The competitive real estate market in Iowa shows no signs of slowing down any time soon.
The combination of low interest rates, a strong housing market rebound in most areas and a continued decline in inventory has resulted in a competitive sellers’ market with more and more buyers competing for less available homes. Multiple offer situations, also known as bidding wars, are becoming more common for sellers in many markets. Recent data from the National Association of REALTORS® (NAR®) shows that agents across the country are reporting an average of three offers per house for sale and an increase in multiple offer situations.
The increase in demand from competitive buyers and a decrease in available homes for sale is also causing a steady increase in home values as bidding wars drive up the purchase prices. A recent market report from Danielle Hale, the Chief Economist at Realtor.com, notes that buyers, motivated by low mortgage rates and the certainty of homeownership in an uncertain time, are quickly putting in offers on homes for sale, driving the overall numbers of homes for sale lower and putting upward pressure on home prices.
Your agent should prepare you for the state of the market but you should also know what to expect during the negotiations, tactics you can use and how to evaluate offers from multiple buyers.
The 4 Ways Sellers Can Leverage a Multiple Offer Situation
Before your home hits the market, you and your agent should have a conversation about what to do if you receive multiple offers. Sellers in a multiple offer situation may have more bargaining power, but they have to evaluate many offers and have an agent with sharp negotiating skills who can negotiate the best deal.
Read on to learn more about how to evaluate offers, what to expect during negotiations and how to choose the best offer.
1. Use your agent as a resource.
A multiple offer situation can be a great opportunity for a seller. You might be able to earn more on the sale of your home and negotiate fewer costs on your side. But it can still be stressful and overwhelming which is why your agent is the best resource you have during the process.
Your agent can prepare you for what a multiple offer situation looks like: reading personal letters from buyers, negotiating and then re-negotiating with buyers, moving as quickly as possible, etc. There are a few key things your agent should discuss with you:
Talk to your agent about lenders and loan packages.
Your agent should discuss buyer financing with you before the offers start rolling in. Make sure buyers have pre-approval from a well-respected (and ideally local) lender before they ever see your home. It will save you time in the long-run in case they’re not able to get financing from a lender or unable to get strong financing. Your agent should have relationships with lenders and companies in your local market, they can tell you which ones are easy to work with.
Your agent can also coach you to evaluate buyers with solid loan packages and good downpayments. A cash buyer or buyer with a conventional loan and a big downpayment is almost always ideal!
Be prepared to read personal letters from buyers.
If a prospective buyer includes a personal letter with their offer, your agent will pass it on to you to read. Buyers use personal letters to introduce themselves to sellers so that you can get a sense of them as a person, not just an offer on paper. You’re not required to read personal letters, but they can help you make a decision if you’re overwhelmed by the offers you receive.
Talk to your agent about your non-negotiables.
Do you need a specific closing date because you’re closing on another home? Do you need delayed possession because you’re building a new house that won’t be ready soon? Are you unwilling to cover a buyer’s closing costs?
Talk to your agent about your must-haves and what you can be flexible about. This is essential information they should know before talking to prospective buyers so they can field offers that just won’t work before they get to you. Don’t forget to make a list of included and excluded items, such as appliances and add-ons like children’s play equipment and gardening structures. You might be surprised by what buyers will ask you to leave behind!
You and your agent should also discuss how to evaluate offers holistically- purchase price isn’t everything! We’ll go more in-depth on evaluating offers further down.
2. Talk to your agent about what to expect during negotiations.
When you start receiving offers, you can talk to your agent about taking one of two approaches to fielding offers.
Option #1: Let all buyers know it’s a multiple offer situation.
Your agent can let all potential buyers know it’s a multiple offer situation and give everyone the chance to present their highest and best offers. This can ramp up the competition between buyers and entice them to come to the table with better offers than they might initially have presented. Then you and your agent can set a specific day and time to review all the offers at once and choose one.
This is a great strategy to use because you can get everyone’s best terms at one time. Remember, you can’t negotiate with two buyers simultaneously. Your agent can talk to you more in-depth about what this means for the negotiation process.
Option #2: Choose the best offer that comes in first.
You don’t have to give everyone a chance to come to the table with a strong offer. As the seller, you have the right to review offers and choose one at any time. If you don’t want to wait for everyone to present an offer, you can accept the first one that meets your needs. Keep in mind, other buyers can request a signed rejection of their offers so they know that you did review it.
This is a good strategy if you need to sell your home quickly or a buyer makes an offer that’s too good to pass up or negotiate. However, giving multiple buyers the chance to compete could potentially earn you more.
3. Negotiate with buyers using these tactics.
Although you typically have an advantage as the seller in a bidding war, that doesn’t mean you won’t negotiate with buyers. In fact, it’s in your best interest to do so you and your agent can work out a deal that meets your needs (and then some).
These are some of the negotiation tactics you and your agent can use while working with buyers:
- Negotiate early or late possession
- Ask the buyer to remove the “Subject to Appraisal” contingency
- Ask the buyer to remove the “Subject to Inspection” contingency
- Ask the buyer to remove the seller tax credit
- You can accept a back-up offer
Negotiate early or late possession.
In a normal market, possession outside of closing day can be a tricky thing to negotiate because you’re working with more than one person’s timeline and buyers sometimes have to sell their homes too before they can close on yours. However, you have leeway to ask for more buyer flexibility when it comes to early or late possession.
Early possession is when you vacate your home before closing so the buyer can move in. This can be tricky for you as the seller because technically someone is living in the home who doesn’t own it- making you liable for anything that happens. Late possession can also be tricky because the buyer owns the home after closing while you’re still living in it.
If you need the flexibility of early or late possession, make it clear to potential buyers right away and pick an offer that allows you to negotiate that. Your agent will help you negotiate these additional terms which will most likely be on a separate addendum to the purchase agreement.
Ask the buyer to remove the “Subject to Appraisal” contingency.
If potential buyers are offering above your listing price, this is a good strategy to use. It shows you how serious the buyers are if they’re willing to remove it and protects you if the appraisal comes in lower than the purchase price. If your buyers are using cash or can make up the difference between their conventional loan and the purchase price, this also shows you how strong they are financially.
But if you have buyers who are strapped for cash, already at the top of their budget or are not using a loan package that allows them to remove this contingency, they won’t be able to drop this from their offer.
Ask the buyer to remove the “Subject to Inspection” contingency.
This is a good tactic if your buyers are savvy and experienced people who won’t be spooked by this suggestion. Even without the inspection contingency in the offer, the buyer can still pay for an inspection to be done before closing “for buyer’s knowledge only.” This means they can still find out what they need to know about the condition of the home, but they should not be able to negotiate for repairs or credit toward improvements. This is something your agent would strictly outline in an addendum to the original offer.
This is not usually a tactic that will work with first-time homebuyers or buyers who don’t have the cash or home knowledge to make the repairs themselves.
Ask the buyer to remove the “Subject to Sale” contingency.
If your buyers are also in the process of selling their current home and you’re afraid it will slow down your transaction, your agent can ask them to remove this condition from their offer. The buyer’s agent can talk to them about options to make this viable (such as using a short-term rental or bridge loan). This can be a difficult ask for buyers who need to use the proceeds from their sale in order to fund the purchase of your house.
Ask the buyer to remove the seller tax credit.
In Iowa, homeowners pay property taxes in arrears. This means you’re still responsible for paying property taxes on your house even when you sell it, in order to cover the time you lived there. In most markets in Iowa, the seller gives the buyer credit at closing to cover the cost of property taxes for the time the seller lived in the home up to the closing date. If you know your buyers are financially sound, you can ask them to remove the seller tax credit from the offer.
If your buyer is using a conventional loan or paying in cash, you could try to negotiate this with them. However, if your buyers are using a non-conventional loan (think VA, USDA, FHA, etc.), they may not have the option to do this.
You can accept a back-up offer.
If you accept a really strong offer from prospective buyers but then another buyer comes along and wants to make you an offer, you can accept the second buyer’s offer as a back-up. Deals fall through all the time in real estate, so it’s a safety measure on your part to accept someone as a back-up, just in case.
If you do accept a buyer’s offer as a back-up, their earnest money, inspection date and closing date will only be set once you officially notify them that your first offer fell through and you’re taking their offer now.
Your second buyers have the right to rescind their back-up offer at any point before you officially notify them that your first buyers fell through. They likely will continue to house hunt while they wait to hear from you. Once you formally accept the back-up offer, your agent can start negotiating with the tactics mentioned above.
4. Work with your agent to evaluate offers holistically.
If you decide to accept multiple offers and evaluate them all at one time with your agent, you should be prepared to look at more than just how much money the buyers are offering you. There’s more to a good offer than just the purchase price!
You and your agent should consider:
- Buyers with solid financing and a good downpayment. These deals are less likely to fall through (but it’s still not a guarantee!).
- Review how much they’re offering in earnest money. It shows you how serious they are about the house. Is any of it non-refundable?
- Does the closing date work for you? Are they willing to be flexible if you need early or late possession?
- What costs are the buyers asking you to cover? Think about closing costs, home warranty, repairs and improvements, etc.
- Think about the included and excluded items list you made. What do they want you to leave behind?
- If the buyer included a personal letter, consider any emotional connection you may have felt when you read it. Can you see them living in your home?
Once you decide on an offer, your agent can start negotiating with them to try and reach the best possible terms for you. At the end of the day, while the purchase price is important, there’s a lot more that goes into making a strong offer. You have leverage as the seller in a multiple offer situation to reach a deal that helps you meet your financial goals and move on to your next home.
Looking for more information on selling your home? Our seller series is coming soon! This complete guide will cover the costs of selling, how to list your home, negotiating offers with your agent and how to close. No matter if you’re a new seller or an experienced one, you’re sure to learn something that will help you make the best deal possible.
Multiple offer situations can be stressful, fast-paced and competitive on both sides of the transaction. The real estate market, both in Iowa and nationally, continues to face an inventory shortage that, coupled with low interest rates, is likely to increase the number of bidding wars buyers and sellers are navigating with their agents.
If you’re thinking about jumping into the real estate market this year, just remember these tactics and strategies. Your agent is your best ally and resource, whether you’re a buyer or a seller. Everyone should be prepared to compete in this real estate market, especially as the inventory shortage continues to be a real factor for the next year.