Submitting an offer in a competitive market where you know there are multiple offers feels a bit like sending a racehorse to the starting gate and hoping for the best. Given that it is May and the Kentucky Derby takes place on the first Saturday in May followed by the Preakness just a couple of weeks later, I can’t help but notice the similar feelings and emotions. For the Kentucky Derby 20 three-year-old racehorses are loaded into a starting gate after years of careful planning and strategizing, only to let loose to run hopefully what will be their best race for what is known as the greatest two minutes in sports.
Anyone that knows horseracing, knows the favorite horse doesn’t always win the race. There are many factors at play in these races: the surface, the jockey, the other horses, the starting gate, the speed at the start of the race and so much more. Just like there are many contingencies at play for each offer that is submitted for a home.
I like to think that each buyer is submitting their best offer when they want to purchase a house. Lots of careful thought and consideration should go into each offer just like the careful training that goes into a racehorse. Racehorses have a mind of their own and all the factors named above. Sellers reviewing offers with their listing agents also have their own minds and ideas about things like the contingencies in each offer.
I won’t go into detail for each and every contingency in a purchase agreement, but let’s highlight a few and see how they may affect multiple offer situations which can start to feel like a horse race. Contingency number one from paragraph eight of the purchase agreement, the terms of purchase and the source of funds to close. This is probably one of the biggest contingencies and can have the most impact. The old line of “cash is king” certainly is at play here. Buying paying cash for a property it eliminates some of the other contingencies we’ll talk about next, but there are also other terms that can be helpful when comparing offers. The type of mortgage (such as conventional, FHA, RD or VA), amount financed, and interest rate can all help a seller get an idea of how strong this buyer or offer might be.
An appraisal gap is another thing that we are seeing more often with offers that are financed when offering above list price. A mortgage cannot be for a higher amount than the home is worth, or what it appraises at, an appraisal gap is the cash to cover the difference if needed. Offers with large appraisal gaps are more attractive than offers without appraisal gaps, because the buyer is committed to bringing the cash to guarantee the difference if there is an issue with the appraisal. Not every home that goes over list price has an appraisal issue where a gap is utilized to cover a portion of the amount.
Paragraph nine and identifies the buyer’s obligation to consummate the transaction. There are three options here: not contingent, contingent upon closing and contingent upon the sale and closing. If the offer is contingent upon the closing or sale and closing of another property, that means the buyer cannot afford to buy the property they are offering on without the proceeds from the sale of the existing property. A non-contingent offer is the strongest here. Sometimes when we get into contingent offers it can create a domino effect if one of the transactions involved begins to have issues, which can hold up everyone’s transaction until it is solved.
The next “favorite” contingency people talk about the most right now is the home inspection. This means that the buyer is willing to purchase the home without a certified inspection looking at the home, and is committed to purchasing the home as is, without any negotiations or repairs for the home if there are any problems. An inspection is not a bad thing, and every single home (even brand-new construction) will have things that can be fixed or updated on an inspection report. I like to think of a home inspection report as the ultimate to do list for a house. With that being said, some people are comfortable waiving them completely based on their skillset, budget, previous home experience or even skillsets of friends and family that may be able to help if a problem arises. An offer without a home inspection is attractive to sellers because it eliminates the waiting period where a buyer can back out of the transaction because of what may be found on an inspection report, that doesn’t mean a seller has something to hide if they accept an offer without an inspection, it simply means there is one more hurdle or delay to get to the closing table.
Property surveys are outlined in paragraph 18 of the current purchase agreement. I don’t find that a lot of my clients elect to do to the survey during the transaction, but they are important if there is ever a question of what piece of property belongs to who. Surveys always need to be done if a fence is being installed near a property line, so that the fence company is installing the fence on the right piece of property. If the fence is installed on wrong property line or wrong location and a neighbor disputes it and is right, then the fence would need to be removed at the fence owner’s expense. I can’t think of a worse way to welcome yourself to the neighborhood if that were to happen.
While the contingencies I outlined above are not everything that a seller may consider when reviewing multiple offers, they can certainly play out like a horserace with all the offers in the starting gate and then they get reviewed. At first the cash offer may jump out and look like the best offer, but it’s a lower price than the others. Then the offer with an FHA mortgage and local lender with $15,000 appraisal gap look like a strong solid offer and moves into contention, but they want a 10-day inspection period. One of the offers has a conventional mortgage, waives inspections, and has a $5,000 appraisal gap but has a lender that is not local, and the listing agent is not familiar with and wasn’t able to connect with the buyers agent for any additional information. That offer fades into the middle of the pack.
So which offer wins? Well each seller is different but I’ve found the winning offer in competitive situations usually look something like this: at least 10% over asking price, a strong local lender if getting financing, an appraisal gap, contributing to sellers closing costs, and a straight forward shortened inspection period if inspections are done after the offer deadline, and an a buyer’s agent representing you with a good reputation and excellent communication skills.
In case you didn’t have a winning offer this week or your horse didn’t run its best race there’s always plenty of Mint Juleps on derby day to help ease the pain. Here’s the recipe for the Woodford Reserve Classic Mint Julep.
- 2 oz. Woodford Reserve®
- 1/2 oz. Simple Syrup
- 3 Fresh Mint Leaves
- Crushed Ice
Express the essential oils in the mint and rub them inside the glass. To the same glass, add simple syrup, bourbon and crushed ice. Stir. Garnish with more ice and fresh mint.Posted by Ariel Christy on