When selling your home, the highest offer is not always the best offer
Many areas in the US are firmly in the grips of a strong sellers’ market including homes for sale in Seattle WA. Competition between buyers for the limited inventory is intense and multiple offers is currently the norm. Everything goes in cycles but for moment at least, sellers are comfortable set in the driver’s seat, king of the castle and masters of their domain (that is, until they turn around and try and buy their next home).
If you're selling your home and you and your Realtor have done the basics like preparing your home properly, pricing it correctly (don’t get greedy!) and take great photos, you can usually expect to get more than one offer.
In a slow market, you anxiously wait for an offer, any offer, to come your way. In a hot market, offers pour in the door and now you have to decide which one of the bunch is the best one. We’re only human and 9 out of 10 human sellers will automatically want to grab the offer with the highest price scribbled on it.
But not so fast…..
At first look, that highest price offer might look great, but you need to dive a little deeper to see what lies below the surface. You have to look at the WHOLE OFFER to see what the buyer is really offering you.
First of all, what are the components of a real estate offer?
When a buyer makes an offer on your home, they will sit down with their agent and fill out a series of standardized forms that detail what the buyer wants to offer for your home plus the conditions under which they are willing to buy the home.
The main components of offer to buy a home are as follows:
The Purchase and Sale Agreement which is an overview of the whole offer and lists a bunch of items including the offer price, identifies the parties and the property, the closing date, earnest money amount and the escrow and title companies. This form must be part of any offer. The purchase and sale agreement also lists all the buyer’s contingencies.
A pre-approval letter from the buyer's lender stating that they are officially pre-approved for a loan to cover the purchase of the home.
A copy of the Legal Description (unique identifier of the home, part of the title report).
Contingencies / contingency clauses are conditions that need to be met in order for the buyer to purchase the home. For example, with the Financing contingency, the buyer is stating that they will only buy the home if they are approved for a loan and the home passes an appraisal. The various home buying contingencies usually make up the bulk of the paperwork in an offer.
Different parts of the country will have different forms and different forms are used for different types of homes. For example, is the home a condo or a house, does it have a septic system or is it connected to the main sewer line? Will also depend on how the sale / purchase process works in a particular state.
The most common contingencies are:
- Financing / Appraisal contingency: purchase of the home by the buyers is contingent on (1) the lender approving the buyers for the loan and as part of that process (2) the purchase is conditioned on the home passing an appraisal (see below).
- Inspection contingency: the buyers’ purchase of the home is contingent on them doing an inspection of the home and property.
- Title contingency: the buyers gets to review the title report for the property.
- HOA / Resale Certificate contingency: the buyers get to review and approve the Home Owners Association, their financial stability and the likes.
- Sellers’ Disclosure Statement: 6 page document that seller fills out detailing any issue with the home during their ownership.
Different offers will have different combinations of contingency clauses depending on how strong the buyers want to make to their, how much due-diligence they did before making their offer and on the type of financing being used to buy the home…. And how much they are comfortable with taking risks. Risk-averse or cavalier?
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When listing your home for sale, the objective is to secure an offer that is the best combination of (1) a good price and (2) has the best change of closing successfully. |
From the seller's perspective, the fewer the contingencies the better. The fewer the contingencies means the fewer the options the buyers have for getting out of the contract between mutual acceptance and closing.
For the SAME offer price, here is the sliding scale from the worst to best offers you can expect to get on your home…. Less is more!
Contingencies that sellers would prefer to avoid
One of the scariest contingencies from a seller’s perspective is the Inspection contingency. No home is perfect, even brand new construction, and there are a number of common issues that can kill a home sale.
For Seattle real estate, the inspection contingency contains the following few words of English that are loved by buyers but feared by sellers:
“This agreement is conditioned on Buyer’s SUBJECTIVE satisfaction with inspection of the property and the improvements on the property”.
This means that no matter how perfect you home might be, the buyers can walk on the sale and not even have to give you a reason as to why they are walking. For buyers who get cold feet, it’s a priceless contingency. It’s their get out of jail free card. They get their earnest money back and are freed to go look for another home.
In the meantime, you have taken your home off the market, has been tied up for a week and now the buyer has bailed. You put your home back on the market and but is its perceived by buyers as having issues. Your agent posts the comment “Buyers got cold feet” but we all know there’s something most definitely wrong with your home.
So if Buyer A is offering $515,000 and has waived the inspection and B is offering $535,00 but is contingent on an inspection and a bunch of other contingencies then maybe taking the lower offer might be the best path?
For condo sellers, the HOA / Resale Certificate review is another one to give them sleepless nights. It has details on the HOA’s finances, meeting minutes (discussion regarding a potential special assessment), the Reserve Study report, rules and regulations (CC&Rs). All in one giant PDF.
“Surely the buyer will find something ugly in there and want to walk?”
Will your home pass the appraisal?
After the Inspection Contingency, the 2nd scariest contingency for a seller is the Appraisal Contingency (part of the Financing contingency). You list your home for $500,000, immediately generates a lot of buyer interest and you receive multiple offer of varying quality.
Let’s say for purposes of simplicity that all offers have the same contingencies and the only difference is the offer price. You list you home for $500,000 and you get offers for $500,000, $515,000 and $535,000!
$515,000 is good but $535,000 is fantastic. You’ve already started projecting what you will do with that extra windfall. Your Realtor looks like a genius and has a shiny aura around her that only you can see.
Time to step back a little. The big question you have to ask yourself is “if the buyer is relying on financing, will the lender's appraisal pass at $535,000?”
When a buyer purchases a home with lender financing, part of the process is for the lender to determine whether the home is actually worth the money they are lending. The lender wants to be sure that in the event that the buyer stops paying the mortgage that there will be enough equity in the home for the lender to get their money back if they have to repossess the home.
The buyers pay for the appraisal by an independent 3rd party professional appraiser. The apprasier visits the home, takes measurements and photos and then heads off and write up a report on the how much your home is worth relative to other recent home sales in your area.
If all thw homes in your immediate area has been selling for $515,000 and under, then unless have done some remodeling and upgrades, your home is unlikely to appraise for the $535,000. In a hot sellers’ market with rapidly increasing prices, the risks of a low appraisal also increase. If the home appraises at the agreed upon sale price or higher, then excellent, on to closing we go.
But, what happens when an appraisal comes in low?
- You, the seller, can try and contest the low appraisal by paying for a 2nd appraisal, However, the lender will nearly always go with the first appraisal result.
- Drop the price to meet the appraised value.
- Ask the buyers to cover the difference with cash at closing.
- Refuse to budge on price.
If you don’t reach agreement / compromise with the buyer, they are free to walk on the sale. In hot sellers’ market, some buyers, even though they are replying on financing will either (1) waive the appraisal contingency completely or (2) agree to cover a fixed difference between the agree upon sale price and appraised value. Only for the brave or those with access to extra cash reserves.
And that's why cash offers can be so appealing…… there is no appraisal.
Question: When is a cash offer not the best offer?
Simple answer...Frequently!
Just because it's a cash offer doesn't mean it’s a great offer. Many buyers using cash think that just because they are offering cash that automatically they are king of the offers.
The great thing about a cash offer, particularly one that is well above asking price in a bidding war, is that you don't have to worry about the appraisal failing. Cash buyers don’t require an appraisal because there is no lender involved.
However, for a cash offer, just like a financed offer, it might not be the highest price and might have just as many contingencies. Certain neighborhoods / cities will see a higher percentage of cash offers than others, particularly those attracting overseas cash investors / buyers.
About that cash…
- Is the cash liquid, easily accessible or tied up in stocks that have to be sold?
- Can the buyer provide proof of funds? Show me the money!
- Is the cash a gift that is not currently sitting in the buyer’s bank account?
- Is the cash local or sequestered overseas and you can’t decipher the banking statements provided?
When cash buyers are informed that they did not get the home, they are usually flabbergasted.
“WHAT!! But I paid CASH!”
Dear all-cash buyers: just because you are paying with cash does not give you an inherent right to get the home. There’s that thing called offer price and number / types of contingencies.
Also, please don’t call me all peed off when you don’t get the home. Tell your Realtor to craft a better offer when they know it will be a multi-offer situation. For some reason, I never get calls from irate financed buyers who have missed out on one of my listings.
Good news for weary buyers who think cash offers are getting all the homes: in the current hot market, about half the homes I list for sale will get one or more cash offers. However, only about 10% of those homes actually sell to a cash offer. A full 90% of the time, the winning offer was relying on a mortgage because their OVERALL offer was way better. And only one of those financed offers failed to close.
For real estate offers, cash is NOT always king.
subtle indicators of a good and potentially a not so good offer. Do the buyers REALY, REALLY want my home?
When reviewing offers on your home, the objective is choose the offer that will be a combination of a good price / return on your investment AND the one that is likely to give you the smoothest path to closing with the least amount of hassle.
Although you might get a wham-bam amazing offer, sometimes your (or your agent’s) second sense will niggle at you and hint that accepting that particular offer might lead to more than a bad dose of indigestion down the road. Absolutely no offer is 100% guaranteed to close but minimizing the risks of it not closing by choosing the right offer up front goes a long way toward a successful outcome.
Here are some signals (some more subjective than others) to watch out for that might help distinguish a highly motivated buyer who genuinely wants your home from one that might not be as committed:
Go with your gut......
- How many times did they come to see the home? Just once, 2 hours before the offer review deadline?
- Did they pre-inspect or reluctantly waive the inspection? The buyer who has pre-inspected the home has seen all the good, the bad and ugly bits and are going in eyes wide open. The buyer who just waived the inspection without actually inspecting it might lie awake at night second guessing themselves. “What if……?” (yes, buyers lie awake worrying too).
- Sign of genuine enthusiasm for the home (offer included a buyer love letter not written by their agent).
- How well is the offer written up? Does their agent know what they’re doing? Is their agent responsive and will they make for an easy transaction or will you have to chase them for every little piece of information.
- Did the buyers come back to meet your agent at the open house. Usually indicates they really want your home.
- Are they asking the right questions? Is their Realtor asking the obvious question: “what does the seller want?”
- Have the buyers done their due diligence by previewing documentation that was made available when the home was listed for sale like the Resale Certificate, the Seller Disclosure Statement and the Title Report or is their offer contingent on reviewing all 3 of them after mutual acceptance?
- Are the buyers looking for you to pay some or all of their closing costs? If so, their real (net) offer is less than the offer price.
- Did BOTH the hubby and wife see the home or will Mrs. Buyer freak out (not in a good way) when she sees it?
- Did they submit an offer out of the blue without asking any questions?
- Did they go see the home the first couple of days after it came on the market or wait for the open house and then call their agent?
- Did they offer their maximum price off the bat or escalate up from the list price in small $100 increments?
- Are the buyers pre-approved or just pre-qualified for a loan? Or worse, neither. OK, that one is nowhere near subtle. If they are not, then their offer is dead on arrival in a multi-offer situation!
- Who is the buyer's lender? Local, responsive or monolith with a reputation for delaying closings and take two days to return calls. Or some obscure lender you’ve never heard of before?
So, if you're lucky enough to get multiple offers on your home, take the time to really review each one and don't fixate solely on the offer price. If you don't delve below the surface, your smooth sailing home sale might be sunk by a bad offer iceberg.
Here are some great additional resources for sellers:
- How can I sell my home fast? from Lynn Pineda.
- And from Xavier De Buck: 8 reasons you still need a real estate agent.
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