The Most Acceptable Offer
By: Tom Meyer
Residential real estate negotiations are conversations between a seller and a buyer. In buyer favorable or balanced markets, the discussion goes like this:
Buyer: I would like to buy your house. How much money do you want?
Buyer: I will give you $450,000
Seller: How about $475,000?
Buyer: OK. But before I commit to giving you $475,000, I want to inspect this, that, and another thing. If I don’t like what I see, I might ask you to change the price. Do you understand?
Seller: Yes. I will wait and wonder while you do what you have to do. Maybe you’ll let me know in 30 days or so?
Buyer: Yea. Maybe.
We are three years into a Seller’s market. The Buyer-Seller conversation goes like this:
Buyer: I want to buy your house. How much money do you want?
Seller: How much you got?
We’re living in a scene from National Lampoon’s Vacation. If buying is what you want to do, you’re going to have to play by rules that change depending on the homeowner’s desires. The opportunities to negotiate prices and terms that would be more favorable to the Buyer’s side are few. The statistics show that homeowners are likely to get their asking price and more when the sale occurs within seven days of going on the market. Few homes linger longer than a week.
We can’t know for sure what price or terms an owner will accept. Owners rarely know what they will take before seeing the offers that make up their choices. If the goal is to own the house, we have a simple strategy to help clients make offers owners might be eager to accept. Our idea isn’t a strategy for everyone, but everyone can decide for themselves.
1) Accept that you will pay a fair market value for the home PLUS an incentive for the Seller to accept your offer.
- a) If you outbid the crowd, you are the one person who is willing to pay the high price. If you need to sell right away, it’s unlikely that the people who came in second or third, or fourth will pay the price you paid.
2) The Seller does not want to share any risk with you.
- a) Contingencies protect buyers from making commitments to close. If you need a contingency, you’re asking the Seller to take a risk that you’re not willing to take.
3) If you need the protection of a contingency to get a commitment letter from a mortgage lender, you may not be the most attractive Buyer.
- a) If you want to borrow the money to purchase but can show that you have sufficient funds in savings accounts to close on the property if the bank decides against loaning, you could structure your offer to exclude the contingency to get a lender loan commitment.
4) A commitment letter is typically issued after underwriting has approved you. The commitment will always include conditions. No one gets the lender’s money until they sign all of the documents at closing. When a buyer delivers a commitment letter 30 days after acceptance, the Buyer and the Seller are still at risk right up to the end of the closing when the bank finally releases the funds. A commitment letter 30 days after acceptance is no better than a commitment letter issued before acceptance of an offer.
- a) Some wise lenders underwrite the borrowers subject to obtaining an accepted offer. If your lender doesn’t preapprove you through underwriting, you are at a disadvantage.
5) Expect to take on the responsibility of deferred maintenance. Anything can be considered a defect, but not all conditions are bad enough to pass on buying a house.
- a) If you can’t buy without the protection of a contingency to inspect the property to discover defects, decide if there is an amount you can live with paying to correct conditions. A typical inspection might turn up a few thousand dollars of conditions needing attention. I’m not going to say what is or isn’t a big issue. That’s up to you. If you can agree to live with something, but you can’t commit to buying if the condition exceeds your comfort level, we can establish a threshold that might satisfy a seller who has no better options.
6) Closing dates: Owners don’t know the ideal closing date until they start planning their move and organizing movers. Allowing the Seller a few days after acceptance of the offer to select a closing date within a range of dates is the simplest and most impactful concession you can make.
7) Closing costs: The standard offer to purchase is prewritten to assign certain closing costs to the Seller. Title insurance. Proration of taxes. Transfer tax fees. Broker fees. Preparation of the deed and gap insurance. Increasing the Seller’s net by decreasing their closing costs can help avoid an appraisal issue.
8) Guarantee a price. Lenders loan on a percentage of fair market value, not the purchase price. If the lender will loan 80% of the purchase price, the property has to appraise for the purchase price or more. The financing commitment contingency is rigid. Buyers can declare commitments unacceptable for the slightest deviation from the terms stated in the contingency. If you have to have a financing commitment contingency or an appraisal contingency, the Seller will look for some safety net to ensure you will close on the price you offered to pay.
- a) With home sales prices rising and more homes closing this year, we may have a better supply of recent sales to allow appraisers to support the higher prices. I’m less concerned about appraisals that will happen in May and June. Still, it will help to promise to make up differences as necessary to satisfy the lender.
The Most Acceptable Offer
When you find the house you want to own, make the offer that others will have to beat. Know you will pay more than the home is worth to the next, most likely Buyer after you. Know the house will not be perfect. Accept that you might have made a more significant commitment than necessary. Prepare to show yourself as the most committed, safest Buyer the Seller will meet.
The most acceptable offer will always be when the Buyer lets the Seller name their price. We’re not there yet, but it’s close. To win in this market, you want to be the most attractive Buyer. Sellers will judge your appearance on your demonstrated commitment to close with no surprises, verified financial ability, and risk tolerance.
It’s a fair question to ask me if I would be willing to make the kind of commitment I just described. The answer is an emphatic yes, I did exactly as I described. Patrick did the same. Again, this strategy is not for everyone. But everyone who uses this strategy eventually gets an offer accepted and goes to closing.