10 essential strategies to compete with cash buyers in a hot market

Many buyers in a seller’s market put down a cash offer to stand out. While it may be challenging to compete with cash buyers, aspiring homeowners who need a mortgage may make a successful offer by taking a more strategic approach. Consult your real estate agent and consider these 10 strategic tips to sweeten your bid in the face of a cash offer.

1. Understand the appeal of cash offers

Understanding why cash offers appeal to sellers is a good first step toward making an attractive purchase offer.

Sellers compete for cash offers because they’re seen as less risky than those that require the buyer to qualify for a mortgage. A cash offer shows sellers that there is no need to obtain financing, and therefore, no need to wait for loan underwriting and approval. All the buyer needs to do is prove they have sufficient funds to buy the home.

A buyer who finances a home may also request more contingencies in their purchase offer that allow them to cancel the sale. Aside from the financing contingency, there may be an appraisal or inspection contingency. Cash buyers can opt out of contingencies because they’re not required by lenders to get a property appraised, which may allow the sale to close more quickly.

2. Get preapproved

Mortgage preapproval can help you be more attractive to sellers because it shows how much a lender expects you to be able to borrow based on a review of your finances. Doing so could help you compete with those who are putting in cash offers who also have the means to buy a home.

Preapproval is different than prequalification. Lenders typically don’t review or verify your financial information for prequalification, but they do confirm it for preapproval.

Rocket Mortgage® offers a seamless preapproval process online, so you can check what you may be able to borrow.

3. Up your earnest money deposit

Earnest money is paid to the seller when they accept your offer as a good-faith deposit. The earnest money is held in an escrow account until the home closes, when it’s applied to your closing costs or down payment. If the sale falls through for a reason not covered by contingencies in your purchase agreement, the seller keeps the earnest money.

You can put down any amount as earnest money, although most typically put down around 1% or more. To compete against cash home buyers, consider increasing your earnest money. Speak with your real estate agent to find out what the average buyer puts down, and consider going higher than that.

4. Include an appraisal gap guarantee

An appraisal gap is when the fair market value of the home is less than the purchase price. Lenders won’t let you borrow more than a house is worth. If the buyer has an appraisal contingency or mortgage contingency in the purchase agreement, an appraisal gap would let them cancel the sale, and the seller would need to find a new buyer.

An appraisal gap guarantee reassures the seller that the buyer will cover any shortfall between the appraised price and the sale price.

Depending on how competitive the cash offers are, you can include an appraisal gap guarantee that pays for the entire difference, or up to a certain percentage or amount.

5. Offer more than the asking price

Offering to pay more than the asking price is an easy way to tip the scales in your favor. While it’s no guarantee, those making cash offers may rarely do so unless the market is really competitive.

Sellers want to get as much money as possible for their home, so an offer above the asking price should catch their attention.

Be careful with going this route, as you don’t want to risk paying more than you can afford.

What’s more, lenders may not be willing to lend you the full offer amount if there’s an appraisal gap. You will need to find a way to pay for what you can’t borrow.

6. Limit contingencies

Contingencies are conditions that must be met for a home sale to go through. Unmet contingencies allow one party in a home sale to cancel the deal without penalty. Common contingencies include obtaining financing, a satisfactory home inspection, and being able to sell your current home within a certain timeframe.

Waiving some contingencies may convince a seller to accept your offer and help you close on the home more quickly. There are potential risks associated with this approach, depending on the contingencies you wish to remove or limit.

7. Be flexible with closing dates

Working with the seller and their ideal closing timeline could make a big difference between having your offer accepted and being turned down. Here’s where working with your real estate agent to open lines of communication with the seller can work in your favor.

Say the seller wants to sell their current home and buy a new one at the same time. If their home sells before they buy a new one, the seller will need to find and pay for an interim place to live.

8. Use an escalation clause

An escalation clause increases your offer price automatically if a higher bid is received, up to a maximum amount. This can help you avoid missing out on a home to an offer that’s only slightly more than yours. Having this clause in place could help you remain competitive when there are multiple offers and convince a seller to pick you.

9. Explore cash-backed offer programs

Cash-backed programs eliminate the need for a financing contingency by underwriting and approving you for a mortgage up front. Or, the lender promises the seller that if there are any issues or delays, it will purchase the home and work with you to finalize the loan.

That way, you can tell the seller you’re guaranteed funding and can make a cash-equivalent offer.

10. Work with an experienced agent

An experienced real estate agent who understands the local market is a valuable asset. Your agent can help you come up with a compelling offer and increase the chance that yours is accepted.

Speak with several agents before you decide on one. Good questions to ask include how many buyers they’ve worked with, how long they’ve been a real estate agent, and how well they know the area where you want to buy.

The bottom line: Mortgage-backed offers can compete with cash

Cash offers are very attractive to sellers, but that doesn’t mean you can’t win out with a mortgage-backed bid. Putting down more earnest money, removing contingencies, and being flexible can help you stand out.

Before looking at homes, discuss with your real estate agent what strategies you want to use to increase the chances of your offering being accepted. Deciding these ahead of time can prevent you from getting too emotional and making decisions that pose too many risks when you find a home you love.