Buying an Investment Property In a (Super) Competitive Market
Buying investment property, even for seasoned investors, is rarely easy. The process can be expensive, time consuming, and complex, leading to a significant undertaking with every transaction. In addition, some markets, especially in California, are harder to buy in than others.
Purchasing in a competitive market poses its own unique challenges beyond the basics of buying. When properties receive 20 or 30 offers, all of which are at or above asking price, standing out from the crowd is essential, not just a benefit. And to make matters even more difficult, as an investor, to profit from the property, you need to buy at a competitive price.
When being the winning offer on a listing is imperative to building a robust investment portfolio, investors need to take advantage of every opportunity available. These tips can help California real estate buyers get a leg up on the market competition.
Apply For Pre-Approval
Some investors wait to apply for approval until after they have found the right property, but when time is of the essence, waiting can be a costly mistake. Instead, seek mortgage pre-approval before the first open house or realtor appointment.
There are tools that can help buyers estimate what amount of financing they can take on for their investment property. The pre-approval process will determine accurately how much borrowing you qualify for, which will help you narrow down your search of available properties. Your best bet? Contact one of our loan officers. They can help you find the best loan program and total borrowing costs for your investment purchase.
In addition, submitting an offer when you are pre-approved can provide a little extra peace of mind for a seller. When time is of the essence, accepting an offer from someone who has a mortgage pre-approval can be a way to ensure that a sale will not run into any financing glitches. While offers of all kinds fall through for many reasons, a seller will sleep better knowing that affordability will not be a potential hurdle to face.
Offer Over the Asking Price
An asking price is not a limit; it is a starting place. In a buyer’s market, buyers have room to talk prices and drive a hard bargain, and in a seller’s market, the opposite is true. Right now, we’re in an extremely hot seller’s market.
When making a purchase in a competitive market in which a single property receives dozens of offers, it is best to start with a highly persuading offer. This does not necessarily mean offering the highest amount you would be willing to pay for the property – although that can be done as well if it seems like the most effective alternative given all circumstances – but rather an offer a seller would find desirable. You can consider offering some amount over an asking price and/or including additional benefits, like covering some or all the closing costs, paying in cash or allowing for a sale-leaseback at a minimal cost to give the seller flexibility with the timing of their move.
If possible, make sure your offer lets the seller know that you are motivated. Stating your seriousness can be an easy way to let a seller know that you may have wiggle room in your offer. Emphasizing motivation can be very effective when combined with letters or visits (both of which are described below); if the seller likes you or wants to work with you, they may give you an opportunity to match a top offer.
Even a great offer will not necessarily nab you every property you want, but a seller’s market is no time to pinch pennies.
Put Down a Sizeable Down Payment
A lot of factors can go into how sellers will weigh various offers – who is making the offer, the size of the offer, the financial state of the prospective buyer – and it is not unusual for down payment to be one of them.
In competitive markets, the amount of a down payment can matter. A small down payment can raise questions in a seller’s mind as to whether a prospective buyer can afford a property and secure proper financing. A large down payment, on the other hand, can provide a peace of mind, including that some variability in the property appraisal will not impact the prospective buyer’s ability to meet the down payment threshold. If a larger down payment fits within your investment strategy, consider putting more down than you usually would in a seller’s market. It might pay off in the end.
Assemble the Right Team
Real estate is rarely a solo venture. From the legwork to find a property to the legal process involved in successfully completing a transaction, there are usually multiple professionals involved along the way.
If you want to make a successful purchase, having the right experts on your side from the start can be imperative. Agents, mortgage brokers, attorneys, and home inspectors can make a sale much easier – but the opposite can be true, too. Going with any old agent or inspector could lead you down the wrong path and inadvertently stand in the way of a successful sale.
You likely already have professional connections in the industry, so now is the time to put them to use. Make sure your trusted resources are available and ready to work with you. If there are any kind of conflicts, it is better to know with enough time to expand your network. The last thing you want is to move forward with making an offer only to learn that some of the professionals you were counting on are not available to help.
Talk to the Seller in Person
The art of communication is never dead. In real estate transactions, when a personal touch can differentiate one similar bid from another, an in-person appearance can increase the odds of your offer being accepted.
Most offers are made through real estate agents after private tours or open houses at which sellers are not present, creating an opportunity to set yourself apart from other bidders. By arranging to meet the seller in advance by going to the house or setting up a meeting through an agent, it is possible to create a connection that will supersede other offers.
In addition, a meeting face to face can solidify one name over another. When a seller gets dozens of offers on a house, names of potential buyers tend to run together. However, when you introduce yourself, make your interest known, and state your vision for the future of the property, you are much less likely to be forgotten. If a seller is considering a few offers that are similar or equal in financial terms, a friendly smile and a warm introduction can be the deciding factor. As an investor, the buyer may want to sell to a family, but explain to them your upgrade vision for a future family.
Be aware that not all sellers want to meet prospective buyers. To some, a meeting can feel high pressure, so be sure to lean on your real estate agent to get a feel for a seller whenever possible.
Follow the Seller’s Lead on Closing Procedures
In general, closing is guided by the seller, not the buyer. However, it is not uncommon for buyers to have preferences, too.
When the market is tight and competition is fierce, it behooves buyers to defer to the seller’s ideal circumstances. Sellers hold all of the power in a competitive market, and pushing too hard against what a seller wants can cause a sale to fall through. Be prepared to work on a seller’s preferred timeline and, if necessary, split any closing costs a seller may deem necessary.
This is not to say that you should be passive during closing or allow yourself to be forced into circumstances that are not right for you. If something does not feel right during closing, or if the seller is making demands you cannot or do not feel comfortable accommodating, you have the right to speak up.
All cash offers can be a great way to incentivize a seller into accepting an offer. Coming forward with cash negates the need for financing, demonstrating motivation and interest to a seller who may be juggling multiple offers. As paying cash is somewhat uncommon, anyone who can make this kind of offer is going to look appealing to a seller.
Paying in cash can clear a lot of hurdles in the closing process as there is no mortgage in play. This can expedite the transaction, by bypassing the underwriting process, appraisal process, and other bank approvals, and the speediness of closing can be highly appealing for a seller who needs to move quickly.
Those considering a cash purchase may think a loan broker is unnecessary, but that is not always the case. A loan broker can provide benefits in purchase situations of all kinds, including for investors who need a large amount of cash on hand with which to make a purchase of another property. For example, an investor can use an existing property as collateral for a bridge loan or a hard money loan, use the loan proceeds to make an all-cash offer on another property, and complete any property repairs and rehab. Then, using the new appraisal value after renovations, the investor can refinance the new property and use the cash proceeds from the new mortgage to pay off the bridge loan or hard money loan. That puts you at an advantage when shopping for a home and in the negotiation process. You can act as an all-cash buyer. Now, the seller has confidence to sell you the property.
Loan brokers can also play a role for buyers who want to make home improvements upon property purchase but may not have adequate cash left over after a sale is finalized. Lending professionals can find creative solutions for cash-flow shortages, helping to facilitate the buying process.
Paying in cash will not be possible in every circumstance. But when it is an option and you are intent on a particular property, playing this ace card can be a good way to win.
Buying real estate is never easy, but a competitive market only makes it harder. When there are dozens of offers on the table, it can be difficult to make yours stand out from the pack. However, getting a little personal with greetings, demonstrating your financial stability with mortgage pre-approval, a large down payment, or sometimes even a cash purchase, and being prepared to move quickly, can make all the difference.