Throughout much of the U.S., there's a major lack of inventory when it comes to rentable homes. This has created unprecedented competition -- in many areas, homes are selling in just days (or even hours), and often for full listing price or even more.
With that in mind, it's more important than ever when buying an investment property to make your offer stand out above the competition. Here are three ways you can do just that.
Show that you can actually buy the property
The most enticing offer in the world is meaningless if a buyer can't afford to buy the property. One of the biggest fears a seller has is taking the property off the market for a month or more, only to find that the deal falls through when the buyer is unable to obtain financing.
If you're a cash buyer, this step is easy. Simply submit a bank or brokerage account statement along with your offer showing that you have enough money to buy the property.
If you're planning to finance the property, it's a good idea to submit a preapproval letter from a reputable lender. This shows that not only can you afford the property, but the lender has done any necessary credit, income, and asset verifications to ensure that they're actually willing to give you a loan. Note that this is different from a pre-qualification -- a preapproval is a commitment to loan you money, provided that the property meets the lender's standards and your situation doesn't change dramatically.
Offer a large earnest deposit
When you submit an offer to buy a property, it's standard practice to submit a small deposit to show the seller that you're serious. This is known as an earnest deposit, or "earnest money." Essentially, if you fail to buy the property and don't have a contractually valid reason, the earnest deposit is given to the seller.
Expectations for earnest deposits vary by market, but roughly 1% of the home's value is a good rule of thumb. For example, if you're offering $479,000 for a home, it's usually reasonable to offer a $5,000 earnest deposit. However, in some markets, a smaller ($500 to $1,000) deposit is standard, regardless of the home's value, and in hotter markets a higher amount could be expected.
If you want to make your offer stand out, consider showing the seller that you're really serious by including a larger-than-expected earnest check. If $5,000 is expected, consider offering $10,000. After all, your earnest deposit is applied toward the purchase of the home when you get to the closing table, so it doesn't cost you any additional money in the end.
Think about your contingencies
There are three major contingencies that appear in most real estate contracts: financing, inspection, and appraisal. And by getting a little creative, you could use them to make your offer stand out:
- Financing: I never suggest waiving the financing contingency unless you're prepared to pay cash for the property, even if you're 99.99% sure that you can get approved for a loan.
- Inspection: It's generally not a good idea to waive your right to inspect, unless you're planning to completely renovate the property or tear it down. However, you could offer a shorter inspection period -- say, five days from the contract date instead of 10.
- Appraisal: For most buyers, if you're going to waive one of your contingencies, this is it. Essentially, the appraisal contingency gives you a way out of a deal if the property doesn't appraise for the contract price. By waiving this, you're agreeing to purchase the property even if the appraisal comes in low. In hot real estate markets, this can be very appealing to a seller. The risk is that if the appraisal comes in too low, your lender might not want to loan you as much as you expect, and you'll have to cover the difference out of pocket.
The Millionacres bottom line
Sellers don't like uncertainty -- period. By showing that you're financially capable of buying the property, putting more of your money on the line than you have to, and making the contingencies in your offer as light as possible while still protecting yourself, you can help reduce the uncertainty in the eyes of the seller and could make your offer stand out in a bidding war.