This is Mortgage Secrets Episode 9

In this episode of Mortgage Secrets, we are going to talk about writing winning contracts in these crazy competitive markets we have around the country. And you might be surprised it's about way more than the price. This is episode nine and I'm John Downs.

So here we are in mid-2019, and I'm witnessing what has been about the most demanding season that I've ever helped counsel people through, and demanding in the sense of it's not uncommon for me to see 10, 15, 20 people bidding on the same house. And it's no secret that we are in an inventory crisis in many of these major cities around the country. If you go all the way back to the depths of the financial crisis, new construction became extremely anemic. And when you look up in the skyline and you see all those cranes and all these cities, they've been building mostly apartment buildings. So of course, now that credit has eased dramatically, meaning lower downpayments, we have a much healthier consumer, delevered like I've probably never seen it again.

I do live in somewhat of a bubblelicious area of DC where incomes are high, and I've been seeing lower debt than I've seen in quite some time. So of course you bring all that demand forward. But yet if you're in this market where there's not a lot of supply, it really just heightens competition. So if you're a buyer out there trying to buy a house, you notice that you write and you lose, you write and you lose, you write and you lose. And I counsel people from time to time that maybe have written two, three, four contracts with a different team, right? A different real estate agent, a different lender. Maybe they were do it yourselfers and they wanted to be in control, whatever it is, they stumble upon us and they say, "Hey, this isn't working. So let's try over. Let's try again."

And when I talk to these people and I'm like, "Okay, well, why have you been losing?" 9.9 times out of 10 people say, "Because I am outbid, I keep losing to price." And then I dig and, and start getting a little deeper into how'd you write your contract, what did it look like? How are the internals? It becomes pretty clear to me that maybe a lot of these people that have been losing, maybe it wasn't losing to price. Maybe it was actually something within their offer. And when I start digging in and enlightening them to what we're about to talk into today, they wake up. They're like, "Whoa, maybe I could have won all those other things like, wow, I didn't know that I should be looking at these other things."

So of course, the goal of this episode is to give you a clear perspective of what winning looks like, right? And it's really easy to say, "Just pay the most. Pay the most, waive all your protections, close faster than anyone out there." But the reality is not everyone can do that and nor should a lot of people. So of course my goal is that everyone just puts their best foot forward, whatever that is, that it's your best. So you know with confidence that if you lose, it's like, "Well, I did my best. So now I just have to wait for another one." There's nothing worse than losing and realizing that, oh my gosh, I just didn't do the right stuff. I lost because I wrote a poor contract.

So of course, the episode today is how to write a winning contract. What should you think of? How should it be drafted and considered in the timeframes and all that stuff. So in the end, I just want you to do your best, whatever that is. So you never live with all those “what if” doubts and you can just get right into housing and win that house when the perfect one comes along.

To win in real estate, you really need to get into the seller's mind and start putting yourself in their position. So of course, price matters. If you sell anything you want the most for it, period, goes without saying, your price matters. You need to be somewhere near the top to even be considered. But also as a seller, you're probably moving. You have equity in that house that you're trying to use to buy something else. You might have a young family you're trying to transition. You need to pack. You need movers. You need to transfer utilities. You need to take time off work to prepare for the move both before and after. You need to get in for a certain school district or like who knows? All the different things that people have going on in their life, where they need guarantees.

If something falls through, it can either cost them more money, or it just creates so much internal anxiety and pressure that they just don't want to deal with it. So price matters. Safety, security, and everything else that goes with it can be more important. So earlier when I said a lot of people wound up losing, and the first thing they say is, "Oh, I lost out because someone bid too much.", what I found is a lot of those contracts that were written didn't take into consideration the comfort that the seller wanted. So a lot of what we'll get into is to just raise awareness. So as you hear this, and you think about your situation, these things we'll talk about should come up. You should ask your real estate agent and your lender, "Hey, what about this? Hey, I really, really, really want to win this house. Should I consider this? What risk is this for me? Will this make a difference?"

All those things is what I want you to start thinking about and start getting into. So in every case, the seller wants confidence in the numbers, wants confidence that that transaction closes on that very specific day so that they can start planning the next leg of their life. Oh, by the way, they also want a really good price. And sometimes they will take more personal risk for a bigger price. Sometimes they will take a smaller price, let less money for more guarantees. So that's the takeaway and it's always the hardest part of negotiating is not really knowing the motivation of the other side, but at least you can kind of start piecing this whole thing together and start figuring out what your best can look like.

So we said that price is key. It's one of the most important things. In these hot markets, it's not uncommon to see the property sell quite a bit over what the list price was. So let's just use this example of a $600,000 house and it's listed at $599,900. And ultimately it is for $675,000, right? I've seen $900,000 houses sell for $1.1 million. I've seen $300,000 condos sell for $350,000. So the reality is a lot of those listing prices were just somewhat strategic marketing. So I know it's worth $400,000. I'm going to list it at $375,000. I'm going to have a feeding frenzy on this thing, tell everyone to put a strong offer forward and we're going to get $425,000 for it. So it's totally not uncommon and something you should totally look at. And quite frankly, in these hot markets, when I have people trying to figure out what price point they should look in, it makes it hard because a lot of times they get really excited and they're like, wow, I keep seeing all these super cool houses listed at 600,000. But what they don't look at is the sale prices when they actually close. And you're like, "Oh crap. They actually were like $700,000 houses. And I thought I would get those for $600,000."

So you have to really understand where the market is. Now again, back earlier when I said people had these experiences of losing, there is a part of pricing, and we're going to get into this a little bit later where you really, really, really need a good realtor on your side. A lot of the people that wound up losing that I hear from, it's usually because of poor guidance. I think of a real estate agent sitting at a table, looking at you, you want to buy a house and they say, "So what do you want to offer?"

That drives me crazy. I'm like, I don't know, you're the professional. What is this thing going to sell for? I don't know. You tell me. So you obviously, as a buyer have a say, but I think the real estate agent should have a lot of information. And in some cases, that information is yeah, this place is totally worth here. I have extreme confidence it's $675,000. I think some emotionally crazy person who's going to be homeless in three weeks if they don't win this thing, could they offer $700,000? Sure. Do I think you'd be overpaying at $700,000? Yes. If this house marks all the, like whatever, and it's perfect for you forever for your future, what's $10,000, $15,000 anyway in 10 years. Right? So that conversation really needs to be had before any of this other stuff we're going to get into matters.

So that price is key and the way you get to it, or the mechanism that they use in real estate to kind of define what your offer strategy is as far as price is called an escalation clause. Now an escalation clause is, it's very much like buying something on eBay. It's, "I want to pay $600,000 for your house, but I'm willing to pay $5,000 more than the next guy, but I will not under any circumstance pay more than $675,000." So that escalation clause really has two components. It has the max price, which is really where your agent is involved, and you have the escalation factor. Now where I also see a lot of people lose at this escalation factor, they go like $250 over or something like that. When you have big-ticket items like this, if you're trying to really sway the seller to take your offer, you need to offer them real money, so like $1,000, $2,500, $5,000, 7,500, and that escalation factor can be part just winning. It could also be part saying, "Hey, I know my contract is more risky for you. So as a result of taking that risk, I will pay you an extra $5,000." And we'll get into what more risk is through the latter part of this conversation. So just know that that escalation margin can actually be a key component of winning.

So now imagine the seller sitting at their dinner table the day of the contract deadlines. Their listing agent comes in, they have 10 offers and the agent pretty much just stacks it all from highest price to the lowest price. And then maybe the seller grabs the top three or four, lays them out on the table. And then they pretty much say, "Okay, so now I have these four contracts. They represent the highest price. So we know what our life is moving forward. We know what's important to us. So which one of these contracts are the safest for us to achieve our goals?"

So this is where thinking like a seller becomes really important. So the contract says I'm willing to pay X, but then you have these things called contingencies within the contract, the guts of the contract, the internals. Really the most important piece of any contract is all this other stuff. So contingencies, I call only-if clauses. So I want to buy your house, but only if, only if I like the home inspection, that I like the shape of your house, that I can look at everything that's going to break and die in five or 10 years, and I'm comfortable with it. Or only if my financing is good, only if my loan gets approved, only if the house appraises. So those are only-if clauses. Those contingencies wind up coming with one is just the action, the appraisal, the loan, the home inspection. And then the other is the duration of time that you have to clear them. So if you put your hat on now and you're a seller and you see these only if clauses and to you, those are the period of time in which this contract can fall through, means, goes away.

I lose all my plans, my moving trucks, the vacation time I took at work. All that stuff that we did to try to prepare for this move is gone. So to them, that's what a contingency is. To you as a buyer, the contingency is this nice period of time that if things don't go your way, you back out and you get your deposit back. So that is your protection. It's a risk to a seller, potentially. It is a protection for you, the buyer. So let's look at these individually, the big three home inspection, financing, appraisal, and try at least define how you can sweeten your contract with these three things. So on a home inspection, you'll find in hot markets if you go, let's say the day before or day of contracts is due, it's not uncommon to see three, four, five home inspectors inside the house, which is kind of crazy.

You don't even own the property as a buyer and you pay a home inspector $500, $600, $700, however big the house is to go in and give you an inspection on a house. And in turn, you can write a contract and say, "Hey, seller, I can't back out. I cannot ask you for more money. I am going to pay you this much, and it is not contingent on whatever I find later." Now, the reason that's so important, the reason that you could waive that home inspection contingency is because in many markets, we find real estate agents recommending and/or buyers doing this where they'll just offer way more than they should. And then they'll say something like, "Yeah, but I have an appraisal contingency that will drop the price. So yeah, I'll pay $700,000. I know the appraisal's only going to come in 675,000." On the home inspection is, I'll say, "I'll pay 700,000, but then through the home inspection, I'll renegotiate everything. I'll ask them for a new HVAC system, but in lieu of that drop the price $10,000. And then I'll ask them for more and more and more."

So the home inspection is a big risk for a seller. And that's why the ultimate strong contract could be doing that pre-inspection. Now all that said, I've certainly seen contracts where people write and said, "Hey, through my home inspection, I found X, Y, and Z. And I do still want that fixed, but I'm still willing to pay you $675,000." So just because you did the pre-inspection doesn't mean you can't still ask for stuff. It's just you can't back out if you waive it, which is super strong for the seller. You can't renegotiate the contract so the seller has confidence.

Now there are other cases where you can't do a pre-inspection. Maybe you couldn't get one in fast enough. Maybe you got to that listing later. Another way around it is shortening the duration of time. Hey, I'll get my home inspection done in one day instead of seven. I will, my home inspection is for informational purposes only. My home inspection is for the right to back out only. Remember, it's removing doubt to the seller, "Hey seller, if you take this contract, you have this period of time in which I can do this. So you have two days in which I can back out, or you have two days for me to just get it done. And it is what it is. I don't have one. So you have nothing to worry about." So that's that duration of time and/or whatever the action is.

So the financing and appraisal, although somewhat similar, they're not. So every jurisdiction around the country, these addendums are written differently. So I'm going to talk about them separately. In some areas, financing and appraisal is one, and you can get a separate appraisal. So when we say financing contingency, that just means that your loan will be approved. So some people say, "We need 21 days to get your loan approval." So if you're a buyer, you can say, "Huh, well, my lender can get it done in 10 days. So now you only have 10 days of worry with me, and you've got 21 days of worry with them. So I am stronger than them." So step one is shortening the duration of time that you need to clear that contingency.

Now, the other one with financing is to just waive it altogether. So there's some risk with that. I think if a lender did all their due diligence upfront, if you went all the way through underwriting, you signed disclosures, you just did all the work upfront and you know your loan is good, your risk as a buyer is somewhat minimal. It could be just that you lose your job. So if you lose your job between now and closing, you lose your deposit, but the reality is you didn't want to buy it anyway, maybe because you wouldn't have a job. But that ends up being your risk. So what some people do in hot markets is they just waive financing. I've already done my work. I know my loan is good. There is no risk to me. There is no risk to you. So why have it?

So waiving financing's a big, big, big, big thing you should consider because I personally think it's pretty easy to do. Again, not everyone should. There are cases where we don't, but with a little bit of pre-planning, you can knock that one out with some pretty good safety. So the appraisal's another piece. So again, you'll hear me, there's the duration and then there's the action. So should you, how much time do you need to clear the appraisal? So if someone says 14 or 15 days or 21 and you can do yours in 10 or seven, so that is something you can do to make your contract stronger. The appraisal contingency simply says that a licensed appraiser that is not single-handedly chosen by a lender, and there's a lot of regulation out there that the appraisals are ordered through these random rotations of people that in most cases selected by the lender, so you have some control there of good people, but back in the day, loan officers could call up an appraisal and be like, "Hey dude, I'm going to give you this appraisal. Make sure you bring it in a contract price."

In today's world, there's no communication. There's a technology that orders it round-robin. So a licensed appraiser goes out and agrees that the property is worth what you said on paper that you were going to pay. So you can always shorten that duration if your lender can give you confidence in the ability to do so. And there are risks associated with that in the sense that if a loan officer feels like they can get an appraisal done in seven days because they did it in April and then they try to do it the last week of June, not realizing that it's July 4th next week and 60% of the appraisers are on vacation and everyone else is starting to take time off.

So there's real practical things in life and calendars and holidays that need to go into play when you choose these shorter timeframes. But it still, it helps dramatically especially if sellers are worried like, "Oh I don't, I know like everyone had an appraisal contingency, but this guy only needs seven days. And all these other people needed two weeks. I'd rather take the risk on the guy with seven." So those are sort of how I would frame contingencies. There are people who waive the appraisal, that's sort of a separate conversation. There's a different risk analysis that you do. And typically, it involves how much money you're putting down. So if I just give you a quick example, you're buying a $600,000 house. Minimum requirements say you need at least 5% down. You're putting down 15%. In theory, that house could appraise for 10% less and you still get a loan.

The difference is your mortgage insurance might be more expensive. So there's going to be some costs associated, but there are cases where people look at that and they're like, "Oh, well, I want to pay 600,000. I'm going to waive my appraisal. I'm only financing 500,000. I really just need this place to appraise for 525,000. And my agent really thinks it's going to appraise for like 690,000 anyway or 590,000 anyway. So yeah, I'm comfortable waiving it." So that conversation happens quite frequently, and that can be a deciding factor to people winning. Some people want control or protection. Some just want the house, so different for everybody.

Now, the last thing that you can do to make your contract stronger is speed to close. So again, the seller has plans. They're moving, they're moving trucks, all that stuff. They want the equity. They've got something planned with it. And the sooner you can give them the money sometimes is a factor. So I will close in 20 days. You will have all your equity in your bank account in 20 days. Whereas other people might say 35 or 45. The reason speed to close can be key is let's say you have other parts of your loan that requires a contingency as an example, like you're putting 5% down. You have to have, you must have an appraisal contingency period. Well maybe you increase your escalation factor and close 20 days. And maybe you waive financing because your loan is already approved from a credit income asset standpoint. So really it's all about the appraisal. So you can see that a lot of these things can come into play. And earlier, when I said I want everyone to put their best foot forward and that their best foot is different than someone else's best foot is because you have to know where your best is and then where you can actually strengthen.

So if you're doing 5% down in a market where everyone else is doing 15, well maybe you do have to pay a little bit more. Maybe you have to do that pre-inspection. Maybe you've got to close in two weeks. Maybe you have to rush every appraisal. Maybe you have to use a lender that actually is known for really good, smart, local appraisers versus big call center, online, rocket company or whatever that is. So there are things that go into your contract that you can in a backwards way control. And maybe you find a seller that's willing to take more risk in certain areas, in exchange for less risk in others.

So far, we learned that in order to win, you need to think like a seller. You need to have your price be in the game and a little bit of knowledge about the contingencies that you put, both the action, do you have it or not, and the duration of time that you have to clear it, is it tight or extended and then how fast do you close? So those are the big rocks of winning, but there is one more. And I think this is where a lot of people get lost. And that is, and you've heard me reference it indirectly a couple times throughout this episode. And it's the team that you employ to help you win. And when I say your team, I'm mostly talking about your real estate agent and your lender. So all those people earlier, when I told you that I would counsel someone and they lost, lost, lost and they were changing up their team and they said, "Hey, we just need to do something different."

In many of those cases, when I start introducing them to top realtors in the area, they miraculously win their next offer. And then they start looking back and they're like, "Wow, we got so lucky. We finally got one." And what I want to say is, "No, it wasn't luck. It was really good guidance." So the real estate agent plays a massive role. And step one is to help you identify the price that you can put in your escalation clause. And I think that's twofold. One is helping you figure out where you really need to be to win. But then two, putting a little check on the price. Having bad representation goes both ways. Sometimes you don't offer enough, and sometimes you offer too much. Good representation helps people pause when they need to pause, helps them reach when they should reach, and helps to check emotion.

So you increase your chances of winning, but you also increase your chances of being well protected when you choose a really good top realtor. So the other part of your team is the lender. So the real estate agent helps you with the price, helps you find the house, helps you write the contract, structure everything, manage it. You have the lender that winds up helping you fulfill whatever those other tight deadlines could be. So can that lender help you waive financing with confidence? Does that lender have really good appraisers? Does that mortgage company have underwriters that understand and the local dynamics and how the appraisals are done from an underwriting perspective? You can have a really good appraiser, but you can also have an underwriter not agree with what the appraiser gives. So both those people have to talk. Does that lender have a really good, strong, personal brand and reputation in the local market?

And that goes both for the real estate agent and lender. Are they socially connected in the sense that there is a level of comfort that comes with your offer that that real estate agent and that specific loan officer is involved? So the listing agent can say, "Here is a contract. This one looks really strong. The price is about $5,000 less than this one, but they actually waived financing. Their appraisal's going to be done in about 10 days shorter. And I can tell you that the agent that's representing them is known for putting really good contracts together, always performing, always closing on time, using really good home inspectors. And I've actually seen that lender in action many, many, many times and they operate flawlessly."

So just imagine the difference, versus that other one that's $5,000 more, I don't know that real estate agent, I don't know that lender. They've got all these contingencies and all that stuff. It's a little bit messy. And for $5,000, I think I would take the other one.

So hopefully, you realize now that writing a winning bid is about so much more than the price. The contingencies matter. The team you have working for you matters. All those little details can sort of be in concert together to make your offer rise to the top. So in the next podcast, we're going to dig into the very specific risks from a buyer's perspective of writing these super-strong contracts. So earlier I said, just because everyone can pay the most and waive all the contingencies and all that stuff, it doesn't mean everyone should. There are risks associated with everything that you do. And before you write those crazy aggressive offers, make sure that you analyze all the risks associated with it. So definitely check out our next podcast. And until next time, this is John Downs with Mortgage Secrets.

If you have any questions between now and then, feel free, again, to email us at DownsGroup@VellumMortgage.com, or check out our website www.DownsMortgageGroup.com.

If you want to learn more about shopping for mortgage, be sure to download my companion e-book to this podcast at DownsMortgageGroup.com/shop. Or, as always, you can email me at DownsGroup@VellumMortgage.com. Thanks so much for joining us!