After a long and emotionally draining process—from the moment you decided to sell your home, start searching property records, hiring a realtor, decluttering your house, adding curb appeal, repainting, cleaning daily, tiptoeing on eggshells every time your realtor called your cellphone—you have received an offer for your house. And then?? Miracles of miracles…you have a second offer. This may sound like a rhetorical question, but shouldn’t you always accept the highest offer on your house?
Hang on…isn’t cash king? In short, like everything else in life, it depends.
While it’s a delightful dilemma to have multiple offers on your house, there are a variety of factors to consider when assessing those offers; price is only one of those factors. That said, the obvious thing that homeowners look for in any offer is the offering price. However, the highest offer in terms of sale price may not be the best offer once some of these other variables have been considered. It really does pay to consider what’s contained within the rest of the offers.
Cash really IS king
If you have multiple offers and one of those offers is an ‘all-cash’ offer, that offer should go right to the top of the pile. Why? It’s because that buyer has signaled a willingness to purchase the house without financing delays due to banks and underwriters. In short, all cash offers are the most up front, uncomplicated offers you’re likely to receive. It just may be worth the money to accept the lower offer to avoid any of the potential hassles that come from other offers.
All cash offers normally contain fewer contingencies as well. All cash offers generally don’t include a ‘contingent upon appraisal’ clause. Banks want to ensure that the value of the home meets or exceeds the amount of money they’re lending. While it’s uncommon for an appraisal to come in below the listing price (or the value of the offer), it does happen occasionally. This adds time and an extra round of negotiations.
All cash offers also have the greatest flexibility when it comes to closing. This is especially true for quicker sales. All cash offers can sometimes close in as little as 30 days. If you need to move quickly, an all cash offer might be the only way to make that happen.
Of course, an all cash offer that lowballs your asking price may not make sense, despite the convenience.
What about offers that aren’t all cash? Again, it pays to look at the contingencies in each offer. In general, more contingencies means more time and potential hassles. Factoring in the contingencies of each offer might make the less-money offer more attractive. So what are some of these contingencies?
Conditional upon inspection
Not even an all cash offer will waive this contingency. In fact, NO buyer should ever give this contingency away. Conditional upon inspection gives the buyer a chance to look at the report from the home inspector and submit to you a list of their concerns. At this point, you address the concerns, fix the problems, offer a price credit adjustment or some combination of all three.
Inspectors are trained to look for problems with your house and buyer’s agents are trained to maximize the impact of those problems—even if they’re minor in nature. During subsequent negotiations, minor problems that may cost less than $100 often result in thousand dollar deductions (or more) per problem. Heaven help you if your home inspector finds a multitude of ticky-tack problems with your home.
Everyone will get the same inspection report and see the same list of concerns—how buyers choose to address these concerns (and their subsequent offers) should be factored into your decision making process. Some might require you to fix every problem prior to the sale. Buyers who take minor flaws and try to extract exorbitant concessions from you might make a lower priced offer look more attractive if the lower offer isn’t trying to squeeze every drop out of an inspector’s report.
Conditional upon financing
Buyers who aren’t all cash types come in two flavors—pre-approved and pre-qualified. What this means to you, the seller, is the one who’s pre-approved has already filled out the paperwork at the bank and they have been approved to borrow the money necessary to purchase a house in your price range.
Pre-qualified buyers have not been approved and may not be able to obtain the necessary financing to purchase your home. Depending on the magnitude of the price difference, choosing a pre-approved buyer may make sense. You’re taking a chance with the pre-qualified buyer. Further, a pre-qualified buyer will require extra time to get approved and obtain their mortgage. If timing is an issue for you—a pre-approved buyer can (normally) close faster than a pre-qualified buyer.
Pre-qualified buyers might be using their higher offer to ‘buy time’ with their high offer that has the potential to fall through. If you are considering multiple offers and the highest offer comes with this condition, do the math and think about the price difference…is it worth it to perhaps wait it out? If so, then cash really is king and you can accept such an offer.
Contingent upon selling current home
Some buyers might stipulate that their offer is contingent upon first selling their home. The obvious danger here is their house doesn’t sell in a timely fashion and you’re stuck waiting.
However, your agent should discuss their listing with the buyer’s agent and determine whether this contingency makes sense for you. It’s possible that the buyers have an offer on their house and are in negotiations as well. Or, perhaps just put their home on the market and priced it to sell quickly (your agent can easily confirm this by checking comps). Your agent can also let you know how many showings that property has had and whether any offers have been made.
If the buyers house has been on the market for months, hasn’t attracted much interest and seems overpriced for their neighborhood, then it might make sense to accept a lower offer to avoid becoming anchored to someone else’s problem.
If their house has seen a lot of activity and it seems like a sale is likely, then it might make sense to wait things out for a bit if it means a higher return in the end.
One way to protect yourself from a buyer’s home-sale clause is to counter with a kick-out clause of your own. This allows sellers to continue to market their home to other potential buyers and notify the current buyer if the sellers receive another offer. The sellers normally give the buyers a window of opportunity to remove the home-sale contingency (3–4 days) from their existing contract or the sellers can nullify it and move onto the next offer.
As previously noted, banks and underwriters use the appraised value of a house to determine how much they’re willing to lend to a buyer. If an appraisal clause is included in an offer and the appraisal comes back lower than their offering price, the buyers could try to renegotiate the price.
An appraisal clause potentially adds time and an extra round of negotiations to the sale process. When considering two offers and the higher offer contains an appraisal clause, it would be wise to those two factors (time and renegotiation) as it relates to the price difference between two offers.
This contingency is often included in the seller’s offer and assures them that title is free of liens or ownership complications. If you’ve owned the house for years or you did a title search of your own prior to purchasing the house you’re now selling, a title search shouldn’t be problematic and likely won’t move the needle for or against an offer. It just adds one more possible stumbling block to the sale of your house.
Semisonic wrote the song, but it has an impact on real estate…most contracts stipulate a 30, 45 or 60 day closing window. These windows normally align with the amount of time it will take buyers to secure financing, obtain inspections and address concerns.
Look closely at your multiple offers and decide which one aligns best with you and your own timetable. If time is a consideration, closing in 30 days might make the most sense even if It isn’t the highest offer. You’ll need to evaluate that time vs. money equation in your head.
Price will always be the most important factor in a real estate transaction. However, it’s not the ONLY variable, and it pays to examine those other variables. As with anything in life…the devil is in the details. Use the guidelines above to determine what worth or weight (if any) they carry.
Once you have an idea of their importance, you can better evaluate the differences between two or more competing offers. It’s certainly possible that when you include things other than price, you might conclude that the “best” offer doesn’t necessarily correspond to the highest bid. Review any/all offers and decide which one works best for you.
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Emme October 7, 2017
Hey Karl Nice article i'm pretty sure the community will appreciate this. Thanks! ;)
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