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Ask Adam: Winning the Home in a Competitive Situation

by ARLnow.com — September 18, 2012 at 1:30 pm 3,031 21 Comments

This periodic sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty. Please submit follow-up questions in the comments section or via email.

Question: Are you seeing competition for homes in Arlington? If so, what is the best way to win?

I am seeing more competition for homes in Arlington than I expected to see this year. Unless housing supply begins to catch up with demand for certain types of homes in Arlington, this trend is likely to continue.

The most obvious variable in a purchase contract is price, but nobody wants to pay more than they need to. It would be nice if we knew exactly what others have offered, but the listing agent is not allowed to share this information unless he or she has written consent from the seller to do so. Most sellers don’t feel the need to share this information so you are usually going to be in the dark about the amount of other offers.

You can, however, include an escalation clause with your contract. An escalation clause allows you to start with a certain price while allowing your offer price to escalate in predetermined increments until it gets to a maximum or beats the other offers. For example, you could write your offer for $500,000 with an escalation to $510,000 in $1,000 increments. If the other highest offer is $505,000 your offer would escalate to $506,000. That does not mean you automatically win the contract. In fact, I have seen plenty of situation where the person offering $505,000 (in this example) wins the contract.

You have to keep in mind that there are many other criteria being considered in an offer beyond price. Below are seven items you can use to strengthen an offer for little or no cost. You may also want to consider these seven items to strengthen your negotiation position even if you are the only one writing an offer on the home you want.

1) Earnest Money Deposit (EMD)

In Arlington, we are usually able to get away with an EMD equal to about 1% of the purchase price. Sellers prefer to see more because it makes them feel as though you are more committed to the purchase. Assuming you fulfill your obligations under the contract, this money is credited back to you at settlement. Therefore, why not increase the EMD amount to strengthen your offer? Talk to your Realtor about a percentage that makes sense for your situation.

2) Appraisal Contingency

Most contracts request 21 days or more for the appraisal contingency. The regional contract even suggests that 21 days is typical. Sellers prefer for this contingency to be as short as possible so they know the outcome sooner than later. Let me share a secret, most lenders can get an appraisal completed in 3 days if they need to. I guarantee you that mine can. Why not shorten the contingency period? Talk to your Realtor and lender to decide on a number of days that they can live up to.

3) Financial Contingency

Like the appraisal contingency, most contracts request 21 days or more for the financial contingency. Again, the sellers prefer for the contingency period to be as short as possible. By working with your lender to get them everything they need prior to writing an offer, they can speed up the approval of your loan. This will allow you to shorten the financial contingency period and strengthen your offer.

4) Home Inspection Contingency

Most contracts request 7-10 days for the home inspection contingency, regardless of when they plan to do the home inspection. If you are writing an offer on Wednesday and plan to do your home inspection on Saturday, do you really need to ask for 7-10 days? The faster you can commit to removing these contingencies, the stronger your offer will be in the eyes of the seller.

5) Termite Inspection

By default, most agents require that the seller order and pay for the termite inspection in the contract. A seller looks at this and sees dollar signs coming out of his or her pocket. This can be one more thing that weakens the contract or one more way to strengthen it. We have relationships with local pest inspectors that allow us to have a termite inspection completed for less than $35. If you don’t mind absorbing the $35, then maybe it makes sense to cover the termite inspection instead of asking the seller to do so.

6) Closing Date

The time between ratified contract and settlement is typically 30 days. Many Realtors default to this time frame when preparing an offer, but some sellers prefer a shorter or longer settlement period. Your Realtor should be learning as much as possible about the seller of any home you are thinking about making an offer on and together you can decide whether it is a good idea to try and accommodate the sellers preferred closing date. By providing your lender with all the information he or she requires, prior to writing an offer, you will be in a better position to close in less than 30 days if you need to.

7) Lender Pre-Approval

The more complete your loan application and supporting materials, the stronger your pre-approval will be. Compare the difference between a home buyer who has just given the loan officer a few details over the phone to the home buyer who has completed a full application and provided the loan officer with all the supporting documentation. The first is very flimsy, while the second buyer is ready to be funded as long as the home meets the bank’s qualifications.

In the right situation, you may also want to consider a heartfelt letter to the seller. You may even want to include a photo of the adorable children that you plan to raise in this home. In order for this strategy to be effective, it has to be the right buyers and the right sellers, so use it cautiously.

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com.

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  • Openly Gator

    Unless housing supply begins to catch up with demand for certain types of homes in Arlington

    What types are those?

    • CW

      Non-condos.

      • Jeff

        Condo prices are headed up too.

        • CW

          Right. But the supply of them is inherently orders of magnitude greater than that for townhouses and SFHs could ever be.

  • KARLington

    Even more fun: include photos of the oddities you will hoard and the colony of feral cats you’ll be attracting to the home. They’ll be thrilled they are leaving the neighborhood!

  • Arlington Cat

    It is now a seller’s market? Who knew?

  • I think.

    It has been a seller’s market for a long time here in Arlington and other areas. As the Dulles toll road increases go into effect, gas prices increase, and traffic continues to choke; Arlington and other inside the beltway jurisdictions will continue to see upward pricing.

  • PL25rd

    Single-family homes under $750K in North Arlington go like hot potatoes. I know that from personal experience, having lost out on our first-choice home in a bidding war last year, then having another one go under contract before we could even look at it. That’s where the seller’s market is. The mega-mansions in the $1.2 million and up range sit on the market for quite a while, but the more affordable homes go fast!

    • CW

      I think more developers need to realize that’s the sweet spot. Lobbyists and law partners are always going to have their run of the high-end SFH market, and the supply is so constricted anyhow that those selling can name their price. Kids fresh out of college will always pack apartments and subleased condos/THs in Ballston. It’s the people in the middle that are squeezed. $150k or so combined gross annual, maybe. Looking to buy but wary of condos, and not necessarily needing to be right on the main drag. All the new THs going up are sized and priced to compete with SFHs. I think a big market would be for smaller THs, maybe closer to traditional Baltimore rowhouses. 4-6 on a mcmansion lot. More density for the County, more young buyers who want to invest in equity (and thus the County) are actually able to do so, and the developer nets more in the end anyhow. But what do I know.

      • Zoning

        Unfortunately you have no clue how this works in Arlington. There are things called zoning ordinances (look it up) that don’t let you say build 5 units on one lot.

        • CW

          I am sure there were zoning ordinances that predated the current onces in place in areas of the county that are currently high-density but were formerly not. As the county moves towards higher density is it incomprehensible that zoning may change?

      • Raul202

        Then maybe you should try, or stay, in Baltimore.

        • CW

          What does that comment have to do with anything? I was referencing a well-known architectural style as an analog to a format that could potentially be compatible with the desires of a large population of potential buyers.

  • ARLSeller

    Would you consider a two level stacked condo in high demand… its not quite a condo, not quite a townhouse. We are looking to put our North Highland (Rosslyn area) stacked condo on the market in the spring and hope the demand is strong.

    • Mr. Neutron

      Condo is a form of legal ownership, not a housing style or type. A condo can be a detached SFH, or a high rise, or a TH … or anything practically.

      • ARLSeller

        Thanks for the clarification on what condo means Mr. Neutron, but that doesn’t really answer my question about the demand for my style\type of housing (which is a condo form of ownership that happens to be 2 levels).

    • Greg

      Spring is a long way out. A lot can change, especially if Romney wins.

      • Jeff

        The chance of that happening is getting smaller by the day.

    • doug drabek

      I am lookin at something similar. The demand is strong

      • ARLSeller

        Doug – I’d be happy to sell you mine early next year… there would be a good discount if we didn’t use realtors (sorry Adam). I would also sell to you now if you were willing to rent to existing tenants until March ’13 ($2700 a month).

  • John Fontain

    It appears Adam isn’t suggesting the use of escalation clauses as much as he is informing people about their existence. I’m glad he isn’t suggesting them.

    So many people got burned by escalation clauses just a few years ago (during the housing bubble), that I’m shocked that any level headed buyer would ever consider using them.

    The problem with escalation clauses is this: you offer an amount but also state in the contract that you are willing to pay up to X dollars more than your offer. So what does the seller’s agent do? They see the escalation limit, inform you that their have been other offers higher than your original offer, and tell you that they’ll sell you the house for escalation limit.

    During the housing bubble, this happened all the time, with buyers not asking for proof of other higher offers and sellers’ agents not providing proof. To be frank, there was a lot of fraud in this area (i.e., no other offers really existed that would trigger this escalation limit). Experienced agents are well aware that this routinely happened, but for obvious reasons this isn’t discussed or acknowledged.

    My advice: Offer the lowest price you think the owners will accept, but no more than the property is worth based on the property’s intrinsic value (a historical multiple of cash flows the property could be expected to generate from rents). I realize most buyers won’t do this and will instead price their offer based on extrinsic value (comparable sales amounts). This is what got so many buyers into trouble during the housing bubble and is a highly flawed way of valuing a property (“if somebody else paid $XX, it must be worth that much”). Nonetheless, if you are going to price based on comps, try not to pay an amount that will result in you paying significant more in monthly payments (with zero down) than you would otherwise pay in rent for the property.

    And don’t include an escalation clause. If the seller has other offers and wants to see if you’ll pay more, they can always counter your offer. If they do this and state it’s because they have other offers, make them show you the contracts and earnest money deposits.

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