Do you keep losing bidding wars on apartment deals?
You rarely make it to the best-and-final offer rounds. When you do, the apartment deal is always awarded to someone else.
The most common solution investors implement after losing multiple bidding wars is to increase their offer price. Yet, oftentimes, they still end up on the losing side.
This is because the offer price is just one of the many terms in the contract that make or break a deal. Therefore, the secret to winning more bidding wars is knowing how to create a more attractive offer by focusing on the other purchase terms that are the most important to the seller.
In this blog post, I outline five ways to create a better offer in order to win more bidding wars.
1. Hard Earnest Money on Day One
The earnest money is a deposit made to a seller that represents a buyer’s good faith to buy the property. The standard earnest money is a refundable deposit equal to 1% of the purchase price.
When the earnest money is refundable, the buyer receives the full deposit back (although there may be a cancellation fee) if the contract to purchase is canceled.
Therefore, one way to create a more attractive offer is to submit a nonrefundable earnest money deposit.
Why is this more attractive to a seller? Because of the negative consequences of a buyer canceling a contract.
Once a seller accepts an offer, they no longer market the deal to other potential buyers. Assuming the first buyer closes, everything is fine and dandy. But what happens if the first buyer backs out?
Well, at the very least, the seller is annoyed because their time was wasted. But there are countless other negative outcomes:
- The economy changes, resulting in lower offers the second time around.
- The seller had their sights set on another opportunity, but won’t be able to acquire it because their capital is still locked up in this deal.
- The other buyers who submitted offers before are no longer interested in the deal.
When comparing a refundable and nonrefundable earnest money deposit, the latter shows the seller that the buyer is more serious about closing. If they don’t close and the earnest money is nonrefundable, the buyer loses and the seller gains tens or hundreds of thousands of dollars.
There are a few different approaches to offering nonrefundable earnest money.
First is the timing of when the money goes “hard.” For example, the full earnest deposit can go hard on day one, which is the most attractive to the seller. Another option is the full earnest deposit can go hard after a certain clause is triggered, like at the end of the due diligence period, or after a certain number of days, like 30 days. The third option is a hybrid of the first two: a portion of the earnest money goes hard on day one and the reminder goes hard after a certain clause is triggered or a certain number of days.
For example, we offered a 1% earnest deposit on a $40 million deal, which is equal to $400,000 in total. In the contract, we offered $250,000 to go hard on day one and the remaining $150,000 to go hard after 30 days.
In addition to the timing of the earnest money going hard, the other option is to increase the nonrefundable earnest deposit. For example, we’ve gone as high as a 2% nonrefundable earnest deposit on day one of a deal.
I do recommend adding a few contingencies to the nonrefundable earnest deposit. If one of the contingencies is triggered, the earnest money is no longer nonrefundable. Examples of contingencies we include in our contracts when the earnest money is nonrefundable are:
- Title: A major lien.
- Survey: If something comes up on the survey that disqualifies the deal from financing.
- Environmental Reports: If something comes up that wasn’t disclosed by the seller.
In other words, these are contingencies that would result in the deal not qualifying for financing because of something the seller did or did not do.
2. Shorten the Due Diligence Period
A second way to create a more attractive offer is to shorten the due diligence period in the contract.
During due diligence, you and your lender/mortgage broker are performing inspections and reviewing the operations of the property in order to confirm your underwriting assumptions and uncover any disqualifiers.
Usually, contracts have due diligence timing and contingency, meaning the buyer can cancel the contract based on the findings of the due diligence reports before the due diligence period expires.
A 30-day due diligence period is standard. Therefore, during those 30 days, the buyer can cancel the contract.
By offering to shorten the due diligence period, you are shortening the time in which you can cancel the contract. Like the nonrefundable earnest deposit, this shows the seller that you are more serious about closing on the deal. Plus, the shorter the due diligence period, the faster you close, which means the seller gets their capital back sooner.
3. Sign an Access Agreement While Negotiating the Contract
A seller is offering their apartment for sale. Buyers express their interest in purchasing by submitting a letter of intent (LOI). The seller accepts the best LOI. However, once the seller accepts an LOI, the deal isn’t officially under contract. The buying and selling parties will negotiate the final terms and then sign a purchase-sale agreement (PSA).
It is possible for a seller to accept an LOI from a buyer who doesn’t ultimately sign a PSA if negotiations fall through. Again, this is a waste of the seller’s time.
To respect the seller’s time, show that you are serious about closing, and get a head start on due diligence, sign an access agreement within three days of being awarded the deal.
By signing an access agreement, the seller gives the buyer permission to inspect the property while the final contract is being negotiated. The access agreement has some of the same provisions as the PSA but is usually more limited in scope.
Something else you can do is stipulate that once the access agreement begins, the due diligence period begins. In other words, you will have 30 days from the start of the access agreement to conduct due diligence. You can perform some of the due diligence prior to signing the contract and then do the heavier due diligence once the PSA is executed.
4. Use and Mark Up Their PSA
To reduce the back-and-forth negotiations, offer to mark up their contract.
Rather than sending a seller a PSA created by your attorney, use their contract. Then, have your attorney mark up the contract with minimal revisions.
This may seem like a minor act, but it is not uncommon for a deal to be killed because of a disagreement over legal language in a contract. When you offer to mark up their contract, making minor revisions, the seller knows that they are already comfortable with all the terms not adjusted by your lawyer. Therefore, the chances of the deal being canceled are lower.
5. Guarantee a Closing by a Certain Date
If there is talk of a market crash on the horizon, it is an election year, or there is some other event in the coming months that may result in economic fluctuations, offer a guaranteed closing by a certain date.
For example, during an election year, guarantee a closing by November 3, the end of the year, or by inauguration.
This means no extensions and may also require the shortening of certain contingencies, like the due diligence period.
By following these five tactics, you maximize the probability that you come out as the winner in a bidding war.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.