step 3 Receiving an offer
What to consider when you get an offer
The offer usually comes on standard “Agreement to Buy & Sell Real Estate” contract that all agents use. It is 8 pages long with 31 different sections and covers anything and everything that could happen. Some of the sections may seem obvious but remember they’ve been put there because it has happened in the past. The main items that we’ll be looking to see what the buyer is offering are :
Who is the buyer
The price they are offering
What type of financing will they be using
Is it a cash offer
How much money are they putting down
Do they have a house to sell first
What date do they want to close on
Are they asking for any items in the house
Are they asking for closing costs ?
Do they want a “due diligence period” or “contingent upon inspection”
Are they asking for a home warranty
Is it contingent upon appraisal (it will be if they are getting a loan)
Have they added an addendum to the standard contract and if so, what is on it.
Who is their real estate agent
These are the main blanks that the potential buyer fills in and that, as a seller, you are concerned with. Every one of the items (except who is the buyer) is negotiable when you respond to the offer and every one of the items has a number of implications. Let’s look at each one now
who is the buyer ?
Knowing who the buyer is can help you with how you respond to their offer. It's the day of internet stalking, we can find out so much about everyone online these days, so as soon as the offer comes in, I’ll be trying to find out as much as I can about the buyer(s). Are they investors, do they own other properties, are they moving to Charleston, where do they work.
I’ll ask their agent about them too, who often spill more details than they should about their clients !
The more we know, the more we can understand their motivation, their approximate income, their past real estate history, how much they love your house or if they’re looking at others. A lot of it is guess work, we’ll never know their true budget etc, but every detail helps
2. The price they are offering
Well the is the obvious one, how much are they offering. Remember this is a first offer, so don’t get offended if it’s low. I see it happen all the time, everyone thinks they are master negotiators and come in low. I always say an offer is like serving in a tennis match, they’re just putting the ball in your side of the court and seeing what you come back with.
Now if the offer is good and solid, within what you think is reasonable for the house, then it’s ok to accept it. You don’t have to be stubborn and say “I’m not accepting their first offer, let’s try to squeeze another thousand or two out of them”. Remember until both sides have fully signed the contract, either side can walk away, so the risk of countering back on a good offer that you have received is that they can walk away, they could be looking at other houses. Once you sign their offer and deliver it back to them, then it’s an official contract. I’ve seen more than one seller regret not just signing the offer.
3. What type of financing will they be using
This is such an important detail because it will dictate a lot of how the next month goes until closing. If you get multiple offers, the type of financing needs to weigh in on your decision which offer to accept.
A conventional loan is the best of the loans, it’s relatively straight forward, means the buyers are generally well qualified and while the banks do their due diligence on the buyers, there shouldn’t be many hiccups.
VA/FHA/Rehab loans are a little trickier. They still happen and I’ve done many deals with them but the lenders are stricter with their parameters, there’s more boxes to tick and they can sometimes require the house to be in a certain (good) condition.
Portfolio loans are not uncommon in Charleston, especially downtown. Don’t be put off by these, I actually like them because it’s real local bankers who live and know Charleston making the decisions, they are not dictated by Fannie Mae guidelines.
This is very important to know : Unlike the other contingencies on a contract which have a deadline after X number of days, the financing contingency remains in place until closing. If for any reason, the bank says we cannot finance this buyer, then the buyer can use this contingency to get their earnest money back. I had a buyer get diagnosed with a very serious illness, lose their job and therefore were unable to get a loan, this happened two days before closing.
4. How much money are they putting down
This can range from 0% down to 50+% down.
0% are not as common these days, ‘doctor loans’ or VA loans can be 100% financed. FHA loans can be 3.5% down. As a general rule, you’d like to see more money down because it means the buyers are more financially secure. If someone is putting down a small amount of money and Murphy’s Law strikes and their car needs a new transmission the week after you sign a contract, that could mean they suddenly don’t qualify for a loan and the deal falls apart.
If a buyer is putting down 20%, it’s good for them because they avoid PMI and good for you because if they’ve got $50-100k saved up for that level of downpayment, they should be in good shape for a loan.
There are exceptions to all above of course.
5. Is it a cash offer ?
This is what any seller loves to see, a cash offer. A cash offer can close early, remove some of the contingencies that a bank require such as inspections and appraisal. The cash buyer can still include these, but they can be negotiable, rather than actually required.
The biggest issue with a cash buyer is that they often come at a lower offer price than someone getting a mortgage. Cash is king and the folks offering cash know that.
6. Do they have a house to sell first ?
If they do, you’re about to get into a relationship with a third party who you don’t know ! Here’s the scenario, your house is House A, your buyer’s house they are selling is House B. They can’t buy House A until House B sells. Now you can control who you accept an offer from on your house, but you can’t control the contract on House B or more importantly their buyers, let’s call them Buyers C are. Everything involved in the sale of your house now involves you, your buyers and Buyers C. Just last year I had a deal where everything was going very smoothly until two days before closing Buyers C just simply changed their mind and decided they didn’t want to buy House B, which mean House A couldn’t close. Nightmare scenario !! We got it sorted in the end, but it’s an example of what can happen and since it’s a contingency, it’s a valid reason for a party to cancel the contract without recourse.
Summary : Ideally you hope your buyers don’t have a house to sell first. It does happen a lot though.
7. What Date do they want to close on ?
Another important parameter and one that is very negotiable. As the seller, you want to close as soon as is possible. Why ? Many reasons, you have a contract to sell your house, both parties genuinely want to move forward and then, boom, your buyer gets sick/loses a job/gets transferred/divorced or any of life’s other great issues that can happen and your contract falls apart.
CLOSE YOUR HOUSE AS SOON AS YOU CAN. I cannot stress this any higher.
If it means you have to go rent & move twice while you find a house, do it. If it means you have to rent your own house back for a while, do it. Just get it legally closed and sold so that you have your cash in the bank. Then any of life’s issues that impact the buyer are their problem, not yours.
Most loans can close in 30 days, cash buyers can close in 14 days. Make this your target to close.
8. Are they asking for any items in the house ?
Only anything that is attached physically to the house conveys with it. A ceiling fan, a stove, a microwave that is screwed in etc. A fridge, washer & dryer does not generally convey with the house unless specifically stated in the contract. The onus is more on the buyer here to declare any items they want, but the seller needs to be aware of it.
This is another situation where the seller needs to be smart and not stubborn just for the sake of it. Don’t let a $500,000 deal fall apart over a five year old fridge !
9. Are they asking for closing costs ?
Closing costs cause a lot of confusion to people and they shouldn’t.
Example : Buyer offering $500,000 and wants $5,000 in closing costs paid for by the seller.
This is now a $495,000 offer to you as the seller. $500k-$5k = $495k. Simple. It’s the same as if the buyer is offering a straight $495,000. It’s just an accounting line on the closing statement.
As the seller, your biggest issue with closing costs is that the sales price has been artificially inflated by the amount of the sales prices (again using example above, the price should be $495k but now it’s $500k because you have to give them $5k in closing costs). So now your house has to appraise to the higher price of $500k, not $495k. If you agree to a $500k with $5k in closing and the house appraises for only $495k, now you’ve under appraised and you have to deal with that, unless you have an experienced agent (ahem, like me) who accounts for this with a clause in the original contract.
In reality though, NO buyer should ask for closing costs unless they are short on cash, which can be the case with 0 or 3.5% or 5% down loans. All closing costs means is that the buyer has to bring less actual cash to closing.
Example : Let’s say the buyer is doing a 3.5% down loan, but even that 3.5% down is stretching the cash they have in the bank. If they ask for $5k in closing costs, that is $5k less actual cash they have to bring to closing, so instead of having to bring, say $25k, now $5k of that has been paid for by the seller, so they only have to bring $20k and they can keep the $5k for reserves.
When I see closing costs on a $500k+ house, it very rarely makes sense and tells me the other agent doesn’t know what they are doing.
10. “due diligence period” or “contingent upon inspection”
This is another big one. Anyone buying your house needs to inspect it physically and may need to find out other information about it, zoning, insurance, renovation costs etc.
The contract allows for this in either Due Diligence or Contingent Upon Inspection way.
As a seller, you’d rather see Contingent Upon Inspection. It’s tighter for the seller and doesn’t give as easy a way out for the buyer (in general). In this case, a home inspector & a wood infestation inspector do their inspections, find whatever issues there are and the buyer submits a repair request to you that is negotiable. The contract is clear on what is the seller’s responsibility to repair and what isn’t, so even though negotiations tend to go back and forth, they generally get an agreement and proceed with the deal.
With a Due Diligence period of X number of days, it’s a lot more open ended in terms of why the buyer can back out of the deal (without recourse) if they want to. Now when it’s my buyer, I always write the offer with a due diligence period and not contingent upon inspection because it favors them but for the same reason, when I’m representing the seller, I’d rather not have a due diligence.
11 Are they asking for a home warranty ?
If your home is a bit older, it’s not uncommon for buyers to ask a seller to provide a home warranty. It’s about $650.
12. Is it contingent upon appraisal ?
If your buyer is getting a loan, their mortgage company will have an independent appraiser come out and appraise the value of your house. Two things can happen :
1. The house appraises at or higher than agreed contract price : This is good. One more step complete.
or
2. The house under appraises below the agreed contract price : This is not good because the mortgage company will only lend based on the appraised value, not the contract price.
Example :
The contract states that the price is $500,000 & buyer get a loan for 80%.
If the house appraises for the $500,000, the bank will lend 80% or $400,000. The buyer has to put down the remaining $100,000
If the house only appraises for $480,000, the bank will only lend on this $480k, not the $500k. So the bank will only lend 80% of $480k = $384,000 which means the buyer now has to bring $116,000 instead of $100,000.
So that’s why it’s so important that a house appraises. Aside from the buyer being annoyed that they agreed to pay more than the appraiser says it’s worth, they know have to bring more cash to closing, which they may or may not have.
So if the event that a house under appraises, these are the possible scenarios
The seller agrees to reduce the contract price to the appraised value
The buyer agrees to the original agreed price and brings the extra cash to closing
The buyer and seller negotiate a price somewhere between original and appraised price
No agreement can be reached and the deal falls apart. Since the contract was contingent upon appraisal, the buyer would get their earnest money back.
13. Have they added an addendum to the standard contract ?
Buyers can include an addendum to the standard contract and it could have anything on it !
14. Who is their real estate agent ?
There are good, bad, full time, part time, experienced, inexperienced agents. Agents who are reasonable and can handle their buyers and those who can’t. This is more important for me than for you, but it can affect you as the seller too because the agent is the quarterback in the deal and can dictate how smooth the process goes or equally how stressful it’s going to be. I’ve seen multiple offer scenarios where the rest of the offer terms were very similar and the buyer’s agent was the deciding factor.
Hopefully all of the above didn’t scare you off wanting to sell your house. It’s not all that complicated and I’ve included 10 years of experience in some of the “what could go wrong” scenarios above, but it’s important that you know 1) what’s included with the offer and 2) what could happen