How to Make a Competitive Offer on a House in Maryland

Introduction

Figuring out how to make a competitive offer on a house is an essential step in the home-buying process in Maryland. Having a clear understanding of your financial situation, researching comparable properties, and working closely with your real estate agent can help you make a competitive offer.

If you’re planning on making an offer on a house, there are a few things you’ll need to consider, including your budget, local market conditions, and how much you want the property.

Market Considerations

It is essential to consider the market conditions before purchasing a home. If the housing market in your area favors sellers and has a high demand for homes, you may need to make a higher offer than usual (or be willing to waive contingencies such as home inspection or financing requirements). On the other hand, if the market favors buyers and there is less competition in the area, it’s much more likely the seller accepts a lower offer price.

Before basing your home purchase offer solely on price, consider your financial circumstances and get pre approved; if the monthly expenses are too high for you, don’t place the offer! Always discuss your pre approval letter, monthly payments, and closing costs with your loan officer—remember, a purchase agreement is a legally binding document!

Buyer’s Market

How do you make a competitive offer on a house in a buyer’s market? When there are more properties for sale and fewer buyers, sellers may be open to negotiation on the asking price. Another consideration is the time a seller’s agent takes to sell any individual property. With more properties on the market, it may take longer for any one particular property to find a buyer.

With less of a competitive market from potential homebuyers, there may be some leniency regarding the negotiation. Because multiple offers are unlikely in this market, buyers can often get a good deal below the asking price by requesting assistance with closing costs or having a home inspection without concern for other buyers starting a bidding war.

Note that the home seller will still require a pre qualification letter, even if the property sells at a lower price. Receiving pre approval from a local lender is critical if not paying in cash.

Seller’s Market

But what if the market isn’t in a buyer’s favor—how do you make a competitive offer on a house in a seller’s market? In a competitive seller’s market, buyers may have difficulty finding a house that meets their needs. They may also face competition from other potential buyers, which can drive up prices and create bidding wars. Buyers must be prepared with a competitive offer and letter of pre approval.

One of the buyers’ main difficulties in sellers’ markets is the lack of inventory. A lack of inventory means fewer houses are on the market than interested buyers are looking to purchase, leading to homes selling very quickly after they are listed, sometimes even before the potential buyer has had a chance to view them in person! Because of this high demand, sellers often have more negotiating power, and you must do everything possible to make your offer stand out. This demand can lead to inflated prices or complex contract terms for the buyer. It’s essential for those purchasing in this type of market to be aware of these challenges and take steps accordingly.

Be prepared with solid financing (and get pre-approved), and be comfortable paying above the list price if necessary. Contacting an experienced real estate agent in a seller’s market is critical to getting your offer accepted. You may need to place an offer on a few homes before your contracts receive acceptance.

Increase Purchase Price

The most obvious way to improve an offer is by spending more money with the highest price bid. The first step is to request your real estate agent prepare a Comparative Market Analysis (CMA). A CMA is a report prepared by a real estate agent that estimates the value of a property. The information includes comparable sales data and active listings, and its purpose is to help buyers and sellers determine the fair market value of a property.

To prepare this report, the real estate agent will research comparable properties. This research includes looking at recent sales and listings of similar homes to estimate whether the property is worth the price compared to a few houses nearby. An accurate estimate of what comparable properties are selling for can give both parties more confidence when it comes time to make or accept an offer on the house.

If you’re in a highly competitive market, offering more than the comparable price or list price may increase your chances of submitting the winning offer. Ultimately, it comes down to how much you’re willing to pay for the property and how badly you want the home.

Pro Tip

Use an escalation clause in your contract! An escalation clause protects the buyer in case the competing offers are lower than anticipated. For example, if there are no competing offers, you pay one amount, and if there are competing offers, you state your willingness to pay up to another amount.

Increase Earnest Money Deposit

Putting down more earnest money into the escrow account sends a solid signal to the seller that the buyer is committed to making an offer and is more likely than not to follow through with the purchase. Sellers want assurances that a buyer is financially capable of purchasing their home; a larger deposit indicates that the buyer has both the financial ability and willingness to make a larger payment on the property.

Additionally, increased earnest money deposits infer more cash on hand. This earnest money helps cover any costs associated with defaulting on the home sale.

Financing Options

There are many different types of home purchase financing available to buyers today. The most common type of financing is a mortgage loan. Banks, credit unions, and other financial institutions typically offer mortgage loans.

Suppose the buyer cannot secure funding aligning with the contract terms. In that case, financing contingencies offer them an out with minimal disruption or cost (even after the buyer receives their preapproval letter). It can be costly if financing-related issues force the seller to accept a lower asking price or other unfavorable terms.

If the original buyers back out because of this contingency, it might also be difficult for the seller to find another interested party willing to purchase under similar conditions. All of these aspects are considerations made by the seller’s agent.

Cash Purchase

In a cash purchase, the buyer pays the entire purchase price of the home upfront in one lump sum. This financing eliminates the need for a mortgage or other loan and can often help buyers get a better deal on their home purchase; sellers are more likely to negotiate on price when they know there won’t be any delays in getting paid. Making a cash offer on a house can give you an advantage if multiple offers are on the table.

Although a pre approval letter is not required when making a cash real estate purchase, the buyer will use proof of funds instead of getting pre approved.

Conventional Financing

Conventional financing is a mortgage loan not backed by the government and typically offers competitive interest rates. Another advantage is that you may have more flexibility in using the loan proceeds. One of the main difficulties of conventional financing, however, is its more stringent pre approval process (unlike financing backed by the government).

Other Financing

There are plenty of non-traditional financing options for home buyers besides the more commonly known FHA and VA loans. Some examples include seller financing, lease option agreements, and owner carry-back mortgages. However, government-backed loans might be less appealing to the seller because they often have more repair requirements that the seller must complete before closing. If multiple offers exist on your dream home, consider adding an addendum stating your willingness to pay for any lender-required repairs.

Did You Know?

Personal letters may seem like a good idea but are typically dismissed by the listing agent as they have the potential to violate Fair Housing laws.

Down Payment

A down payment is an initial payment made on a purchase, typically a percentage of the total price. In short, a higher down payment is less risky for a seller because the buyer has more skin in the game and is, therefore, more likely to follow through on the purchase. For this reason, a higher down payment is preferable to a lower down payment if all else is the same.

Note that the down payment is not the same as the earnest money deposit. The earnest money deposit is submitted before (or immediately following) contract acceptance to indicate the buyer’s seriousness.

Waive Inspections

Homebuyers may waive their right to a home inspection in some situations. For example, if they buy a new construction home from a builder, the builder may have already completed an inspection and made necessary repairs. Or, if the buyer is purchasing a home from a family member or close friend, they may feel comfortable skipping an inspection since they know the property well.

Although waiving an inspection can save time and money for the seller and make your offer more competitive, it’s essential to consider all potential risks before making this decision. By skipping an inspection, buyers may encounter pricey repairs down the road. Ultimately, it’s up to the buyer to decide whether or not to have a home inspection. Those who are unsure should consult with their buyer’s agent for guidance.

Financing Contingency

An appraisal contingency is a condition in a purchase contract that allows the buyer to back out of the deal if the property’s appraised value is less than the agreed-upon purchase price. The home loan appraisal occurs as part of the loan underwriting process.

Suppose the buyer is unable to obtain adequate financing. In that case, the seller may be compelled to accept less favorable terms, such as a lower purchase price or a different closing date. The seller can choose to find another buyer or proceed with the sale at the appraised value.

When buyers want to purchase a property using a mortgage, their initial offer will include a contingency based on the appraisal from a mortgage lender. Generally, you may utilize one of three home appraisal contingencies types with your offer: standard, partial, and none.

Standard Contingency

A standard appraisal contingency protects buyers against overpaying for the property since they can back out of the purchase agreement if the appraised value is lower than the contract price. However, this type of contingency is often less favorable to sellers since it gives more power to the buyers to decide whether to move forward with purchasing a property.

Partial Contingency

A partially contingent appraisal means the buyer will pay a specific amount in cash over the appraised amount if (and only if) the property appraises for less than the contract sales price.

Example 1:
– Offer: $635,000 with $5,000 over the appraisal value but not exceeding the contract sale price.
– Appraisal: $625,000
– Total: $630,000 ($625,000 + $5,000 cash)

Example 2:
– Offer: $635,000 with $5,000 over the appraisal value but not exceeding the contract sale price.
– Appraisal: $650,000
– Total: $635,000

No Contingency

The final option is waiving the contingency entirely, also called an appraisal gap. This option should only be utilized if the borrower has ample cash on hand in case the property does not appraise at the anticipated value. An appraisal can be reordered, but this rarely changes the outcome.

Closing Considerations

Two events need to occur for the sale’s finalization—parties must fulfill the promises made in the sales contract, and the mortgage funds must be distributed. You can use a few tactics to better your offer closing terms.

Transfer and Recordation Tax

Maryland imposes taxes when residents sell real property via transfer and recordation levies. Three taxes are due at settlement, including a state transfer tax, local transfer tax, and local recordation tax. If either party prefers to negotiate who pays what amount, it must be in writing within the final sales contract.

Paying 100% of one or more of these government taxes is very competitive, as the seller receives higher net proceeds.

Did You Know?

In Maryland, most sales contracts split taxes evenly between buyer & seller, often referred to as a 50/50 split.

Settlement Company

Some sellers prefer a specific title company because they had a good experience in the past or it is close to their home. Other reasons include if that company previously completed the property’s title search or has low seller closing fees.

Further, you may also opt to pay the seller’s closing costs. If the seller or listing agent prefers a specific settlement provider, consider using it to increase your offer’s competitiveness.

Closing Date

Sometimes closing faster is preferable to the seller. If you can close quickly, it could save the seller money on mortgage payments.

The closing time frame typically depends on the lender’s capabilities but can generally be determined before contract ratification. Closing often happens much faster for a buyer who can make a cash offer than when using the original bank loan. If you are flexible on your settlement date or even willing to accept lesser terms, this might help make up for not being able to close quickly.

Ask Your Real Estate Agent

Sometimes, other aspects of the deal can improve the offer’s outcome, such as adding a free or reduced-cost rent back for the seller. Including a rent back means the seller stays in the home for a while after completion, typically one to three months. Rent backs allow the sellers to take their time while finding somewhere else to live or waiting for their new property to be ready.

It is best to contact a buyer’s agent for advice on improving your offer in your local market. An experienced agent will know how to help you find the right property and will also be able to help you with the negotiation process. Further, their efforts to act on your behalf in advancing the purchase depend on their persistence in receiving a response. Be sure your agent contacts the property’s listing agent to establish which contract elements may improve terms.

Conclusion

To make a competitive offer on a house in Maryland, you must be aware of the competition and prepared to negotiate. With these things in mind, you can make an offer that the seller will be more likely to accept. In the end, remember that the goal is to reach a fair agreement for both parties. Contact us today to learn more about how Harrison, one of our seasoned, in-house real estate agents, can assist with your home search!