All That Glitters May NOT Turn Out to Be Gold
You may be scratching your head about the title. The term “Highest and Best,” which used to refer only to the best use of a piece of property has morphed into a common catchphrase used when a listing receives multiple offers.
In a strong real estate market, sellers typically expect that there will be multiple offers on their homes. Sellers have a natural tendency to say “Let’s take the HIGHEST!” It’s not greed, it’s just human nature.
BUT – a real BIG but – it’s very hard to evaluate multiple offers. Many times it’s a real challenge for sellers and their agents because they have very limited information. It’s always a good idea to look at offers in depth to see what each buyer is really offering – and what they can deliver.
Surprise – the most important issue isn’t price, it’s about CLOSING. Reading each offer carefully and seeing what it contains is critical. There may be some issues that don’t jump out at you and seem reasonable that can blow up a deal quickly.
Remember, if it isn’t closed, it isn’t SOLD!
The biggest issues are always the “what if’s” – the contingencies. Let’s take some examples of an offer that is substantially above all the others – perhaps well above the listing price. For these examples, let’s say the offer is $5,000 above either any other offer or the listing price.
• Example 1 – The offer is contingent on an inspection and financing AND is based on only a 5% down payment. The prospective buyer is stretching and may not even qualify at a lower price. If the house doesn’t appraise, they will either walk OR try to get the seller to make make the deal work.
• Example 2 – The down payment is 20%, but – again – the offer is contingent on inspection and financing. If the inspection points out problems, the deal probably won’t finance and you’re back to negotiating.
• Example 3 – The down payment is good, there are no contingencies about inspection, BUT the appraisal doesn’t work out – no financing! Back to negotiating? YES!
• Example 4 – The offer is all cash. This sounds great, there are no down payments or “will it finance?” questions, BUT there are still contingencies. Again, you could end up in one or more rounds of negotiating after the home was “sold.” (Cash is NOT “always King.”)
The “best and highest use” of the seller’s time is to be very aware of all the things that could torpedo a deal and avoid them. Here are some key things to look at BEFORE accepting a contract:
1. Price – how likely is it the home will appraise at or above the current list price? Most contracts have a contingency for the appraisal that lets them walk – or at least reopen negotiations.
2. Financing – is the LENDER going to ask for repairs in order to make the loan – AND will the buyer expect the seller to bear the costs?
3. Inspections – is the buyer going to nitpick and be unreasonable or unrealistic during the inspection period? Have they been in contract before on another property – and how did that turn out?
4. Closing / Possession – is the buyer flexible on possession and can they close on time? This can be a big help.
Sellers need to be extremely careful about accepting the highest offer as it usually often isn’t the strongest offer. The majority of the time, the person willing to pay the most is the person who can afford the least.