500,000 home, but there are going to be eleven or thirteen other offers, and you'll have to offer more to have a chance. So looking for homes priced at below the qualifying amount sets people up for success."
2. PAY ATTENTION TO THE NUMBER OF DAYS A HOUSE HAS BEEN ON SALE
"If you qualify for $500,000 and a home has been on the market for two or three weeks at that price, it makes sense to look at it. But with houses selling so fast right now, you have to realize that if it's been available for that long, it probably needs some work — and you have to budget for that."
3. WHEN LOOKING FOR A LENDER, GO LOCAL
"One time this year, in a multiple-bid situation, the buyer I was working with was competing against an offer from someone working with a large, national-brand bank. It was Presidents' Day weekend, and the agent representing the seller couldn't contact the lender at that national bank, but the seller could reach my buyer's lender, and my buyer got the house. So pick a lender who's local and has a good reputation for being responsive. Communication is key right now with multiple bidding, and the seller being able to get a hold of our lender won it for us."
4. FILLING THE APPRAISAL GAP
"Right now, all of the offers I've seen that are getting accepted have language about the appraisal gap, which is where the buyer guarantees the seller that they will pay either the total amount or some amount if there's a gap between the purchase price and the appraisal price. For example, if the purchase price is for $500,000 and the home appraises for $475,000, the buyer is guaranteeing the $25,000 difference. Sometimes the buyer will need to restructure the loan, which is why the lender is so important. Instead of saying 20 percent down, they might say 10 percent down and use that other 10 percent to cover the appraisal gap."
5. FACTOR PRICE INCREASES INTO YOUR BID
"Single-family homes were up 6 percent in March over February, which is pretty significant, especially if prices keep going up. If buyers decide to wait three to six months to buy instead of paying $25,000 more than they'd planned now, the prices could be up a lot more than $25,000 by then. And it can take months to find a house right now. If a buyer sees that 'if it takes me six months to find something, I might be outpriced,' they may have to compromise on the features of a home today instead of waiting."
6. THE NEW LOAN EXCEPTION
"We're definitely seeing even more aggressive tactics in the market right now, including a lot of cash offers. So in addition to buyers covering appraisal shortages, we're also starting to see them waive the new loan objection. And this isn't just for first-time buyers. For any buyer who is financing their home, one of the contingencies in their contract is called the new loan objection. It usually occurs five days before closing, and it states that the buyer can terminate the contract based on any details of the loan they are not satisfied with. It could be the interest rate, it could be the payment — and it's nice for the buyer if their loan terms are not satisfactory to them. But for a seller, that's not a lot of assurance. So we're starting to see buyers eliminating that new loan objection deadline — basically saying, 'If the lender doesn't close this, the seller can keep our earnest money" — defined as a good-faith deposit you make on a home, often in the 1 to 2 percent range, to show the seller you're serious about buying.
"I wouldn't recommend waiving the new loan objection to a buyer unless they're 100 percent confident in their lender, and the lender has given them assurance that they've reviewed their file and submitted it to underwriting and everything is fine. It's not something I would do lightly, but I'm seeing buyers bring it to the table. With the lenders I work with, I've never had an issue, and it's a powerful strategy to compete with cash offers that makes a buyer's offer a lot stronger in this market."
7. MORE GUARANTEED MONEY TACTICS
"I'm also seeing buyers making a portion of their earnest money non-refundable upon acceptance of their offer. They may say, 'If the offer is accepted, $2,500 of our earnest money is non-refundable for any reason.' Inspection, loan appraisal: No matter what, you're guaranteed whatever amount the buyer is willing to offer. And I'm also seeing buyers offering to pay part of the seller's closing costs. Sellers are responsible for paying for title insurance and some other minor costs, and I'm seeing buyers say, 'We will pay for these.' That's another way they're able to increase the seller's net."
"Sellers who are planning to move may need a rentback from their buyer. So another important strategy is to offer up to a sixty-day rentback to the buyer — offering that rentback for free, at no cost to the seller. That also increases the seller's net, when they know that this particular buyer isn't going to charge them rent during that sixty-day period, even though the buyer will be servicing their loan during that time."
One more thing: Macaskill is often asked by buyers if they should write what she calls "a love letter or a pick-me letter, to let the seller know more about them and why they should sell their house to them. But you can't do that. The Colorado Division of Real Estate says this can open the door to fair-housing discrimination, and you're opening up the seller and the agents to liability and huge lawsuits by allowing buyers to include love letters. That's definitely not a good strategy."
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