If you’re currently renting, but would love to buy a house at some point, you probably feel a little like the odds are stacked against you. You aren’t alone. There are multitudes of younger people in the 18-44 year old range who are totally planning to buy a home in the future, but have some obstacles to maneuver around before they can get in the game...or at least think they do.
To most people hoping to someday invest in their own home, the path to homeownership appears to be littered with hurdles, such as:
- strict lending requirements to qualify for a loan
- Increasingly high home prices
- seemingly unattainable down payment thresholds
- confusing real estate contracts
- conflicting information about mortgage prices
- not enough homes at entry level prices
- too much competition from a glut of other house hunters and more experienced buyers
Daunting? Yes. But it's not over yet...
You can compete and get an edge over the competition. Understanding a few things about how the process of negotiating a home purchase works, and what motivates sellers, can make your offer look better than all the others, even if you don’t have the best credit score and the biggest down payment.
1. Get Pre-Approved BEFORE You Start House Hunting
This gets the #1 spot because it’s the most impactful way you can set yourself up for success. Also, a TON of people are still doing it backward and trying to find a house before they have a green light for financing.
You can be the one who gets it right.
Having a pre-approval letter in hand shows a seller you are serious about purchasing and are very likely to be able to follow through on any offer you make.
Sellers don’t want their time wasted, and are just as frustrated with the whole real estate transaction process as you are. They are going to place their bet on the offer that nets them the most profit, with the least amount of hassle.
Having your ducks in a row makes you look good right away.
And it’s not as difficult as you might think to get pre-approved. Most borrowers have their answer in 10-15 minutes on a quick phone call, and are on their way with an approval letter to prove their ability to make a deal.
With as much competition as there is for starter homes in the entry-level price range, you can’t afford to waste precious time once you find the right one for you. Get pre-approved before you start shopping so you can move faster than your competition.
If you really want to step up your game, work with your lender to get a fully underwritten approval for a To-Be-Determined property. This is a significantly higher level of approval and can allow you to close quickly and lets the sellers know you are extremely serious about buying a house.
2. Save for More than Just the Minimum Down Payment
With the information you now have after getting pre-approved, you’ll know exactly what your limits are, and what you’ll need to save for a down payment. But don’t stop there. Make sure you account for appraisals, lender fees, taxes and insurance, and inspections.
Be prepared to read a lot of advice from lenders and real estate agents who will tell you to focus on just the down payment...and yes, it is possible to get a house with just your down payment, but you are handcuffing yourself when you take that approach.
You are in competition to buy a house, and if you are able to cover the standard portion of escrow and title fees for your area then your offer is going to look stronger. You are also going to want to have a little money to pay for whatever inspections you think you need (roof, whole house, pest, pool, etc.).
Buying a home might be the largest purchase of your life and having an extra $1,000 to make sure your $300,000 purchase is a good one just makes a lot of sense...a lot more sense than saving that $1,000 for that net TV you want to put in the living room.
3. Increase Your Earnest Money Deposit
An earnest money deposit (EMD) is the first check you write when you’re trying to buy a house. It’s an up-front chunk of the price you’re offering on the house, and goes toward the down payment amount when you close the deal. Increasing your deposit above what is being asked of you can indicate to the seller that you’re in it to win it, and are willing to put more money where your mouth is to prove it.
If you are really serious about buying a house, it doesn’t hurt to increase the deposit amount of your earnest money. It’s all going to your down payment and closing costs at the end of the day anyway.
Just make sure you read your contract carefully and stay on top of your contingency periods. Once you remove contingencies or breach your contract your earnest money can be fair game for the seller.
If you and your team stay on top of dates and deadlines you shouldn’t be at any increased risk.
4. Go Over Asking Price
If you’ve adequately prepared for battle, and there’s a lot of competition for a home, it sometimes makes sense to go over asking price right out of the gate.
A reasonably priced house in a good area can bring multiple full-price offers within hours of being listed. You can get the seller’s attention by offering slightly more than they were asking, which might still be a great price for the house.
This move is a gamble, so be careful. If you’re right on the border of not being able to afford the house in the first place, you might want to wait for a more affordable house to come along. Consider how much your emotions are dictating your actions before you throw extra money at a house, but know that it’s an option buyers have in their arsenal if it makes sense for you.
Just to be clear: don’t ever offer on a house if you know the monthly payment is not going to work for your budget; you only want to offer over when the monthly payment on your increased offer still falls into your “I can do that” category.
5. Minimize Your Demands
Asking the seller to throw in some of their cool patio chairs, or leave behind the big rug that really ties the room together is a bad idea in a crowded real estate market. If you’re competing against other buyers, who probably have their own rug, you’re better off to just leave it alone, and keep the personal property out of it.
6. Offer to Pay As Much of The Closing Costs as You Can Afford
You can employ this tactic when you know there will be other offers similar to yours, and you want yours to shine brighter. Remember, the people selling the house might be saving for their own down payment on their next house, so any way you can think of to help save them money (not just make them money) will improve the quality of your offer.
Offering to pay more of the closing costs saves the seller more than they’d make if you put the same amount toward the overall purchase price...and bonus for you, it doesn’t get lumped into your new mortgage, where you’ll pay for the interest for the next thirty years.
When a seller is going over your offer they look at section 7, allocation of costs to determine what they are going to have to pay for. Several of these items aren’t that expensive and psychologically it may help you look like your a better buyer if you agree to pay for some of the smaller items and portions of the bigger items. Talk with your agent and don’t just go with what is typically paid for by the buyer. In a hot market you’ve got to stand out.
7. Offer the Seller an Extra Month of Occupancy
You’ll have a month of owning your new house before you have to make a mortgage payment. Why not offer the seller this month as extra incentive to accept your offer over someone else’s?
It probably sounds like torture to close escrow on your very first house, and have to wait another whole month to move in, but if you’re willing to pull out the big guns, a gesture like this can go a long way in showing the seller your offer will prove to be the most trouble-free of the bunch.
Remember, sellers are facing their own sets of challenges, are probably trying to buy their next house at the same time they’re selling to you, and have jobs and families complicating everything just like you do. Offering to give them some extra time to make the transition might be worth more than you could imagine.
8. Write a Letter
Don’t laugh. This still works, and in fact, it works really well sometimes. If you know there might be multiple offers on a house, and you’ve already employed all the other tactics you could afford to sweeten your offer, a letter explaining why you want to buy this particular home can appeal to the seller on a personal level and tip the scales in your favor.
This doesn’t mean cash isn’t still king. There’s a lot of money on the table in a real estate transaction, and sometimes a seller genuinely needs to get a certain amount of money for the house they’re selling to make the next purchase work, but often, there’s such a small margin of difference between competing offers, a seller might choose the offer that revealed the actual people behind the numbers, over a few extra dollars.
A lot of starter homes listed at entry level prices are being sold by families who were once trying to buy their first home. They are probably emotionally attached to the house, the neighborhood, and the memories their family made in it.
Some clients of ours recently saw this tactic play out in real life:
After years of watching the real estate listings, and waiting for an affordable house to come up for sale in their favorite neighborhood, an ideal home in their price range finally came on the market.
The family was able to move quickly to make a bid on their dream home, and submit a great, full-price offer to the seller. When the offers were all in, it turned out there were multiple great offers, including several that were over our client’s full-price offer. The seller countered our asking them to increase their price.
Already at the top of their budget, they had an emotional debate about what to do, and ultimately choosing not to jeopardize their financial security by spending more than they could afford, declined to increase their bid.
A few tears were shed, but at the end of the day, they reasoned their peace of mind was more important than that specific house, and eventually, they would find the right fit.
Miraculously, less than an hour later, their realtor called back to say that the seller had decided to accept their offer, despite the fact that it was lower than the competing offers.
As it turns out, the letter our clients had included with their offer explained how much they loved the seller’s house, how long they had been searching for the right fit, and what it would meant to them to raise their family in that neighborhood.
Even the realtors involved were surprised that a simple letter was powerful enough to turn the tides of a financial transaction as big as a home sale. As the seller explained later, the reason for the change of heart turned out to be a simple one.
Here's what the seller had to say about why she chose the offer she did.
“I wasn’t losing money on the house, and at the end of the day, a few thousand dollars was a small price to pay for knowing a nice young family would get to make their start in such a great neighborhood.”
If all other factors in competing offers are relatively on par, a well written personal letter has the power to bring out the humanity in a seller, and illuminate the people behind the contracts and conditions, who may just remind them of their own early struggles to purchase their first home.