If you’re actively looking to buy a home in the Madison WI real estate market, you’re probably aware that it’s been a seller’s market for over a decade now. We know it’s easy to get discouraged because we know about buyers who have bid on our listings and lost out...for the third, fourth, or even the sixth time (true story). We feel fortunate that the clients we represent have never been put through a situation like that (also true). That said, it’s important to have a conversation with your Realtor about what it takes to compete in the event you pursue a home and a bidding war ensues. While Madison area inventory is not expected to miraculously improve anytime soon, there are a number of constructive ways to structure your offer that will dramatically increase your chances of prevailing in the event multiple offers are received on your forever/dream home. 
Below is a list of some of the key parameters included in a typical Wisconsin offer to purchase that should be discussed with your Lake & City Homes Realtor ahead of drafting an offer. Once you understand the pros and cons of each, you can rest assured you’ve structured your offer in the strongest possible way vis a vis your personal and financial risk profile. 


Earnest Money as Leverage

Earnest money is an indicator of how serious you are about buying a property. The more skin you have in the game the more committed you appear to the seller to be about buying that particular home in question. While the earnest money in a typical offer to purchase can be as little as 1-2% of the purchase price, generally speaking the more earnest money, the better. I once had a buyer insist on writing an earnest money check for the full purchase price of the home! Obviously that’s not necessary or even recommended. Note that earnest money comes off the top of what you owe at the closing so think of it as a mini down payment on the home you want to buy. 


To Inspect or Not to Inspect

How old is the home or condo? When is the last time the home was inspected? Was the home pre-inspected? If so, is the inspection report available to look at? When might you consider foregoing doing a home inspection? Are there any other ways of making a home inspection contingency more palatable to a seller when there are multiple offers such as foregoing repairs under a certain dollar threshold? The estimated cost of a home inspection using a Wisconsin registered home inspector is about $275 to $600 depending on the type of home inspection you’re obtaining, the square footage of the home & the amount of travel time involved in getting to the home. 


Testing Contingency Considerations

Many homes in the Dane County area have radon gas or are already equipped with radon mitigation systems due to the random but rather prevalent presence of radon gas in the midwest. Learn about radon gas and other hazardous substances such as asbestos, mold, abandoned fuel tanks and more, then make an informed decision as to whether or not you should ask your home inspector to test for these things. Radon gas is a substance that’s commonly found in our area and many buyers buying a home with a finished basement do test for its presence. Under what circumstances should you conduct a radon test? Since every home is unique, this is a decision your Realtor can best assist you with. Note that professional radon testing will typically run about $150 in Dane County. You can also conduct your own radon test after closing using a $10 kit that you can order from the EPA.


The Lowdown on Downpayments

The Wisconsin offer to purchase contract requires a buyer who plans to obtain financing to state upfront in their offer how large a down payment they plan to make on the home. In general, the larger the downpayment the stronger your offer will look. Note that you could ultimately decide to put down less money after obtaining an accepted offer but you should of course never state that you plan to put down more money than you’re actually able to as that could land you in hot water. In general, the more skin a buyer appears to have in the game by virtue of the downpayment in their financing contingency, the more attractive that buyer will be to lending institutions and therefore to the seller deciding whose offer to accept. 


What About Interest Rates?

We recommend slightly padding the interest rate in your financing contingency to the tune of approximately 1/2 to 1 percentage point. This does not mean the rate you will get on your mortgage will be that rate. It just means that you won’t get countered (or worse, your offer won’t be rejected out of hand) because the interest rate is too close to prevailing rates. Even if you can’t pay cash it’s important to understand that from a seller’s perspective, accepting an offer with a financing contingency that includes an interest rate that matches or is very close to prevailing rates could be a risk in a rising interest rate environment. An increase in rates, no matter how small, would provide an automatic exit for a skiddish buyer or a buyer who changed their mind about a property after obtaining an accepted offer or conducting an inspection in which the outcome was disappointing. That is a seller’s worst nightmare and a scenario many are automatically on the lookout for. 


Cash is (Still) King

Often times the winning offer in a competitive offer situation is the one without a financing contingency, i.e. a cash offer. That said, the other terms in an offer to purchase also matter a great deal. Consider writing a cash offer only if you can prove you have sufficient funds on hand to pay cash. For example, you can get your banker to write a letter or use screenshots of checking/savings or investment accounts to prove you could pay cash if you wanted to. Remember that in the offer to purchase you’ll want to reserve the right to obtain financing in the form of a mortgage if you don’t intend to pay cash. It’s also important to note that if you write this type of offer, your offer will be more attractive to the seller because it will not be contingent on obtaining financing. 


What Appraisal Contingency?

Consider waiving the buyer appraisal if you have spare funds to bring to the closing table in the unlikely event that the property does not appraise out. This is usually only a problem in certain neighborhoods or with certain credit unions who are extremely conservative with their investments. Also bear in mind that the bank will do an appraisal of their own so a separate buyer appraisal will run you an extra $600 or so. 

Using Price Escalation Clauses

Should you include an escalation clause if you‘re told there are multiple offers on the property? This takes the form of, “I’ll offer $290K (a full price offer) but agree to escalate my offer $2,500 over the highest offer received within a certain time period, up to a maximum dollar figure of $308K.” In this case there is additional language that requires the seller to prove they received a higher offer than your’s. There are pros and cons to this strategy and it is anything but foolproof, however it can be a very effective strategy for the right property and buyer, depending on the circumstances involved. 


Closing Date Considerations

Ask yourself if you’re willing to give the seller the closing date they desire, assuming they have a preference. This may mean closing sooner than you actually need to or closing later than you ideally want to. Also, note that if you can’t be physically present for the closing the title company can always arrange for you to do an “away closing” at a corresponding bank or title company in your local area. It’s even possible to do an away closing while overseas although it does take a bit of extra planning. 
There are many other contingencies that can and do appear in offers to purchase Wisconsin real estate. These include everything from sale contingencies for those with a home they need to sell before they can buy, to attorney approval contingencies, to certified surveys and more. It depends on the property type, who the buyer is, the type of financing (if any) involved, and the motivations of both buyer and seller. In other words, every real estate transaction is unique. We recommend you schedule time to talk with us about your circumstances and goals so that you have a clear picture of current market conditions for the area you’re looking in and you know what to expect. 
Whether an experienced buyer or just dipping your toe into the market for the first time, knowing a bit about the current market landscape before diving in head first will increase your chances of landing your dream home and make for a smoother & more enjoyable real estate experience. Contact the broker/owner, Jolenta Averill, at (608) 628-9701 today or fill out the form below to get started. We look forward to helping you land your forever home in 2020!
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