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Monday, 28 Aug 2006

Winning Bidding Strategies
Posted in Articles

Whether you’re a first-time buyer or the veteran of several home purchases, making an offer can be intimidating. Frequently, there are “intangible” factors in play during a negotiation. While money and terms are critically important, never underestimate the role of emotions—yours and the seller’s.

Laying the Groundwork

You have a better chance of getting your offer accepted if the seller has met and likes you. Your offer may even win out over a higher bid from an unknown bidder. When submitting your offer, include a letter telling the seller how much you like the house, a brief background and family picture.

In negotiations, information is power. A buyer’s agent can’t talk to a seller directly, so consider asking the seller why he’s selling. Find out what his “hot buttons” are. If he’s concerned about finding a replacement property, offer to rent back the property for 30 to 60 days so the seller has time to find a new home. Do whatever you can to make your offer attractive to the seller, accommodating his terms while sticking to your budget.

How Much Should You Bid?

The more you know, the better you can structure your bid. Find out what comparable properties are selling for. Is the trend going higher or lower? Before you bid, set a limit on how much you will pay for a home. It’s tempting to get caught in a bidding frenzy, but before you know it, you’re knee deep in a very expensive game of one-upsmanship.

If comparable properties are much lower than the seller’s asking price, have your agent include this documentation with your offer. In rapidly rising markets, consider bidding slightly above the asking price. The property may rise in value during escrow.

Listing or seller’s agents are usually prohibited from disclosing if there are other bids or revealing a seller’s bottom price unless sellers give permission to share this information. If you are not emotionally attached to the property or if you discover that there are no other offers, start low. However, consider the seller’s feelings; starting too low may insult him. In a multiple bid situation, submit a stronger offer at the onset, as many sellers only counter the top bidders.

If you are reaching your dollar limit while negotiating, have your agent tell the other party that this is your final offer and that you are considering several other properties. If the seller says he will wait for a higher price, have your agent emphasize that you may not be around when he reconsiders.

Timing Counts

If you like a property, write the offer as soon as possible. Most contracts allow the buyer some time to make inspections and review reports during the “due diligence period.” You can
usually back out of the deal during this time without a penalty. Delays can cost you your dream home.

As quick as you are to write an offer, someone might still beat you to the punch. Ask your agent if your offer can be in a backup position. Should the original offer not be consummated for any reason, the property will automatically go to you. Be sure to include a provision in your backup offer allowing you to cancel it at anytime.

Beating the Competition

Even in a buyer’s market, the best homes will attract plenty of attention. Making the highest offer is not the only way to beat competing offers. You might consider a short escrow and an all-cash bid, assuming your lender can accommodate the terms. Always include a pre-approval letter from your lender, which may give you an edge over a higher offer without similar documentation. Another incentive to sellers is to show a bigger deposit with your offer (more than 3% of the purchase price). A higher deposit lets the seller know that you are very committed to the home.

One key consideration is to sell your current home before you bid. Offers that are contingent upon the buyer selling his home first are given the least attention. In fact, minimizing the number of contingencies in your offer will put you head and shoulders above the rest. Remember that if a home needs work, it’s wise to make your request for repairs toward the end of the due diligence period when the seller is more vested in the deal.

If you anticipate the seller taking the highest offer without negotiation, bid an odd number. If the list price is $400,000, bid $400,100. Sometimes, you’ll beat the competition by a mere $100. Finally, if you’re in the counter offer phase and there are other offers, consider adding an “escalation clause.” For example, stipulate that if there is another offer higher than yours, you will increase your bid to $2,000 over the highest offer with proof of the higher offer.

Breaking a Deadlock

If the bidding process comes to a screeching halt, but you still want the home, consider giving in to one of the seller’s demands to achieve a lower price. For example, propose that you and the seller split the difference between your offer and the asking price. You might also consider writing an “either/or contract.” For example, offer the seller a higher price with a longer escrow or a lower price with a shorter escrow. This will provide the seller with some options and might jump-start negotiations.

Smart negotiators often use the “take away clause” technique. Assume that your last bid was $290,000 and the seller’s last offer was $315,000. Your limit is $300,000. Make a counter offer at $295,000 and give the seller two days to accept it. Let the seller know that you will pay $300,000 if he accepts within 24 hours. This method puts pressure on the seller to respond quickly.

Whichever path you choose, set a deadline for action, so everyone can move on if there’s no resolution.

The Art of Giving In

If you absolutely must have a home you’ve seen, you may have to meet the seller’s terms and price. Sometimes, sellers are stuck on a price and just won’t budge.

Consider meeting the seller’s price, but asking him to pay your closing costs. If the seller still won’t compromise and you really want the home, contemplate paying the extra money. Over the course of a 30-year mortgage it may amount to only a couple of dollars per day.

Lastly, consider asking the seller to lend you the difference between your top offer and his bottom line. Create a realistic repayment schedule and begin servicing the loan as soon as possible.

Remember that each seller is different and that there are no one-size-fits-all strategies. However, using some of these tried and true techniques, getting to know the seller, keeping your emotions in check and working with an experienced Realtor can often make the difference in a tough negotiation.