Today we’ll discuss the three primary terms to consider with each offer.

In this second video of our three-part series on how to compete in a bidding war, we’ll discuss the primary terms of your offer. If you haven’t, I highly recommend you watch part one of this series so that this information is more effective. As we discussed last time, two major factors combine to make up the strength of your offer: the price and the terms. 

Your terms can be further broken down into primary and secondary terms. There are varying degrees of what constitutes weakness and strength within each individual term. Similar to how you determine your maximum price, where you want to position yourself on each term is predicated upon the unique aspects of the home, your goals, and your market timing. No two offers are ever the same.

Primary Term No. 1: Earnest Money 

Even in the strongest buyer’s market, 1% of your price would be considered the bare minimum. However, in a seller’s market, the bare minimum is 2%. These days, 3% to 5% is considered competitive, and 6% or more would be considered strong. Remember, earnest money isn’t paid in addition to your down payment or closing costs—it’s a piece of them. It’s the liquidated damages the seller will receive if you break the contract without due process. The more skin you’re putting in the game, the more serious your offer looks.

Another variable of earnest money is whether or not you should make it non-refundable. Here, there are three levels of strength:

1. It’s non-refundable except in the event “X” happens. X is whatever you aren’t willing to concede because it’s not worth the risk to you.

2. Making it flat-out non-refundable. In either of these first two scenarios, if you kill the deal without having the contractual right to do so, the seller has to go through the motions to receive the earnest money—it’s not simply handed over.

3. Convert the earnest money to a non-refundable deposit disbursed to the seller soon after mutual acceptance. This means the seller already has your money if you break the terms of the contract. It’s the real estate negotiation equivalent of going all in. It’s simultaneously the riskiest thing you can do while also granting you the highest chance of success.

“The more skin you’re putting in the game, the more serious your offer looks.”

Primary Term No. 2: Financing

Ultimately, cash is king. However, assuming you’re utilizing a loan, the key variables are the type of loan (FHA, VA, conventional, etc.), your down payment amount, and whether or not you need seller concessions. For down payments, more is better, and having no concessions is best.

Protection for low appraisals is certainly of concern. The default option is to negotiate with the seller on what to do if the home appraises below the purchase price. The next strongest option is to pre-negotiate the dollar amount you’re willing to pay in order to bridge the appraisal gap if there is one. The strongest option is to waive financing outright. This most certainly requires a risk-versus-reward analysis with every offer.

Primary Term No. 3: Inspection

The default contractual timeline gives you 10 days to complete the inspection, with an extra five days available in the event your inspector recommends further evaluation by a specialist. To increase the strength of your inspection terms, you could:

  • Decrease your inspection timelines
  • Tell the seller to take it or leave it
  • Waive the inspection outright
  • Utilize a seller-procured inspection (if one is provided) and waive the inspection
  • Complete a pre-inspection on your own dime before writing your offer 

This last option shows the strongest level of commitment to the seller since they know you worked with your trusted inspector to evaluate the home. However, if you lose the bidding war, you don’t get the inspector’s fees back. That’s hundreds of dollars for each and every pre-inspection you complete.

If you’d like to watch my in-depth market analysis, you can watch it here. If you have any questions in general, click here to book a 15-minute phone call with me where we can discuss further. Be sure to watch for part three of this series, where we’ll go over the options of your secondary offer terms. Until then, take care!