The Highest offer is the best offer… Right?

NOPE!  Contrary to what most people think, the highest offer is not always the best offer.  It’s hard for most people to understand that sometimes taking the most money is not always the best decision, especially when you’re talking about their home.  When someone classifies a house as their ‘home’ and they have emotional ties to it, they immediately believe that it’s the most expensive house in the neighborhood.  Now try telling them to take the deal from the buyer who’s offering them $10,000-$20,000 less strictly because the terms are more favorable.  But why would you do that?  Why would anyone take a significantly less amount of money when selling one of their biggest assets?  Let’s look at some reasons why…

TIME KILLS ALL DEALS!  This past summer, we did a deal in which a buyer wanted to wait a full six months to close on a property.  We had two buyers at the table: one that was offering more money and wanted to close in six months, and another who was offering a little less but was ready to close in 30 days.  We begged our seller to take the deal in which the buyer was ready to close in 30 days, and we explained that 6 months is an eternity in real estate, and anything can happen to make the deal go sideways in that length of time.  Unfortunately, all our seller saw was the dollar signs and the convenience of not having to rush to move out of the apartment and organize their affairs.  This property went into contract last summer and was set to close November 1st.  In the summer of last year, the market looked great – But in the last quarter of last year, it looked like the financial markets were all going to melt down.  As a result, the buyer tried everything in his power to back out of the deal.  The seller had already moved out and headed down to Florida for retirement.  Thankfully, we had a little bit of meat on the stick… which leads me to my next point…

CASH DOWN ON CONTRACT IS HUGE!  The buyer from the example above put $50,000 down at contract with no contingencies in the contract at all.  Had he walked away from the purchase, the seller was entitled to keep that deposit.  The buyer had even offered the seller $20,000 to walk away from the deal, but the seller did not grant him the ability to walk away without losing the full 50k. 

CONTINGENCIES…  Had the buyer built any contingencies into the deal, he probably would have gotten that money back and been able to walk away with his deposit.  Luckily for our seller, we came to an agreement in the summer to remove the mortgage contingency from the contract.  What’s a mortgage contingency?  A mortgage contingency is when a buyer is going to buy a house, but if for some reason they can’t secure a loan – they can walk away from the deal and keep their deposit.  Some people also buy houses with the sale of their existing house being a contingency.  So, in that case, if the sale of their current home falls apart for any reason – they can walk away from the purchase of their new home.  In short, when negotiating a contract of sale in the world of real estate – no contingencies is the best position for the seller.

CASH IS KING!  We live in a very fast-moving world, and what moves faster than cash? Nothing.  We previously discussed why time is so important to keeping a deal together, and cash expedites the sales process significantly.  The mortgage process is a long one and can slow a deal down if the buyer isn’t squeaky clean with an 800-credit score.  These banks create a file for buyers and that file gets submitted to an underwriter.  That underwriter reviews the file with a fine-tooth comb – and if anything at all in that file is a red flag, you can be sure that the ‘clear to close’ won’t be coming anytime soon.  However, all cash buyers don’t have to deal with that process – which is why cash is king.

Lastly, if your buyer has no choice but to finance, THE MORE MONEY DOWN THE BETTER – In a rising real estate market, you have to sell the home twice.  Once to the buyer, and next to the appraiser from the bank.  When market prices are trending upward, prices out pace closed sales.  The past 12 months of closed sales are what banks typically go by when appraising homes.  So, in this scenario, its not uncommon for an appraisal to come back short.  With most conventional loans, the loan is based on 80% of the appraised value of the home.  If the buyer is only putting down 20% and the house doesn’t appraise, then they can walk away from the deal.  However, if they’re putting down 30%, they can’t because the cash down covers the difference.

So, to sum it all up – the highest offer is NOT ALWAYS THE BEST OFFER!  Though we’d like to think that it is, there are too many negotiable variables in a real-estate transaction for it to be that simple.  You have to look at the whole deal from a bird’s eye view and look at where the buyer has possible outs.  The more you can minimize those scenarios, the more rock solid a deal is.