Is Owning an Airbnb a Smart Investment?

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Oct 182018
 

Is Owning an Airbnb a Smart Investment?

The old adage “location, location, location” is true even more in vacation rental ownership.

By Kayleigh Kulp, Contributor

colourful holiday seaside apartments in summer sun england

Investors should consider the taxes implications and costs to operate and maintain a short-term rental property. (Getty Images)

It’s easy to see the rise in popularity of Airbnb and other online vacation rental sites and think it’s a good idea to buy a property dedicated to short-term housing. But that strategy may not be as simple or lucrative as it seems, experts warn.

The old adage “location, location, location” is true even more in vacation rental ownership.

“Certain areas are better for year-round renters,” says Will Woodard, a certified financial planner in North Carolina’s Outer Banks. He explains the climate in his hometown: “The weekly [vacation] rental market on the Outer Banks is very competitive and requires significantly more costs. There is a relative lack of supply in the year-round rental market so there is robust demand for rentals, especially those in the nicer neighborhoods that aren’t overpopulated with weekly rental cottages. “The catch is that housing is expensive and though rents are high compared to surrounding, non-resort areas, they would only reward an owner that’s owned more than 15 to 20 years due to high purchase prices, Woodard says.

These are the sorts of market conditions investors should know when evaluating a property to hold as a rental. But there are other considerations you should take into account.

Examine the local ordinances and rules.The biggest threat to the short-term rental business is swift-changing local laws that limit their use.

And in Charleston, South Carolina, where Carolina One Plus real estate agent Susan Matthews says vacation rental margins are “super generous” because of year-round tourist attractions, vacation rental income isn’t legal unless the operator owns and lives on the property full-time. That’s in addition to city rules that require short-term rental operators not only to obtain a special license, but also pay fees and accommodations taxes. They can only host up to four adults at a time, she says.

If you are buying in a foreign country, consult a lawyer to make sure you understand the local laws, and make sure the lawyer is fluent in your language, says David Johnson, founding director of Halo Financial, a London-based firm that provides foreign exchange services.

Make sure the property works as a long-term rental or other use. Short-term rentals listed on Airbnb.com, HomeAway.com or VRBO.com are a great supplement to your rental income, but it is not a good long-term strategy, Breyer says. That’s because the business ebbs and flows, and consumer demand could change.

So when you’re analyzing a property to be made into a rental, make sure it cash flows as a year-long rental too.

“If your cash flow numbers don’t work with a good long-term strategy, then don’t buy the property,” Breyer says.

You could also look at adapting the property to other models, such as furnished student housing or long-term relocation housing, Matthews says. In Charleston, the College of Charleston, Medical University of South Carolina and other schools create high demand for student housing while business growth has created a need for long-term relocation housing. “These rentals also offer good margins,”Matthews says.

Think about the tax rules. IRS tax code provides that rentals at less than fair market value disqualify the owner from taking into account expenses, says Morris Armstrong, an enrolled agent, investment advisor and rental property owner with Armstrong Financial Strategies in Cheshire, Connecticut. That means you can’t keep it for personal use and still get the tax write-offs, and you have to be careful about where you set your rates. If you rent the home less than 15 days a year, it’s exempt from income tax.

Consider the expenses of a short-term rental. Vacation rental properties are more costly to operate and maintain due to furnishings, frequent cleaning and repairs, Matthews says.

You also have to keep the gas, water, electric, cable and internet paid up, Armstrong adds. Discuss with a local real estate agent likely occupancy rates and competitive pricing.

That’s not to mention that you’ll need to spring for the kind of amenities that command higher prices and enough bookings to cover your costs. The top desired vacation rentalamenity is a pool, with 19 percent of VacationRenter.com survey reporting so. That’s followed by pet friendliness at nearly 18 percent, and air conditioning at about 13 percent. VacationRenter.com aggregates vacation rental listings from multiple sites.

Not having what the customers want can turn your cash cow into a net loss.

“If you are looking for income and profit from a rental, then you have to step up your game,” Armstrong says. “I have a client with a dated cottage that in Cape Cod. They refuse to update it with central air conditioning or a more modern look to the kitchen. In the past, they could count on it being rented out most of the summer season. Now, they are lucky if it is rented out two weeks.”

What’s the Difference Between Your Home’s Market and Assessed Value?

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Oct 112018
 

What’s the Difference Between Your Home’s Market and Assessed Value?

The monetary value of your home can vary widely based on the purpose of the appraisal.

By Devon Thorsby, Staff Writer

What’s the Difference Between Your Home’s Market and Assessed Value?
Aerial view of house roofs in suburban neighborhood

Recent sales of nearby homes can be a significant factor when determining the value of your house. (Getty Images)

Understanding your home’s value is an important part of knowing your net worth, what you’ll likely receive if you sell the property and how the local real estate market is faring. Home value is also an integral part of determining how much property tax you’re required to pay the local and state government annually.

But depending on where you look, the value may appear as wildly different numbers. Different valuations can mean different things and are often used for different reasons. The two types you’ll most likely encounter are market value and assessed value.

Market value is the estimated amount active buyers would currently be willing to pay for your home. Your home’s market value is determined by an appraiser, who is typically hired when your lender is deciding how much money to provide in a loan or you are setting the list price when putting your home on the market.

Assessed value, on the other hand, takes the market value and puts it in the context of your property taxes. In many counties throughout the U.S., assessed value is a portion of the market value, calculated as a percentage of the market value of the property. As a result, the assessed value of a property is typically lower than appraised market value.

Market Value

Danielle Hale, chief economist for real estate information company realtor.com, explains that market value is based on the expectation that the property would sell during the period the value is calculated. “When people think about home values, they often mean, ‘This is the price that I could sell it for if I were to sell it today,’ or ‘This is the way a bank would value it if I were to go talk to the bank about getting a home equity loan or maybe refinancing my mortgage,’” she says.

The grayest area of a market value is determining whether the value you assign to your home is based on what current market conditions say a person would pay for your house or what you think a person should pay for it.

For this reason, basing market value on recent sales of similar properties is key to ensuring the number is as accurate as possible. Professional appraisers are an instrumental part of being able to examine a property, nearby recent sales and the factors that may add to or detract from interest in a property, and then assigning a value to the house based on the information.

Appraisers are often hired by a lender, and it’s best if they are are local to the area so they understand nuances that may not be obvious to an out-of-towner, though sometimes an algorithm will be used to determine values on a larger scale or more quickly. A lender can have a property valuated to issue a mortgage for a home purchase, for refinancing or to issue a home equity loan. Individual homeowners can also order their own appraisal to get a better understanding of their home’s current value if they’re considering selling but don’t know what the asking price should be, or simply to get a better grasp on their net worth. An appraisal typically costs between $300 and $400, according to Angie’s List, and is paid by the homeowner for personal use and the buyer for a lender-required appraisal.

An appraisal looks at the sale information of nearby homes with a similar square footage, age, number of bedrooms and other features of your property that have sold recently – most often in the last six months. Appraisers will also factor in major differences that may make your home’s valuation different.

Because the market determines the value, it’s easier to pinpoint a more accurate value for homes that are similar to many in the neighborhood than for houses that are unique. A three-bedroom house in a neighborhood of matching three-bedroom houses is relatively easy to appraise, but a Victorian home on a busy street surrounded by condos and apartment buildings will be more difficult to valuate.

Home value estimates can also be found for free online with tools like Zillow’s Zestimate, realtor.com’s My Home tool or the Federal Housing Finance Agency’s House Price Calculator, but these are unlikely to be as accurate as an appraiser. Hale says online tools serve as a great jumping-off point, but they fail to take into account current and local events that may play a more immediate factor into buyer interest and the ultimate value. “Market conditions can affect that valuation,” Hale says.

Assessed Value

Market value even becomes part of the calculation of your home’s assessed value. But because assessed value is used for the sake of calculating how much you owe in property taxes, the assessed value is also based on laws of your state, county and even city, explains Margie Cusack, research manager for the International Association of Assessing Officers.

“The assessed value will be defined by the legal framework of that jurisdiction,” she says. “A lot of states have value limitations in law, so they might have a market value for the property. But then they have a per law allowable assessed value that they work off of, so it becomes very localized.”

Because of the specificity of assessed value to your exact location, Cusack recommends all homeowners – as well as homebuyers who don’t yet pay property taxes – become well-versed in the statutes that apply to the area, how the assessment is calculated and where your property taxes go.

“You really need to read your assessment notice,” she says. “Usually that will define what assessed value means for that property.”

The exact steps to assessing a property also vary by jurisdiction. Some assessor’s offices will use a predictive algorithm to help determine assessed values for more properties quickly, while others will address assessments on an individual, in-person basis, Cusack says.

Many assessors’ offices keep online databases open to the public that allow you to access information on the history of your property – including the deed from previous sales – and information that factors into the assessment of your property.

What if You Disagree With Your Home’s Value?

At times, homeowners will disagree with the appraised or assessed value assigned to their property. In both scenarios, there are options for contesting the valuation.

For market value, a homeowner or buyer may be able to request a property be appraised a second time with new information the appraiser may not have been aware of before – a finished basement, for instance, can change the value of a home if it can be counted in the square footage. An appraiser may be willing to take a second look at the property without extra charge if something was missed, but you may also need to pay for another complete appraisal to have your house fully reevaluated.

When it’s a lender issuing the appraisal and considering the value, however, there’s not much chance you’ll be able to convince the lender to change his or her mind on issuing a loan or refinance.

For assessed value, many assessor’s offices have contact information listed and occasionally host public forums to discuss individual issues with property value information. Like the calculation of assessed value itself, the process for petitioning a reassessment varies widely between states and counties, so it’s best to explore your local assessor’s office website for information on discussing the matter.

How to Maximize the Increases in Your Homes Value

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Oct 042018
 

How to Maximize Increases in Your Home Value

Take advantage of your growing equity to borrow and improve your house.

By Mike Kinane, Contributor

How to Maximize Increases in Your Home Value
A perfect neighbourhood. Houses in suburb at Spring in the north America.

Help ensure your home’s growth in value by making improvements that keep it on par with the best houses in the neighborhood. (Getty Images)

U.S. homeowners with mortgages have seen their home equity increase nearly 12 percent year over year, according to CoreLogic’s recent home equity analysis. That represents a gain of almost $871 billion since the third quarter of 2016. Most homeowners recognize that having more equity in their homes is a good thing, but do they know how to leverage it – and capitalize on it?

Savvy homeowners are leveraging this jump in home equity through home equity lines of credit, or HELOCs. A HELOC is a line of credit extended to a homeowner that uses the borrower’s home as collateral. Borrowers are pre-approved for a certain spending limit based on the equity they have accrued in their home and can draw against this limit for various uses.

This kind of loan option is particularly popular for those who are financing home repairs after the long, harsh winter and for those who are looking to renovate their homes and outdoor spaces for the warmer summer months. In fact, TD Bank’s recent Spring Home Lending Survey found that property values have increased over the last 12 to 18 months for 69 percent of respondents, and close to half (42 percent) said that they are somewhat, very or extremely likely to apply for a HELOC within the next 18 months.

Compared to borrowing funds from short-term loans or using a credit card, one of the reasons HELOCs are attractive is because they’re one of the lowest-cost borrowing options for a homeowner. They also give borrowers the freedom to choose between a fixed or variable interest rate option.

A fixed-rate option can save customers money by not only dropping their interest rate, but also allowing them to pay off the debt in a time frame they choose. HELOCs can also be helpful in consolidating debt at a lower interest rate. Borrowers have immediate access to low-interest funds, which can be useful for those who are looking to pay off debt.

Putting Money Back Into Your Home

Following a tough winter, many homeowners are dreaming of updating their patio furniture, putting in a pool or adding a garden, and are leveraging the boom in home equity to do so. TD’s survey also found that the most popular uses for HELOCs were home renovations and repairs (53 percent), major home purchases like appliances (28 percent) and debt consolidation (26 percent). An added benefit for those financing a home renovation with a HELOC is that some of the costs may be tax deductible.

For those who are using a HELOC to finance repairs and renovations, the most common updates needed are window replacements (35 percent), and heat or air conditioning system replacements (33 percent), and structural repairs (32 percent). The top three cosmetic renovations are bathroom updates (37 percent), kitchen updates (36 percent) and exterior painting (26 percent).

Maximizing Value

HELOCs are also a sensible option for those looking to increase their home’s value to sell during the summer homebuying season. More than one-third of respondents looking to renovate said they’re doing so to increase the value of their home. Potential sellers should get smart on what can derail a home inspection, however, like a leaking water heater or a loose shingle on the roof, and consider leveraging a HELOC, which can then be paid off at the closing table during a sale.

Homeowners have seen equity increase, and home equity borrowing remains one of the lowest-cost borrowing options for homeowners looking to renovate their home, consolidate debt or accomplish what they most need. With the 2018 homebuying season well underway, now is the time homeowners should speak with their financial institution to gain an understanding of how to obtain and leverage a HELOC. Lenders can help homeowners understand the terms, features and multiple benefits of obtaining a HELOC, and find an option that best fits each homeowner’s unique financial situation and future goals.

The Guide to Understanding Your Homes Value

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Sep 272018
 

The Guide to Understanding Your Home Value

The science behind calculating the value of your home and what it means for your home’s sale price.

By Devon Thorsby, Staff Writer

The Guide to Understanding Your Home Value
Luxurious new construction home in Bellevue, WA. Modern style home boasts two car garage framed by blue siding and natural stone wall trim. Northwest, USA

Determining how much your home is worth is a complex process that depends on a number of factors. (Getty Images)

Getting ready to sell your house, looking to refinance or buying a new homeowners insurance policy – these are just three of many reasons you’ll find yourself trying to figure out how much your home is worth.

You know how much you paid for the property, and you likely consider the work you’ve done on the house and the memories you’ve made there additions to the amount you’d consider selling for. But while your home may be your castle, your personal feelings toward the property and even how much you paid for it a few years ago play no part in the value of your home today.

In short, a house’s value is based on the amount the property would likely sell for if it went on the market.

Pinpointing a specific and lasting value for a property is an impossible task because the value is based on what a buyer would be willing to pay. Factors come into play beyond the neighborhood, number of bedrooms and whether the kitchen is updated. Other things that could influence value include the time of year you list the home and how many similar houses are on the market.

As a result, a reported value for your home or property is considered an estimate of what a buyer would be willing to pay at that point in time, and that figure changes as months go by, more homes sell and the property ages.

For a better understanding of what your home’s value means, how it may shift over time and what the impact is when the value of a neighborhood, city or even the whole country changes significantly, here’s our breakdown on home values and how you can determine how much your house is worth.

What Is the Value of My Home?

If your property value is based on what a buyer is willing to pay for it, all you have to do is find someone willing to pay as much as you think it’s worth, right?

Determining a home’s value is a bit more complicated, and often it isn’t just up to an individual homebuyer. You also have to keep in mind that buyers place no value on the good times you’ve spent there and might not consider your updated bathroom or in-ground swimming pool to be worth the same amount you paid for the upgrades a couple years ago.

Even so, just because you found a buyer willing to pay $350,000 for your home, it doesn’t mean the value of your house is $350,000. Ultimately, the financial backing in a deal decides the property’s value, and it’s most often a bank or other nonbank mortgage lender making the call.

Property valuation primarily looks at recent sales of comparable properties in the area, and key identifying factors are the same square footage, number of bedrooms and lot size, among other details. The professionals who determine property values for a living compare all the details that make your house similar and different from those recent sales, and then calculate the value from there.

But when your property is unique – maybe it’s a triangle-shaped lot or a four-bedroom home in a neighborhood full of condos – determining the value can be more difficult.

The individual, group or tool appraising the property may also influence the outcome of the appraisal. Different professionals appraise properties differently for a variety of reasons. Here’s a look at common appraisal scenarios.

Lender appraiser. In the case of a property sale, the appraisal most often happens once the property has gone under contract. The lender your buyer has chosen will hire an appraiser to complete a report on the property, getting all the details on the house and its history, as well as the details of similar real estate deals that have closed in the last six months or so.

If the appraiser comes back with a valuation below that $350,000 sale price you’ve already agreed upon, the lender will likely state that he or she is willing to lend an amount equal to the property’s value as determined by the appraisal, but not more. If the appraisal comes in at $340,000, the buyer has the option to come up with the $10,000 difference or try to negotiate the price down.

Many sellers are open to negotiation at this point, knowing that a low appraisal likely means the house won’t sell for a higher price once it’s back on the market.

Appraiser you’ve hired. If you haven’t yet reached the point of putting your house on the market and are struggling to determine what your asking price should be, hiring an appraiser ahead of time can help you get a realistic estimate.

Especially if you’re struggling to agree with your real estate agent on what the most likely sale price will be, bringing in a third party could provide additional context. But in this scenario, be prepared for the agent to be right.

“As much as it’s your home and you’ve made a lot of memories there, once you’ve decided to sell your home, it’s now a business deal, and you should look at it that way,” says Gary Malin, president of Citi Habitats, a real estate brokerage in New York City.

Online home value estimator. If you’re not looking for the additional cost of a formal appraisal, which runs from $300 to $400, according to Angie’s List, many real estate information sites offer more informal home appraisal tools that give you a ballpark value for your home. You may have previously taken a look at Zillow’s Zestimate or realtor.com’s My Home tool, or explored the Federal Housing Finance Agency’s House Price Calculator.

But it’s important to keep in mind that an online home value estimator is simply pulling from available information online and may not have all the facts that a professional appraiser would utilize in a valuation report. The online algorithms also don’t necessarily have the ability to account for more temperamental factors, like the immediate impact a storm may have if it caused a lot of property damage in the area or trends taking place in your city.

“Market conditions can change pretty quickly, so for that you might find a slightly different price if you’re actually going to sell,” says Danielle Hale, chief economist for realtor.com.

Tax assessor. Your home’s value is also determined for the purpose of annual property taxes. In addition to examining the sale prices of similar houses sold recently, the tax assessor also looks at what the cost would be to build a similar house, whether you’ve done any recent improvements, if you earn income from the property in any way and the cost of upkeep.

A property’s assessed value for tax purposes is often less than the appraised value – and that’s a good thing. The property taxes you pay annually are based on the assessed value, so the higher it is, the more you owe the government.

How Do Market Values Apply to My Home?

There are obviously multiple ways to find out the current value of your own house, but individual appraisals and assessments aren’t not the only time you’ll hear about home values. In annual, quarterly or even monthly reports, home values are often discussed along with the rising cost of homeownership on a local, state and even national level.

Depending on the source of information, reported values may be based on the online estimator tools, listing prices for houses currently on the market or property value information from local assessors’ offices. These numbers are useful to discuss overarching trends on a large scale, but they don’t always reflect the actual sale prices of real estate deals that closed in those time periods.

The details you get about rising values can be useful as you prepare to put your home on the market, buy your first house or learn more about economic forecasts, but don’t take national trends as indicators of what’s happening in your area.

Hale stresses that housing markets differ from state to state, city to city and even between neighborhoods: “The closer you get geographically to matching up the area where your home is, the more likely the trend is going to reflect what happened to your home in that time.”

The importance behind trends in home values mean different things depending on the stage of homeownership you’re in or moving toward. Here’s what you should know:

For buyers. As you’re preparing to start the house-hunting process, keeping up on real estate market trends can be an excellent way to know what you’ll be facing. If values are climbing every month and year-over-year comparisons show high growth – for example, 5 percent or more – those are signs that a lot of buyers are looking for houses at the same time as you.

“That gives them an indication of how competitive a market is,” Hale says.

For investors. In many cases, regional trends have changed where buyers are looking for homes. Daren Blomquist, senior vice president of communications at ATTOM data solutions, says many buyers purchasing a home to rent out as an investment for the first time are choosing to look outside of the pricey, coastal cities where they live in favor of smaller, more affordable markets such as Indianapolis or Cleveland.

But before you buy outside the area you live in hopes of making money, Blomquist warns that you should learn more about the market (and whether rental ownership there is fruitful) to ensure the investment is solid. “Part of what’s driving [the trend] is low prices, and that’s a red flag,” he says.

For homeowners and sellers. For homeowners looking to prepare their home for sale or even just know a bit more about their net worth, keep in mind that wider home value trends and reports have little impact on you.

“It’s probably going to be less directly relevant,” Hale says. “If you were to think about how your own individual property changed, a national trend is not a very good comparison.”

Instead, keep a close eye on hyperlocal reports; those that provide monthly or quarterly trends on your specific ZIP code can be a better reflection of what’s happening to your property, Hale says.

The Guide to Making and Accepting an Offer on a Home

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Sep 202018
 

The Guide to Making and Accepting an Offer on a Home

Everything you need to know to help you get under contract and moving toward a successful home purchase or sale.

By Devon Thorsby, Staff Writer

The Guide to Making and Accepting an Offer on a Home

Couple reading paperwork in new house.

In most markets, homebuyers must act quickly to get the house they want. (Getty Images)

You’ve spent the last few months house hunting, preparing your house for sale or doing both. All that stands between you and a pending deal is the right offer.

On both sides of a real estate transaction, the purchase offer is the first formal communication that leads to the final deal. The offer combines financial details with the nuances of trying to avoid offending the other party, reaching an agreement and getting started on the steps toward closing.

In the large-scale seller’s market that has stood strong for the last few years, homebuyers are at a disadvantage as they try to compete with other house hunters for the limited number of houses on the market. Formulating an offer isn’t just about the asking price, but also what other potential buyers could offer at the same time.

On the receiving end of the offer, sellers have to be able to weigh the buyer’s offer carefully, negotiate the terms and be as transparent as possible to avoid the deal falling through later in the process. As all real estate markets work through a cycle, sellers should also be ready for changes that give the buyer an advantage over sellers, whether it’s a temporary or prolonged buyer’s market.

To help you craft an offer on a home and understand what the other side of the deal has to do, we’ve broken down the steps to both making and accepting an offer on a house.

Buyers: Putting an Offer on a House

Making an offer on a house isn’t just about telling the seller how much you’re willing to pay. It’s also important to provide proof that you’re able to pay the amount, establish the expected closing date and state how additional costs will be covered and what you expect of the seller leading up to closing. By submitting an offer, you also need to be prepared to provide earnest money, which shows the seller you’re serious about buying the house and can range from $500 to 10 percent of the agreed-upon price.

But don’t get ahead of yourself. The first step to making an offer on a house is finding the house you want to purchase within your budget. The next steps are fairly easy, especially when you have your real estate agent walking you through the process. Here’s what you need to know.

When to submit an offer. Especially if you’re house hunting in a market where there are few available properties compared to the number of active buyers, submitting an offer as soon as you’re sure you want to buy it is a must. Even if you move quickly, there’s a chance you’ll find yourself competing with other offers.

“The first call I make when someone’s interested in a home is to reach the other agent – the listing agent – and find out if there’s any other offers that they have in hand, and if so how many,” says Jeff Plotkin, a Texas-licensed Realtor, attorney and certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas.

Even when competing offers are less likely, you must move quickly to avoid missing out on the house you want.

Other scenarios, however, can give you the timing advantage. If you currently rent a property and have the right of first refusal included in your lease, your landlord is required to give you the chance to make an offer on the property before it’s available to other buyers. The landlord may not be required to take you up on your deal, but the early opportunity isn’t one you want to miss.

How much to offer. While the listing price does provide some insight into the seller’s expectations, the value of the property and the work that needs to be done play a larger role.

When you’re ready to make an offer, your real estate agent will likely sit you down and show you the sale history of properties nearby to help determine the home’s approximate value as it compares to the rest of the market. “I like to look at the last six months of houses that have sold in the same neighborhood, or very close proximity, of a similar size,” Plotkin says.

In addition to recent sales and current buyer activity, you need to factor in your personal needs. Consider the details this house checks off for you, and consider the amount of work you’d have to do. Take into account details such as:

  • Proximity to work, schools, stores, etc.
  • Neighborhood amenities
  • Age of major systems and appliances, including the HVAC, roof, plumbing and electric
  • Deferred maintenance
  • Renovations that need to be done

While your agent will help you consider all the factors that lead to the offer price, the price itself is something you have to determine on your own. Pamela D’Arc, a licensed associate real estate broker for Stribling and Associates in New York City, says she’s learned to advise the buyer appropriately but “never give a number” to avoid making a decision the client isn’t happy with in the end.

Making a contingent offer. Once you’ve moved past the price portion of the offer, consider if other needs and conditions will be included. If you already own a home and need to sell it in order to have the money to pay for this new one, an offer contingent on the sale of your house is necessary.

This offer contingency can be a sore point for many sellers, especially in a seller’s market where other buyers may not have the same constraints.

Barbara Pepoon, a broker with Coldwell Banker Residential Brokerage in Northbrook, Illinois, recommends putting your home on the market before you start the search for your next house. “Once you have the house under contract, you can make offers with home-close contingency,” she says. The contingency will show you’ve already found a buyer and simply need to have the closing on your purchase take place after the sale is completed, which can even take place on the same day.

Competing against other buyers. Low inventory in many housing markets in the U.S. makes the competition among buyers a constant part of the conversation for many homebuyers, particularly for those who are house hunting for the first time. Many buyers are afraid of getting caught up in a bidding war and paying more than they can afford or losing out on the house of their dreams.

Standing out against competing bids may take a bit more work, but a personal touch and some strategic moves can give you an edge. Here are a few things D’Arc recommends:

Write a personal letter. It’s not recommended for every situation, but D’Arc says a personal letter to the seller can make an offer stand out, especially when the seller appears to have some sentimental attachment to the property. Even if your offer price isn’t the strongest, tugging on the seller’s heartstrings can win you the deal, she says.
Include quirky numbers. Rather than rounding to the nearest hundred or thousand, let some of the numbers stay specific in your offer. Offering $345,255 instead of $345,000 registers as a higher number when it’s just a difference of a couple hundred dollars. If you note you’ll cover $1,905 of the seller’s legal fees instead of $1,850, the slight difference in dollar amounts can stick in the seller’s memory. “Quirky numbers can sometimes be the difference,” she says.
Be flexible. A good real estate agent will try to get as much information about the seller as possible from the listing agent so you can structure your offer around those needs. If the seller’s moving out of state, a quick closing date could be more enticing. With the closing date in particular, it serves you well to express that you’re willing to meet the seller’s needs.

Keep in mind that even if you lose out to competing buyers once or even a few times, eventually your bid will be the right one. Don’t get discouraged, and don’t shy away from making an offer on a house because you think you’ll lose out to another buyer. “Most people will still take their best shot – it doesn’t cost a thing to make an offer,” Plotkin says.

 

Sellers: Accepting an Offer on a House

For a home seller, the first part of receiving offers is waiting for interesting buyers to come around. As long as your property is priced within the range of similar houses in the area and has been prepared for the market, you should have done your duty to attract serious house hunters.

Whether you live in an area where multiple offers the first day on market are common or where you’re likely to have to wait a few weeks for an offer, it’s important to be prepared and work with your listing agent as much as possible. You want to be sure your asking price, curb appeal and the interior of the home attract serious buyers and make them remember the property while they’re touring houses. Here’s how you can make your property desirable and work toward a successful transaction once you’ve found a buyer.

Establishing an offer deadline. For the sake of organization and to help drive interest to your property, your listing agent may opt to establish an initial deadline for offers when it goes on the market. With about a week for the house to show and offers to come in, you’ll hopefully have multiple offers to review in one sitting and compare to each other. An offer deadline should be just a few days in the future, so buyers don’t have enough time to find another property.

This works best when your agent expects there to be more than one interested buyer right off the bat, of course. If you’re living in a buyer’s market, an offer deadline may not drive the competitive spirit quite like it would in a different setting. If you receive good offers, don’t try to incite a bidding war because there’s a chance it could backfire and your more serious buyers may walk away from the deal.

Knowing your limit. When you’re determining asking price for your home, you should have the same conversation with your real estate agent that a buyer has with hers: Based on recent sales of similar properties, how much is this home worth?

Weigh that estimated home value with the amount you need to receive to either pay off your mortgage, be able to buy another property or simply feel like it was a worthy deal. Expect to receive offers below your asking price, and know how low of a price you’re willing to accept to move on with a deal. Factor in other details based on your needs, such as the closing date or requested maintenance, and set your limits ahead of time to avoid making a decision based on emotions rather than logic.

Finding the best offer. Once you’ve received offers – and hopefully more than one – you have a lot more to consider than you might think. The offer price is certainly a major factor, but you also have to look at other costs and expenses, the financial security of the buyer and whether the timeline works for you.

Calculate the bottom line for the deal. If buyer offers $500,000 for your house but asks you to cover all closing costs, you’re likely taking home somewhere between $5,000 and $25,000 less than the total $500,000, and that’s before you’ve taken out real estate agent commission, which can be another $30,000.

If sentimentality matters to you, consider a personal letter a buyer writes, but also be sure you’re not basing your decision on any sort of bias against a protected class. The Fair Housing Act prohibits discrimination based on race, color, religion, sex, disability, familial status or nation of origin. If it’s believed you turned down a would-be buyer for any of those reasons, you could be facing a lawsuit.

Negotiating. You may have found the offer for you, but that doesn’t necessarily mean you have to accept every term in the original offer. Here’s where negotiations come into play – whether it’s a counteroffer of the price to bring it slightly closer to asking, a requested adjustment for the closing date or if you’re willing to make some, but not all, changes to the home requested by the buyer.

As with the buyer’s original offer, it’s important for you as the seller to act cordially and keep the buyer’s preferences in mind. Even in a seller’s market where you have the upper hand, offending the buyer could put you back on square one with your property still on the market.

In Manhattan, for example, D’Arc notes the market has cooled compared to a few years ago, and buyers are able to have more power in negotiations. At the very least, they’re less likely to bend over backward for the seller. “Properties are on the market for longer now, and there’s generally more negotiability, and so buyers expect that,” she says.

Accepting the offer. Once both the seller and buyer have reached a price and terms they can agree on, it’s time to move forward with the deal. Your next step is to go under contract and start the due diligence process.

Both parties will need to sign documents noting their intent to move forward with the transaction, along with the established closing date and any other terms or conditions necessary to complete the deal.

Real estate law varies from state to state, so look to your real estate agent for guidance on any other nuances specific to your area to move toward the sale. In New York, for example, the due diligence period takes place prior to both parties signing the contract. In most other states, the due diligence period takes place during the first 10 days under contract.

Backing Out of a Deal

Making it past the offer and negotiation is a major step, but it doesn’t guarantee the deal will go through. In the roughly 30 days or so it takes for most transactions to close following an offer, a lot of information can come up that requires additional negotiation and may lead one party to back out altogether.

For buyers, the biggest problem you may encounter is financial. Be sure to have your finances in order before you place an offer on a house and be forthcoming with your lender about your income, any debt you may have and other possible blips that may appear in your credit history. Being preapproved for your mortgage before you start touring homes can help speed up the approval process because the lender will have already confirmed your credit history and financial background. Even with preapproval, however, avoid making any major purchases until after you close on your house.

The appraisal can also be a potential issue. If the property appraises lower than the agreed-upon asking price, you may have to come up with additional cash or try renegotiating the price with the seller.

For sellers, defects on the property discovered during the inspection can cause a lot of problems. To avoid this, Pepoon recommends having a prelisting inspection to allow you to make repairs, or at least note the needed repairs before a buyer sees the property.

Pepoon says it’s valuable to go as far as having quotes from contractors for the necessary work ready when the buyer’s inspector views the property. When the report notes issues, you’ll already have the cost estimates to negotiate if you’ll make the repairs or credit cost to the buyer in the deal. “Maybe don’t have [the quotes] out on the counter, but at least have them in your back pocket,” Pepoon says.

At the end of the day, the under contract or escrow period serves as a period of time for the buyer or seller to discover everything necessary for the deal to take place and to back out if necessary. That earnest money submitted by the buyer typically goes back to the buyer if the deal falls through with cause on either side, like a low appraisal or major cracks in the foundation, though rules may vary based on state laws.

If you’re experiencing buyer’s or seller’s remorse, now is the time to express your misgivings and determine if the deal isn’t right. Once the deed changes hands at closing, there’s little to no room to go back.