You’ve found your dream house. Or a house. Or at least something worth bidding on.
Whatever the situation, congratulations are in order. Those endless hours spent scrolling through listings, all those sweaty open houses where you braved the masses of buyers, were not in vain.
Southern California home buyers talk about how they made it through — or around — the flurry of ever-higher bids.
But pay close attention: This is where the home-buying process gets real. Before now, the listing agent’s job was to give you a friendly tour of the property and persuade you to buy it. Remember, that agent works for the seller, not for you. Now that you’re interested, the agent’s job is to get you to pay as much money as possible (and maybe waive a few contingencies along the way).
In the Southern California market, you might be competing with a handful or a hundred other buyers. Here’s how to make your offer stand out above the rest.
Get preapproved — not just prequalified
Think of your home offer like a job application. When employers are swamped with resumes, they’re looking for any reason to throw a submission away. In making an offer on a house, an easy way to tell whether your offer is serious is whether you’re preapproved for a loan.
Although often used interchangeably, being preapproved is much different from being prequalified. As outlined in the chapter about mortgages, getting prequalified is a painless process that requires you to disclose some basic financial information to the lender, but not to back it up with documents. The process is usually unverified, and sellers probably won’t accept an offer based on a prequalification.
Getting preapproved is more rigorous, and lenders will often require tax returns, W-2 forms, pay stubs and more to prove that you have the wherewithal to pay back a large loan. If you’re competing against other buyers, don’t even bother making an offer if you haven’t been preapproved.
If possible, make an all-cash offer
It seems far-fetched, but if possible, paying in cash for a home will shoot your offer straight to the top of the stack. In some cases, sellers will choose a cash offer over a financed offer that promises a few thousand dollars more. That’s because cash offers move the transaction along much faster and with more certainty by eliminating the need for mortgages, appraisals and much of the documentation.
If you don’t have $1 million in cash or easily liquidated assets lying around, a few middlemen-type companies have popped up in recent years that help buyers pay with all cash. Most of them work by buying the house you want with cash, then selling the house to you once your loan is approved. These companies include Ribbon, Flyhomes, HomeLight, Opendoor and Accept. Each works a little bit differently, and they all extract a price for the service in one way or another, so read the fine print before going this route.
Hunt for red flags
When we say hunt, we mean hunt. Dig. Investigate. Sherlock Holmes: House Hunters Edition.
We get it. It’s been a long, arduous, possibly heartbreaking process just to find something worth bidding on. It can be tempting to put on the blinders and just hope the seller is being honest when claiming the place has “great bones.” But if you don’t do your due diligence here, the biggest purchase of your life could turn into the biggest headache and worst investment.
For starters, ask your real estate agent to request the title records to see how many times the house has been sold. If it trades hands every few years, there’s probably a reason for it.
“Some houses can be visually stunning but very difficult to live in,” Parsons said. “Take off your rose-colored glasses and make sure the place is livable.”
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The title records can also tell you whether the home has ever been in foreclosure, which is another sign of trouble. You need to think like a seller: A home with a bad history may not be a problem for you in the short term, but it probably will be for potential buyers when the roles are reversed and you’re the one selling the home.
Next, request a CLUE report. CLUE stands for Comprehensive Loss Underwriting Exchange, and it discloses any insurance claims made on the property. California’s climate is wild, so a house that looks fine today can have a history of water, wind and fire damage.
You’ll want to verify whether the insurance claims were accepted and the damage repaired, and if so, whether the repairs were done correctly. Sometimes homeowners will take an insurance payout but pocket the money instead of putting it toward repairs. If there was water damage, check for mold. If there was a grease fire in the kitchen, check the attic. Verify everything.
In a survey from real estate data company Clever, 40% of homeowners said they regretted buying a house with too much maintenance, and 30% said they regretted not preparing for hidden costs. Another survey from financial services company Figure found that 64% of home buyers have put off necessary repairs since purchasing their home because they don’t have the funds to pay for them.
“Buyer interest” letters are common in ultra-competitive housing markets like California’s, even though they raise questions of discrimination.
Contingencies — to waive or not to waive
In a hyper-competitive market, sellers have all the leverage, and they’ll use it to push for more than just the asking price.
The wise children’s book “If You Give a Mouse a Cookie” tells us: “If you give a mouse a cookie, he’s going to ask for a glass of milk.” Well, if sellers receive multiple offers, they’re probably going to ask you to waive a contingency or two.
At their core, contingencies protect the buyers from losing their deposit on a house — called “earnest money,” or money you submit with an accepted offer to show that you’re serious — if something goes wrong. That something can be many different things: a failed inspection, a surprising appraisal, a problem with your loan, etc.
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There are five common contingencies that buyers can use, and when you or your agent are filling out the home purchase agreement form, you can waive any or all of them.
Gov Hutchinson, assistant general counsel for the California Assn. of Realtors, said buyers often waive contingencies in sellers’ markets, but he’s never seen it happening more than now. He added that three contingencies are more important than the others: inspection, loan and appraisal.
It’s risky to waive these three contingencies, but every situation is different, and waiving may be the difference between landing the house or not. Nevertheless, it’s extremely important to understand the potential downside of waiving them.
“Prices are going up over time, appraisals aren’t keeping up with the valuation, you have to bid above the asking price.... And then you don’t know what’s behind the walls because you waive all contingencies,” said David Hong, who recently closed on a townhome in Brea, in northern Orange County. “It’s a lot.”
Inspection contingency
This contingency allows you to hire a home inspector to assess the property’s condition. If the inspection reveals unforeseen problems with the home, you can back out of the deal without losing your deposit.
“One way to make your offer stand out is to waive the inspection contingency because it tells the buyer that you’re committed to buy regardless of the condition,” Hutchinson said. “But it’s a big risk.”
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The risk is that a huge flaw could be hidden anywhere on the property — from the roof to the structural supports to the sewage system — and you’ll be on the hook to fix it if you buy the house.
If a problem is discovered during the inspection, it doesn’t mean the deal is dead. You can ask the seller to make the repairs or lower the selling price, and compromises can be common when both the buyer and seller are motivated to made a deal happen.
Loan contingency
The loan contingency gives you time to secure financing. If you keep this contingency and can’t secure a loan in time, you’ll be able to pull out of the deal and get your money back.
As we mentioned before, paying in cash or getting preapproval or underwritten preapproval makes this contingency much less risky to waive.
Appraisal contingency
If you’re applying for a loan, the lender will require an appraisal, and that appraisal will dictate how much you’re allowed to borrow.
Sellers will ask you to waive this one, especially in hot markets, because appraisals might not reflect the price appreciation of an area. For example, a bidding war might push the price of a house listed at $900,000 up to $1.1 million, but the lender could still appraise it at $900,000 and cap the mortgage loan at that amount, even though the house could be worth $1.3 million in a few months. If that happens, you’ll have to make up the difference in cash, so an appraisal contingency gives you an out.
Here are the other two common contingencies:
Title contingency
This allows your lender to do a title search to make sure the property has no liens or legal claims against it by a creditor. If the title doesn’t come back clean, you can ax the deal.
Home sale contingency
This contingency allows the sale to go through only if you sell your current home. This is easily the one that will make your offer much less attractive than other buyers’ bids.
“Sellers don’t like to be worried that buyers can’t sell their own house,” Hutchinson said.
Of all the contingencies, he said this is the one that’s waived most often.
Know your rights: Under California law, buyers have the right to sue for fraudulent misrepresentation if a seller conceals a known defect with the home. Listing agents are also required to disclose defects learned from any source. So if a different buyer’s inspector found something but the deal ultimately fell through, the agent is still required to disclose what that inspector found. If a dramatic problem pops up, talk to a real estate attorney to see whether you have a case.
Submitting the offer
Once you’ve decided which contingencies you’ll waive and keep, it’s time to submit your offer. Your real estate agent will handle this for you, but if you’re doing this yourself, or you’re just interested in what goes into an offer, here are the components you’ll need to include.
- Your name and the name of anyone else who’ll be on the title
- The seller’s name
- The address
- The purchase price and down payment, along with any escalation clauses. For example, you may offer $700,000 but be willing to escalate to $1,000 more than any offer higher than yours, up to $750,000.
- The amount of your “earnest money” deposit (which typically runs from 1% to 3%)
- The contingencies
- Any concessions (the costs you’re asking the seller to cover)
- Anything you want included with the sale (furniture, appliances, lighting fixtures, the hot tub out back, etc.)
- The date you want to move in
- The deadline to respond to the offer
Note: Along with your offer, it can be tempting to submit a personal, handwritten “love letter” about yourself to pull on the seller’s heartstrings. But consider this: Not only could it be a possible violation of fair housing laws, the vast majority of the time, it simply doesn’t work.
Next: Escrow can be stressful, let's fix that
After the seller accepts your offer, you enter one of the most confusing and nerve-wracking processes in the home buying experience: Escrow.
“I was making an offer on a house and wrote a nice letter to the seller about how I was getting married and how the backyard would be so nice for our dog. I said it would be a home for our future family,” said home buyer Kaitlynn Sanfilippo. “They didn’t care.”
If you bring in a decorator, it could take up to a year before your home is furnished. So buying the current furniture, even for temporary use until you can bring your own stuff into the space, can end up saving a lot of money — and ensure you have a couch to sit on in the meantime.
“First-time buyers forget that it’s a negotiation. You have a right to say yes or no. I bought my place from a development company as opposed to a single seller, and companies can be bullies sometimes, so I pushed back,” said Kirsten Finlayson, who recently bought a tenancy-in-common unit in Little Bangladesh. By the end of the back-and-forth, she had scored a new air conditioning unit in the bedroom and also got the seller to install a new fan and cupboard.
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