Which Offer Is Best for You
All things being equal, you want to sell your home for the highest price someone is willing to pay. But in the world of real estate offers, all things are rarely equal. When evaluating an offer to buy your home, there is a lot more than the price to consider. Whether you are the lucky seller with multiple competing offers to buy your house or you have just gotten your first nibble from a prospective buyer, you have a lot to think about.
When it comes to selling a house, there is an old saying that the “first offer is the best offer”. That does not mean there is no room to negotiate. It just means that you should seriously consider the first offer you receive, even if it is a little lower than you hoped. It is the real estate version of a bird in the hand is worth two in the bush. Remember, every day that your home remains on the market, it loses a little bit of its shine. If you reject your first offer you could find yourself pining for it a couple of weeks later when no one else has stepped up.
The key is negotiation
Most buyers expect a counteroffer. Do not let your ego or pride stop you from making one, even if you feel like the buyer is lowballing you. There is a benefit to keeping the offer alive. Best case scenario: You come to terms you feel good about. Worst case: It buys you time for another offer to appear. It may even make the home more attractive to potential buyers if they know you already have an offer.
Look beyond price. Is the buyer pre-approved for a mortgage? Are they paying all their own closing costs? Are they putting up a reasonable amount of earnest money? Are they prepared to give you a few days after closing to take possession? Each of these things has value that you have to add to the calculation when looking at the offer.
Conversely, a buyer who is making an overly complicated offer without the apparent means to pull it off should set off warning lights. Work closely with your real estate agent to review details of any offer so there are no surprises.
The importance of being earnest
How much earnest money is the buyer willing to put down? Although it will not change your bottom-line profit, the larger the earnest money deposit, the more likely that the buyer is serious. You want a buyer who is invested in seeing the deal through. Someone putting down a minimal amount of earnest money may be willing to walk away and leave the meagre deposit behind, knowing that you probably will not spend the time or money to sue them for breach of contract.
A bidding war on your home? That is the dream of any seller. But weighing competitive offers is stressful because most often each has its own quirks and potential pitfalls. At this point, you are looking to avoid anything that could kill the deal down the road.
You also are not looking to get into a complicated back-and-forth negotiation. If you are in a multiple offer situation, all interested buyers should be told upfront to come in with their highest and best offer and given a date when you will consider them all. Once you have evaluated them all, you can place them in order. Ask your second-best offer if they are willing to be placed in “back-up” position in case something falls through with the first-place buyer. There is no guarantee they will still be there when you need them, but it is better than just blowing them off and then trying to figure out how to renew their interest if your first offer is a no-go.
Financing versus cash
Cash is (usually) king. If you have a buyer who does not need to take out a loan to purchase your home, make sure they can document that the cash is available. If there is no lender to satisfy, you have saved yourself several steps where things could go wrong, including valuation. In a bidding war, a low valuation is a very real possibility that could tank the deal.
Failing that, sellers should focus on buyers who have been pre-approved for a loan. Pre-approved means the buyer has met lender criteria for getting a mortgage. As a seller, you only want to deal with buyers who are pre-approved. (And if you are planning to buy your next home, you should start your own pre-approval process sooner rather than later.)
Exit clauses are like the buyer’s version of a “Get out of jail free” card. They give buyers a way out of the deal if they change their minds or something unforeseen comes up. So as a seller, you want as few as possible. Some are avoidable, but others may not be.
The first avoidable exit clause is one that says the buyer will purchase your home if and when they sell their existing home. Sometimes, in slow markets, you may end up accepting this clause, but make sure it ends within a reasonable period of time, such as 30 days.
The clause you will have the hardest time avoiding is the one most likely to haunt you in a bidding war. It is the bank valuation clause. Whatever institution is loaning your buyer the money to buy the property is going to hire a valuer to come inspect it and place a value on it. They want to make sure the property is worth what the buyer is paying for it — or at least that the buyer is putting enough money down to satisfy the loan requirements.
Most of the time, properties will be valued at or slightly above the sales price. But if there has been a bidding war, the valuation might come in low. Then you are stuck with a choice:
• Lower the price
• Contest the valuation and hope to get a higher one
• Hope the buyer has cash reserves and can make up the difference
• Let the deal die
This is why an escalation clause in which a buyer pledges to increase the price above any other offers does not always work out. They would need to also waive the bank valuation clause.
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