Home Buying and Selling - What You Need to Know in a Bidding War
By Meghan Hardy
Real estate markets are volatile - they either favor the For Sale By Owner buyer or the FSBO seller. Regardless of whether you're in a booming market or a stagnant one, it's wise to learn significant strategies that will help you make the best deal and come out a winner. Arm yourself with knowledge and learn how to negotiate your way through a bidding war; there are hundreds of thousands of dollars at stake.
Know the Market - Knowledge is Power
Whether you're the FSBO seller or the For Sale By Owner buyer, research the market in your area. Know what comparables are selling for and how long they've been on the market. As the FSBO seller, this can help you stand your ground and not take an anxious first offer. As the buyer, you don't want to overbid just to outbid and end up not being able to meet appraisal; the amount the lender will finance will not exceed the appraised value.
In most places, Real estate law dictates that if a property doesn't appraise for the amount offered, the buyer can walk away from the deal without losing his earnest money. This is not a good situation for either the buyer or the seller, i.e., the seller has removed his house from the market and possibly passed up other offers; the buyer has likely spent money on inspections and appraisal fees; even though he's received his earnest money back, he's still had out of his pocket expenses.
Both For Sale By Owner buyer and seller should evaluate the neighborhood comparables (CMA) before agreeing on a price. It's not sufficient to know how much the houses are listing for; you have to know how much they're selling for. This is the basis an appraiser will use to determine the appraised value. There are many factors; sq. footage, number of bedrooms; garages, parking, outdoor spaces. The best way to quickly find out the listing price vs. sold price is to engage a REALTOR® who has this information at her fingertips.
Evaluate the Type of Loan
Sometimes the highest offer doesn't necessarily make the best offer. It matters to a seller what type of loan the buyer has. Seller's closing costs depend upon the type of loan being secured. The best scenario for a seller is obviously cash, but next to that is a conventional loan.
Be Prepared to Sell/Buy
Remove all obstacles that would hinder a smooth transaction. If you own the home, have all legal documentation available. i.e., a divorce decree, probate papers, mortgage payoff, a list of any liens against the property and receipts if they have been paid.
If you have a survey, check with the title company who will be closing the transaction or a real estate attorney and see if it is acceptable. This can save on closing costs. Survey fees are a negotiable fee in most places.
A buyer should have his loan in place with a pre-approval letter in hand, not a pre-qualification letter. There is a difference. A pre-qual letter means the buyer meets all the requirements concerning income, credit and debt ratio. A pre-approval means he's approved and secured. A buyer with pre-approval is a stronger contender in a bidding war.
A buyer should never purchase a property without an inspection nor should a seller sell one. Although it is tempting, especially in a bidding war, it is neither advisable for either party.
To avoid any possibility of legal action in the event of an undisclosed defect, a wise decision for the seller is to have the home inspected. You'll know what repairs are likely to come up. If you have the money, make the repairs and make the inspection list available to potential buyers. It can reduce the likelihood of an inspection contingency on an offer. As a seller, it's an excellent strategy that can help you stand your ground. For the buyer, it helps in determining the price to offer; if he knows the repairs have already been made, he can bid more confidently.
The bottom line is, in any real estate transaction, the best offer is the cleanest offer, one that offers a fair price, is accompanied by proper documentation, and is free of contingencies.
Finally, use an experienced REALTOR®. Entering into a bidding war on a property is not the time to be second-guessing your real estate savvy or strategy. REALTORS® know the market, and they know how to negotiate in a timely manner to facilitate the sale quickly, efficiently, and legally.