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10 Things You Must Know Before Entering a Real Estate Bidding War in Pekin, IL

Written by Posted On Monday, 16 April 2018 19:25

10 Things You Must Know Before Entering a Real Estate Bidding War in Pekin, IL

LOCAL RECORDS OFFICE - As the hottest real estate markets are lower in supply and pushing prices up higher during bidding wars, (as they are becoming more competitive) getting pre-approved with a loan and having a real estate agent with a backbone of the market will give you a higher chance to land you the key to the home of your dreams reassures the Local Records Office.

A bidding war is when two or more buyers are interested and they make increasingly higher offers of what they are willing to pay to obtain the item. It usually occurs at a fast pace and pushes buyers to make less thought-out decisions than they normally would. Bidding wars are becoming more common in seller's markets. "A property that is listed at $250,000 may sell for $300,000 in a bidding war" explains Investopedia's staff.

The shortage of homes has created fierce competition in the real estate market, even with a slump of the prices in the last couple months; the prices will only continue to be on the rise, according to the National Association of Realtors (NAR).

"The lack of supply over the past year has been eye-opening and is why, even with strong job-creating pushing wages higher, home price gains –at 5.8 percent nationally in 2017 –doubled the pace of income growth and were even swifter in several markets," said Lawrence Yun, NAR chief economist. Though, despite a low supply and a competitive market you can still conquer a bidding war as a winner.

Working with a lender to get pre-approved for a loan

Getting pre-qualified and having a letter from your bank stating your lender has underwritten your application and is pending appraisal is one of the first steps to boost your chances of beating other buyers in a bidding war explains Daniel Blatman, a broker with Douglas Elliman Realty in New York City.

The lenders will fully commit to providing the money once you see the house you want to buy and they are convinced it provides adequate collateral for the loan.

This is also a good time to identify what you can afford and finding the best price range for your budget.

Determining how much you can afford to borrow as many homebuyers follow a 28/36 rule, your monthly housing costs including mortgage payments, insurance, property taxes, HOA fees (housing association fees) or condo fees should not exceed 28% of your gross income.

Enter your monthly income, bills and projected housing costs into a mortgage calculator to determine exactly how much you can afford to borrow and the monthly mortgage payments that you can handle by living reasonably within your means.

And spend a lot of time researching the current mortgage rates from dozens of different lenders in your area to work out the amount you expect to be charged.

Online real estate listing of your size and type of home will provide you with property tax and insurance costs to give you an estimate of how much you can afford to borrow.

Down-payments are ideally 20% to avoid paying for mortgage insurance. Buyers typically get their down payments from either savings or the equity they've built from their current residence.

Borrowers can typically qualify for conventional mortgagesmortgages with down payments of 3% and credit scores as low as 640, according to Jim Merrill, the founder of Axel Mortgage Inc. in Phoenix.

There are options with Fannie Mae and Freddie Mac that also let you use a monetary gift for a down payment.

Using a retirement account is not an ideal way to pay for a down payment. Though most families have savings tied up in individual retirement accounts (IRAs) or 401(k) accounts, and if that's the case, tap a Roth IRA or Roth 401(k) plan first.

You can withdraw these accounts without incurring penalties and additional taxes.

When you have held the Roth IRA for at least five years, you can also withdraw an additional $10,000 in earnings to either buy or renovate your first home without paying penalties or taxes.

Though, you do have to pay income tax on these withdrawals and a 10% penalty above the $10,000 limit until age 59½.

The employer's traditional 401(k) plan is the last place to turn to for a down payment. These "hardship withdrawals" are fully taxed and incur a 10% penalty until you reach age 59½.

Taking a loan against out against your 401(k) is a better option, as you can usually borrow up to $50,000 or the value of the account, whichever is less. And your employer will give you 15 years to repay the loan for a home purchase.

Monthly payments are then deducted from each paycheck. The interest you pay is generally a couple of percentage points above the prime rate, will then go into your retirement account.

Do not hesitate on revising your estimate as you shop for homes and mortgages.

Knowing your market

Go online and look into the listings in the area of your choice, this way you will have a better idea of the pricing and what houses are available. And when you start to better understand the market, you will have a more realistic approach when you are ready to make an offer.

Research comparable sales ("comps") and visit nearby schools, chat with neighbors, and do not let emotions steal from your reasoning. Keep in mind that there are always other options available.

Escalation clauses –are often used when home buyers are locked into heated bidding wars reports the Wall Street Journal and this is a useful tool that gives buyers the option of elimination from going back and forth with offers and counteroffers. An escalation clause is an addendum to a contract that raises a buyer's offer by a predetermined increment up to a maximum amount.

With escalation clauses, buyers are giving their maximum amount they are willing to pay and revealing to the seller the highest price they are willing to go, which can be pretty risky.

Say an owner lists the property for $1M and a buyer puts in an offer at $950,000 with an escalation clause of $5,000 increments, to a max of $1M and the second buyer comes in offering $980,000, the escalation clause kicks in and the first buyer wins the property at $985,000.

Though, if the seller hadn't agreed to an escalation clause and wants the highest offer, it is possible the first buyer has made their maximum bid of $1M, and the seller potentially has left $15,000 on the table. While these clauses become hot and more common, they are seen less often in higher-end real estate markets, where the increments would be substantially higher, states Rich Bockmann, Wall Street Journal.

Some claim the escalation clauses can often lead to misunderstandings and simply having the highest offer is the best way to win a bidding war.

Taking the right steps –to making the winning offer

Pre-inspection will cost you a few hundred dollars and "sellers react very positively to offers that are noncontingent on home inspections" says Avi Galanti.

When you are the first in line in making an offer, be prepared for other bids coming in and up their offer when they do.

All cash offers may be far less than the property's worth, though, 57.9% agree it boosts your odds, according to new data on Wall Street Journal. When there is a higher offer on the table, but the buyer is securing a loan, the seller is not as attractive to the sale explains Ravid Dhar, the director of the Center for Customer Insights at the Yale School of Management. Sellers don't want to have to worry about a potential buyer receiving the financing that he or she needs.

Personal letters with family photos and stating the reasons you want their home leaves a personal touch, as "most sellers are very emotional about their homes," says Ramchandani. "They created memories there" and sometimes can even outweigh the highest bidder.

Dropping unnecessary contingencies means buyers waive conditions that are met before the sale goes through, also makes your offer a lot more attractive. Contingencies essentially give the buyer a right to back out of a contract in some cases, they had problems obtaining financing or problems are found during a home inspection or that the house doesn't appraise for the contract amount.

Also, it is wise to be sensitive when you are asking the seller to fix a repair and to respond quickly when there are any requests for information.

A Redfin survey found that waiving contingencies is the most effective strategy for winning a bidding war.

Being flexible with the closing date makes the sellers' lives much easier when you meet their needs. Consider their moving out conditions and adjust accordingly. When one considers closing and then renting the house back out to them for a set period of time, "giving the seller the ability to not have to move twice can get your offer to the top of the pile," explains Hogg.

As you may not always win, the right agent will guide you to the right home. Be sure to also keep getting the most up-to-date listing information available from Redfin, and Zillow, among other sites that send you alerts when there is a new real estate posting.

 

Listing Additional Info

  • State: Illinois
  • Address: Illinois
  • City: Pekin
  • Zipcode: 61555
  • SOLD: no
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