Strengthening Your Offer with More than Price

It would seem that the housing market is still on a steady rise, and getting back to “normal.” This means that as we approach the spring and summer, more listings will pop up and more people will be searching and buying houses. It is not fun when you find yourself competing for a home in a bidding war, because you typically end up paying more than you need to/want to for that home. Sometimes, it’s even worse and you don’t get the house at all because the seller chooses the other buyer’s offer. It’s usually about price, but the other terms in the contract can also affect the seller’s bottom line and affect their level of risk with your offer. You may be able to swing the sellers in your direction with the other available terms in the contract, other than price.

In these multiple offer situations, it’s typically “hey we have multiple offers, bring us your highest and best” and the buyers automatically bump their price. Listen, first and foremost, price has the ability to trump any of the other terms in a contract, especially if it’s significant; I’m not saying that these other terms are more important than price. What I’m saying is too often buyers lean on their price, and forget about the other terms. If you’re in a multiple offer situation you will most likely need to increase your price… but the other guy is going to do that too, so we need to look at the other terms in the contract to give you the best possible chance of getting the house of your dreams. And if you don’t get it, you can hopefully rest easy knowing that you gave it your best shot.

Let’s talk about:

Contingencies

Closing date

As-Is

Earnest Money

Tax Pro-ration

Boom. Added value.

Contingencies

If you’re not familiar with contingencies, here’s a quick version. Contingencies are terms that act as safety nets to protect you and let you out of the contract. The big ones are Attorney Review, Inspection, and Mortgage. Briefly covering these 3…

  • Attorney Review – allows your attorney to make any changes they/you want within the first 5 days of being under contract. Contract can be cancelled if cannot come to an agreement.
  • Inspection – allows you to get an inspection on the home and ask the seller for reasonable repairs or a credit for said repairs. Contract can be cancelled if cannot come to an agreement.
  • Mortgage – Allows you to cancel the contract if you can’t get a mortgage or any of the mortgage terms you put into the contract:% down, interest rate, type of loan, basis points, etc.

If you want to know more about the process in general check out Home Buying Steps

I mention these to understand some of the terms below… You do NOT want to forfeit these contingencies. This would increase your risk and lower the seller’s risk TOO much. I’m going to type this again, just to be sure that you didn’t skip it.

You do NOT want to forfeit these contingencies.

Another contingency that’s fairly common is the Home Sale Contingency, which is necessary if you need to sell your home in order to buy the next one. This cannot be forfeited, whether you want to or not. See my post about You don’t need to sell your home to buy the next one! Having a home sale contingency weakens your offer; it adds a series of risks for the seller and they may not want to take a chance on those variables… i.e. Where’s your house located? What’s your house look like? What’s broken? At what price are you listing it? What do you owe? Is it ready to sell? Etc. You may need to sweeten your deal with more than price in order to make sellers feel comfortable about accepting your offer with a home sale contingency, even if there’s no other offer—sometimes sellers would rather wait for another offer, period!

Let’s discuss some of the terms that I think can be swung so far in either direction that can help you win your home!!!

Closing

This is sooooooo simple. Basically, give them this. Give it away. Let them have it. Who cares? Your lease is up? Move in with your parents, or a friend, or whatever… figure it out. Give them the closing date that they want. Now, I get it. This CAN be important for you, the buyer, and sometimes it can’t be “given” up. And that’s okay. But if you can give the sellers the closing date they want, even if it causes you some inconvenience, then DO IT! In my mind this is a timing issue and timing issues just take planning and are perfectly solvable. Sellers want to be inconvenienced as little as possible—they might even choose a lower offer to be inconvenienced less. If there’s more than one offer, saving the sellers a little bit of inconvenience may be the reason they choose yours. Give them whatever closing date they’d like.

This literally saves the seller money without costing you any.

AS-IS

This one is a little more complicated as far as the explanation, so stick with me here, because I think this is a hidden gem. When a home is sold AS-IS, this means that the seller doesn’t want to fix anything or offer a credit. What you see, is what you get. They aren’t hiding anything, but they’re not fixing anything either. This goes hand in hand with the inspection contingency. After an inspection is done, typically buyers ask the sellers for certain items to be repaired or they ask for a credit from the sellers in lieu of repairs…but on an AS-IS sale, it is understood that there will be no repairs or credits. This AS-IS delegation is typically seen with banks through foreclosures and short sales. It can also be done with sellers who simply don’t want to deal with the repair/credit situation; usually estate sales, seniors down-sizing, etc. However! Sellers who are not selling AS-IS are anticipating this credit/repair request, especially if they know about the leaky faucet or broken outlet. They are expecting it! There’s no way for you to guarantee you won’t ask for anything in advance… except for doing an AS-IS sale.

As a buyer, if you are willing to accept the fate given to you from the inspection, then you can offer an AS-IS sale as one of the terms in your offer. This will give the seller confidence that the price you offer will be the ultimate price… they won’t have to spend money repairing things or giving you a credit. This literally saves the seller money without costing you any. Boom added value.

Now, you can still get an inspection, and you can still cancel the contract based on the inspection items; you’re supposed to either cancel the contract or move forward. Buyers that are truly going to cancel the contract due to items found in the inspection would be wise to ask the sellers if they’ll repair it anyway, even though it’s AS-IS and they aren’t “supposed” to ask for anything. This should not be a bluff–this needs to be a legit reason that is causing you to walk away from the deal. The sellers may not want to put the home back on the market and wait for another offer; that new offer would probably find the same problem also. If fixing this issue or providing a credit seems like an inevitability, the sellers may consider fixing it or crediting you for it, despite the AS-IS term.

If you’re okay dealing with the small stuff that comes up in an inspection then go AS-IS. You can still get out of the deal if there’s something serious, and you might even be able to convince the sellers to fix them… but this will give sellers an incentive to choose your offer over others, which is my point here.

Earnest Money

Earnest Money is the dumbest part of a transaction. Obviously it exists for a reason and there are times when a buyer could lose earnest money. However, it’s very rare and typically you have a bigger problems if you are losing your earnest money.

Earnest money is a deposit that goes towards your down payment and closing costs, and it’s typically paid within a day or two of having an offer accepted. Sellers love earnest money. This is mainly because agents tell sellers that it’s important… if they really understood the odds of them needing to keep earnest money, and the actions they’d have to take to really make up for the headache, they wouldn’t care about it. I digress… whether they should or shouldn’t love it doesn’t matter—they DO love it, and while they love it, you need to give them as much of it as you can.

The only way you lose your earnest money is if you cancel the contract for a reason that falls outside of a contingency. The ones I mentioned above are the big ones, all of which result in the return of your earnest money. The mortgage contingency typically lasts all the way up until a week before your closing date. You could cancel the contract a few days before closing, after the mortgage contingency has expired/been met, in which case, no… you would not be getting your earnest money back. As you can imagine, cancelling a contract a week out from the closing date would cause all kinds of problems; the sellers are probably lined up to purchase their next home, it may be contingent on them selling the one you just backed out of; they may also have hired a moving company or have a storage unit; they could have signed a lease; not to mention that they’ll need to continue paying the bills while the home goes back on the market. Any and all costs incurred by the sellers due to the fact you cancelled the contract outside of a contingency would result in you losing your earnest money and them suing you for performance. This means you need to perform your side of the contract, which was to buy the home. Like I said, if you lose your earnest money, you have bigger problems.

Put up some earnest money, and if you’re going to cancel the contract, you should be within some sort of contingency to do so legally, and have your earnest money returned.

Tax Pro-Ration

This is one way to ease the burden on the seller or for you to make back an increase in your offer price. The seller will need to credit the buyer for the property taxes for every single day that they owned the property. We pay taxes in arrears, which means the bills we get are for last year’s taxes. The new owner will be getting a bill for last years taxes… a time when they didn’t own the property, hence the reasong for a tax credit from the seller to pay for that future tax bill. Since we don’t know what the new tax bill will be, it’s very common to ask for 105% – 110% of the most recent tax bill when calculating the credit. Banks will not pay more than 100% on a foreclosure/short sale, therefore a seller on regular sale will be paying at least 100%.

the price is a very “shiny thing” for sellers.

In this section we’re talking a difference of 5-10%… on a 10k tax bill that’s $500-$1000. This isn’t much, but again, could help a seller pick your offer over another.

You could do this 2 ways. You could ask for only 100% on the tax pro-ration (instead of the anticipated 105% or 110%), which will save the seller the aforementioned amount. Or, you could increase your offer, and ask for it back in the tax pro-ration percentage. Sellers (and agents) will look harder at the sales price than they will at tax pro-ration percentage; in my example above, you could increase your offer by $1500 and ask for a 115% tax pro-ration and make it back. If you ask for more than 110% the other agent may balk at it before the seller even accepts your offer. Regardless of whether they see this initially or after you’re under contract, they will likely catch it at some point in the process, so the point is NOT to be tricky, the point is to understand what you’ll be getting in tax pro-ration credits and change your offer accordingly. Either increase the price of your offer, knowing you’ll be getting some tax credits – or – lower your tax pro-ration percentage to give a little more to the seller. FYI… I like flashing the price more than lowering the tax credit percentage—the price is a very “shiny thing” for sellers.

Read my post about The Not-So-Shiny Important Stuff

To sum this all up like a high school paper. Understand your contingencies and how you’re protected. Give up the closing date, especially if it’s important to the seller. You’re going to need to plan all this stuff anyway, so just plan around the date the seller wants. Offering AS-IS is not as scary as you may think. You can still get out of the contract due to a deal-breaker type issue from the inspection, and you may even be able to get a credit or have the seller fix it anyway. Don’t get hyped up on Earnest Money… buyer or seller. If you’re a buyer, put up as much earnest money as you can, if you’re a seller don’t give it a lot of weight. Understand that you will get a credit for property taxes at closing, and this will help ease the burden of closing costs. You can up your price knowing that you’ll be getting some credit at closing.

Of course, as an agent, I would take care of explaining all of this to you, so you don’t have to remember it. But you’ll at least understand what I’m talking about when we buy your next home 😉

Thank you for reading! Questions and Comments are welcomed!

 

 

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