How to Compete in a Low Inventory Market

As of today, in the last three (3) days in the Central Virginia Regional Multiple Listing Service ("CVRMLS") market, 403 new listings came on the market, and 403 existing listings went under contract. So the inventory is getting chewed up as fast as it comes on the market.

That being said, not all sub-markets are created equal. And not all price points are created equal. But that's a topic for another blog post. Today I want to cover steps you can take as a buyer to make your offer as strong as possible.

This conversation is not going to be about price. Of course that is usually - not always, but usually - the No. 1 deciding factor for any seller. So you need to offer as much money as you are comfortable offering. Your real estate professional will be able to help you, by analyzing recent closed sales and the pending activity, to arrive at the "right" offer price.

But I am talking about the non-price terms. In a crazy competitive market, how do you make your offer the winning one?

First, have your agent call the other agent and ask them what their client, the seller, would want in a perfect offer. This seems obvious, but as someone who represents a lot of sellers, I am shocked at how infrequently this happens. The agent should ask questions like:

• Does the seller want to move quickly?  Or do they need an extended period of time to look for their replacement home?  
• Do they want to rent back?  
• Is there anything that doesn't convey?  
• Is there anything specific about the seller that would be helpful to know in writing your buyer's offer?
• Is there anything the seller is sentimental about?
• Is there anything else you should have asked, that you didn't, that would be helpful and important for your buyer to know?

How can this information help? Well, in the first place, it can show the listing agent that the buyer's agent is professional and would be a good person with whom to work. Also, it allows you to put an offer in front of the seller that maybe, just maybe, they could accept then and there. And the buyer may be able to use some of that information to his or her strategic advantage. For example, I have been in situations where sellers who had lived in a house for an extended period of time were willing to take less on price when the buyers were a young couple starting out and shared their story of how they wanted to make this particular house their "forever" home.

Second, consider whether or not you can waive any conditions, or at least minimize their impact on the seller.

What do I mean by that? Well, there are three (3) main conditions in the standard form residential purchase contract. They are:

1. Inspection;
2. Appraisal; and
3. Financing.

Unless you are a professional real estate developer or a licensed general contractor, I do not recommend my clients waive the inspection condition altogether. However, there are two (2) main strategies I do recommend my clients consider in a competitive market.

First, you can give the seller some $X amount of inspection items that you waive. In the Greater Richmond Metropolitan area, inspectors provide a cost to cure for all of the items they identify as defective. Those costs to cure are given as a range, like "$100-$150," and even little items like improperly working door latches, non-GCFI outlets, etc. can add up quickly, particularly on an old house. So if you waive the first $5,000 in inspection items, as an example, you are giving the seller some comfort that you will not "nickel and dime" them, but you are still protected if there are significant issues with the home that need repair.

Second, you could waive the right to claim repair or repair credit for any single item unless it exceeds $X. So, for example, you could waive your right to claim a repair or repair credit for any inspection items unless those specific items individually exceed $1,000 to cure. Again, the goal is to protect the buyer and make sure s/he is covered if there are major defects, but to assure the seller that if the home is well-maintained, the inspection condition is going to be easily satisfied.

The appraisal is a qualified appraiser's determination of market value for the property under contract. Keep in mind, the appraisal is for the benefit of the bank, not for the benefit of the buyer. The lender wants to make sure the collateral which is securing their loan is actually worth what the buyer has agreed to pay. If the appraisal comes in "low," meaning the appraiser determines that the value is less than the agreed to purchase price, the lender will only lend to the buyer based on the appraised value. The resolution of the deficiency, which is the difference between what the buyer agreed to pay and what the property appraises for, must be negotiated between the buyer and seller. The buyer wants the seller to cut the price. The seller wants the buyer to make up the difference with cash.

So, as an example, if a property is under contract for $500,000, and the appraiser determines the property's market value is $490,000, the bank will only lend based on the $490,000. The seller would want the buyer to come up with an additional $10,000 in cash at closing. The buyer would want the seller to reduce the agreed-upon contract price to $490,000. If the buyer had agreed to "waive" the appraisal condition, s/he is agreeing on the front end, at the time of contract, that s/he will make up any deficiency between the appraised value and the contract price in cash.

This is another condition where buyers should be very careful and make sure they fully understand the consequences of their decision. However, if they are confident in the value they are offering, and/or love the home so much, and have the cash resources to do so, waiving appraisal can be a very effective strategy to make your offer more competitive.

This is the condition most people can't waive. The vast majority of buyers cannot purchase a home with cash, and must borrow the bulk of the purchase price from a lender. However, in this market, there are a significant number of cash buyers. [NOTE: The "why" and the "who" of cash buyers is a topic for another blog post, because it is a fascinating phenomenon. At least to me. But I'm a nerd.] I tell all my buyer clients who are not cash buyers on the front end that you can almost never beat cash. So if they lose out on a house in a competitive situation to a cash buyer, hopefully it doesn't sting as much.  

That said, there are some things you can do to make your offer stronger than other folks on the financing terms. First, having a healthy down payment and a conventional loan will be much more appealing to a seller than a low down payment product, such as FHA or VA financing. The seller's perception, fair or not, is that if the buyer is using a low down payment program, they will not have any or enough cash cushion to deal with issues that may arise in either inspection or appraisal.

The other thing you can do on the financing condition is to make an offer with a full pre-approval letter, not just pre-qualification. If you have been pre-approved, your financial condition has been fully underwritten, you have provided all the relevant documentation to the bank (e.g., tax returns, W-2s, checking and saving account statements, information on income and debts) and you have been conditionally approved for a loan. This is as strong as you can be on the financing condition, short of waiving it all together and paying cash.

As always, would love to hear any feedback or suggestions. If we can help you to buy and/or sell a home, please give us a call. We have strategies and tips for sellers too!

- Melissa

Nest Realty Richmond

221 S. Robinson Street

Richmond, Virginia 23220

Cell: (804) 986-3993

Email: melissa@mikemelissa.com

URL: www.mikemelissa.com

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