Cash is still the preferred transaction method. According to the National Association of Realtors, all-cash offers surged from just 26.3% in 2019 to 33.5% in 2021. The increase in cash offers left many first time home buyers who rely heavily on loan based mortgages on the housing sidelines. While the housing market may be settling slightly in 2022, 58% of realtors maintain that the rise in cash offers seen in 2021 will continue. First-time buyers without the tools to make a cash-backed offer will need to get creative to win bidding wars. In 2022, the top three tactics that are likely to help first-time buyers win homes are offering appraisal gap coverage, forgoing contingencies and asking for no repairs, and including an escalation clause.
If you do not have the ability to give an all-cash offer and you are a first-time home buyer, you may need to get creative to win the bidding wars. The following creative tactics can help first-time buyers purchase a home even during the most competitive housing market.
Offer Appraisal Gap Coverage
A home appraisal is an evaluation and report that is performed by a licensed appraiser to assess and determine the home’s fair market value. Home appraisals are required by lenders to ensure that the amount you agreed to pay for the home is equal to or less than the value that the home is appraised at. When sellers are in control of the market, there is a good chance that bidding wars will escalate the final home sale higher than the appraisal value.
In order to gain an edge on the competition, first-time homebuyers can offer appraisal gap coverage. This tactic was suggested by 67% of real estate agents to help first-time homebuyers win a bidding war in 2022. Offering an appraisal gap coverage means you, the homebuyers, will pay the difference between the appraisal and the sales should the final home cost be more than the appraised value. It is important that you set an amount that you are willing to cover because lenders will not approve a loan for an amount higher than the home’s value. Because of this, you will have to come up with the additional money on your own.
Forgo Contingencies and Repairs
Contingencies are conditions that you, the buyer, can put into your offer. They are meant to protect buyers in case something goes wrong during the buying process so that you can cancel and not lose your money. The most common contingencies are for inspections, appraisals, and finances. In a buyer’s market, sellers are all too happy to comply with contingencies in order to sell their homes at a decent price. But during a wild seller’s market such as the one we are currently in, contingencies need to take a back seat. If you are using a mortgage to purchase your home you will need to keep the financial contingency.
Even if you get rid of your inspection contingency you will still need to get a home inspection done. In addition to forgoing contingencies, many homebuyers are finding success in bidding wars by forgoing repairs. Even when an inspection comes back and shows needed repairs or home fixes that affect the appraisal, a buyer that does not require repairs may have a great chance of winning a bidding war. This was a tactic that 53% of real estate agents said would most likely help first-time buyers win a bidding war. This is of course a risky move as some repairs may require extensive work and investment. You will need to carefully weigh the choice to forgo repairs and discuss the safest and most financially sound option with your real estate agent.
Add an Escalation Clause
An escalation clause might sound intimidating, but it is actually a very useful tool for first-time homebuyers who want to make a higher offer on a house, but only if there is competition on the home’s price. Close to 30% of real estate agents agree that including an escalation clause is a tactic that could help first-time buyers win a bidding war. Here is how an escalation clause works. You are going to make an offer on a house that costs $200,000. You know that you will face competition for the home, but you don’t know how much competition.
And, You don’t want to make an extremely high offer when it is not needed but you don’t want to miss out on the home with too low of an offer. You can have your realtor add an escalation clause to your offer that says you will pay a specific dollar amount above any offer up to your budget limit. This allows you to set your highest budget and allow for increases to your offer by whatever dollar amount you choose, without having to immediately put down your entire budget unnecessarily.
While an escalation clause is perfect during a seller’s market when inventory is low and homes are moving quickly, it does have downfalls. Buyers and sellers lose their chances of negotiating once an escalation clause accepts because the clause reveals the maximum amount a buyer is willing to pay. The maximum number may remove any power of bargaining you may have had.
First time home buyers have had to get creative in the past year and are going to have to continue to find creative ways to win bidding wars against more established homebuyers. In 2021, other out of the box bidding war tactics that home buyers used were closing whenever the seller wanted and 42% of buyers allowed the seller to stay for a long period such as six months to a year.
Additionally, a small percentage of buyers were willing to allow the seller access to a part of the house after purchase, such as the garden or an amenity, offer the seller expensive dinner, paid vacations, cryptocurrency, or season tickets to their favorite sports team. Working with an experienced real estate agent, shoring up cash, getting pre-approved are all necessary steps for first-time homebuyers. However, first time home buyers who want to purchase in 2022 should expect bidding wars and stiff competition that will force them to get creative.
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