You’ve worked with your Realtor to get your home ready to sell. Your home has been professionally photographed, and you’ve priced it competitively. Your Realtor’s marketing plan is working because you’re getting showings daily. You receive multiple offers from buyers wanting to purchase your home. Isn’t it great to be a seller in such a strong sellers’ market?
Getting multiple offers can be an ideal situation. However, both the seller and his Realtor feel pressure to choose the right contract. Otherwise, a buyer could leave them high and dry, putting them back at square one. Falling out of contract is tough because it’s easier to sell a brand new listing with no back story than one that has been off the market for weeks and has become stigmatized. (Many buyers worry that when a home comes back on the market, perhaps a home inspection revealed problems with the house. Or, they wonder whether they buyers fled for a good reason.)
Compare the Offers
Let’s say that you receive 2 offers on your property that is listed for $450,000. Here’s an outline of the first offer:
- Buyer Adam offers you $455,000, and he wants you to pay $5,000 of his closing costs. This is essentially a full priced offer since it nets you $450K.
- The contract is contingent on financing, and you know that he’ll only be making a minimal down payment of 5% for a conventional loan. He has not included a preapproval letter from his lender because she’s still waiting on some remaining paperwork from Adam.
- A second contingency is for the appraisal (any time a mortgage is taken out, the lender will require an appraisal).
- Earnest money deposit is $1,000 which is low for a house in this price range.
- The closing date given is two months out, which is a long time for a home to sit on the market with no showings and no marketing. Buyer Adam needs this additional time because his current lease does not expire until then.
Here is a run down of the second offer:
- Priced at $447,000, the offer from Buyer Bill is $3,000 lower than list price.
- This is a cash buyer, and no contingencies are listed. No appraisal will take place prior to closing.
- Earnest money is $3,500 (a reasonable deposit in this price range).
- The close date is one month away which is very practical, especially since there will be no lender delays.
Ask the Right Questions
When you talk with your Realtor about Buyer Adam’s offer for $455,000, here are some questions to discuss:
- How confident are we that Adam’s financing is going to come through? Adam is making the smallest down payment possible for his type of loan, so I would worry whether he has enough funds to buy a home. He needs the seller to pay $5,000 of his closing costs, which suggests he does not have much cash readily available. Is Adam going to follow through with getting his lender the paperwork needed for preapproval? Is the lender reputable, or is the company notorious for dropping clients during the underwriting process the week of closing?
- If the list price of $450,000 was already a little high for the neighborhood comps, will the $5,000 seller paid closing costs hurt the appraisal? Read more about how seller paid closing costs affect appraisals.
- If Buyer Adam is only willing to put down $1,000 as earnest money while the home is taken off the market, is he going to be more likely to back out of the contract?
- Is two months too long to keep my home off the market? Can Adam terminate his current lease, or is he willing/able to close on the new house while still paying rent?
Although Buyer Bill’s cash offer of $447,000 is less than list price, it also has fewer red flags. Here are some points to discuss with your Realtor:
- Can Buyer Bill provide a proof of funds letter showing that he actually has the cash necessary to close?
- After paying for attorney fees, Realtor commission, etc. how much will the seller net from closing? (Your Realtor should be able to provide you with estimates in a spread sheet or other form showing your bottom line after all closing costs.)
- Is the $3,000 difference in these two offers worth the risk? You wouldn’t believe how many sellers only care about the getting the highest price for their home. And I totally understand from a seller’s perspective since I’ve sold many of my personal investment properties over the years. Of course a seller and his commission-based Realtor want to get the highest possible price after spending time and money marketing and preparing the home to list. However, if that $455K offer never gets to the closing table, then it doesn’t matter whether the price was $460K or $500K. The offer was based on money that Buyer Adam did not actually have.
Multiple Offer Situations in Today’s Market
In this example, the $3,000 difference in the seller’s bottom line is relatively small. However, right now we’re seeing multiple offer situations becoming bidding wars where buyers are willing to pay well above list price in order to secure their top choice of homes. Imagine this same example but with offers of full price versus $10,000 over list price. You can imagine how tempting it would be to just take the higher offer. In these cases, your Realtor’s experience and advice will be crucial. She’ll be able to have a long talk with you to discuss the pros and cons of each offer.