How to Evaluate Home Offers to Purchase
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If you are selling your home or will be soon, you’re probably anticipating the part of the process where the perfect buyer comes along and offers you exactly what you’re asking — or even better — more than what you’re asking. From there, you close on your home quickly, and you both go on your merry way.
Selling a home rarely produces such an ideal scenario. From fickle buyers to failed inspections, many variables affect how timely and smoothly you will close on your home.
But as unpredictable as the process is, one thing you can and should do as the seller is prepare yourself for receiving offers on your home. Doing so will ensure you make well-informed decisions and will help you avoid making any moves you may later regret.
In this article, we’ll take a look at what to consider when evaluating offers to buy your home and how to navigate the process in a way that prioritizes your bottom line.
Preparing yourself to receive offers entails much more than just knowing the amount you hope to walk away with after you close on your home. You’ll want to spend time understanding what to expect when reviewing proposals — whether it’s a single bid or multiple offers — long before the first one comes in.
It’s important to keep in mind that price is just one consideration when reviewing offers. You’ll want to prioritize the proposal with the terms that collectively point to a timely closing. We’ll touch on that later in this article.
Margaret Very, a broker and realtor at Page Taft Christie’s in Essex, Conn., says a few things can contribute to your preparation.
Communicate with your agent
Communicate early and often with your real estate broker if you are working with one. “Communication is huge,” Very told LendingTree. “The earlier you start preparing… the better.”
Education is also key. Very spends time informing her clients on what to expect well in advance. “I bring them in a sales and purchase order (a blank contract) and talk to them about the terms that are going to be on it.” Consider asking your agent to do the same so you can become familiar with the language of the contract ahead of time.
Understand the fair market value of your home
It’s also crucial to have a clear understanding of what “fair market value” means, as many sellers have a misconception about what determines the worth of their home. Sentimental attachment to a property can lead people to believe their home is worth more than it actually is on the market.
“The definition of fair market value is what a ready, willing, and able buyer is willing to pay,” said Very, who has been an agent for over three decades. “It’s not what I think or the seller thinks; it’s what a qualified buyer will offer.”
Naturally, you and your agent would have arrived at your listing price based on reviewing a Comparative Market Analysis, or “comps,” of homes similar to yours. But it’s important to keep the goal of getting fair market value for your home in mind as you enter the offer stage.
Getting offers from multiple buyers
Many sellers are hopeful that their home will elicit numerous offers, potentially sparking a bidding war and driving the price of their home well above asking. Depending on the market and the price of your home, that may or may not be the case.
While receiving competing offers can be advantageous for sellers and provide an opportunity for the home to sell on the most favorable terms, it can also make for a complicated and confusing process.
Very points out that a multiple-offer scenario can either play out well, or it can backfire (as can delaying a single offer in hopes of receiving multiple).
“In some cases, it can create a sense of urgency on the buyer’s part … but on the other hand, there are buyers, who when told they are in a multiple-offer situation, just back out,” she told LendingTree. “They don’t want to participate in a bidding war. So there is potential to go from multiple offers to no offers.”
Options for handling multiple offers
If more than one offer does come in, you will need to determine your course of action:
- You can accept your “best” offer and reject the others
- You can let prospective buyers know that other offers are on the table and invite them to make their “best” offer
- You can counter one offer while putting the others to the side awaiting a decision on the counteroffer
- You can counter just one offer and reject the others
Furthermore, you will also need to decide whether or not to disclose the details of the offers to the other buyers, again, a move that can elicit an even better offer, or one that can leave you with none.
Each option has risks and rewards
Recognize that each of these approaches has advantages and disadvantages. Accepting a single offer without asking the other buyers to rebid could potentially leave money on the table, while inviting prospective buyers to present their best offer could frustrate them, causing them to move on in their home search, and leaving you with low or even no offers.
Karen Alquist, a family and children’s photographer from Madison, Conn., has navigated multiple-offer situations a few times, including right before the housing crisis and a few years after.
In 2005, when selling her South Orange, N.J., home during the housing bubble, she received several offers immediately following the open house.
“We had seven offers, six over asking. And the top four all came in at almost the same [price]. So then we asked them to rebid,” Alquist, 48, told LendingTree.
Five years later, in 2010, it was a different story. When Alquist was selling again, her home received just three offers. She and her husband decided not to counter any of the bids or make the buyers aware they were in a multiple-offer situation. Instead, they reviewed each contract and chose the offer with their best terms.
Your course of action very much depends on the conditions of the market in which you are selling. The differences between the real estate market in 2005 and 2010 when Alquist was selling her homes, warranted different approaches.
This is why Very emphasizes communication with your real estate agent. She says sellers must discuss with their agent, in advance, what to do in the event of a multiple-offer scenario.
Your broker will be able to offer you advice and guidance on how to best navigate your situation.
How to evaluate purchase offers from buyers
As you begin looking at offers, you want to have a full understanding of all terms and conditions, so that you can identify the best offer for you.
Whether you are evaluating one offer or multiple bids, here’s a checklist of what to look for in each as well as some things to take into consideration.
- Price. Ideally, you want the highest price possible, but keep in mind the goal is to get at least fair market value.
- Method of payment. A cash offer means a faster closing and no chance of financing falling through because of a low home appraisal or other lender requirements.
- Preapproval. If a prospective buyer is getting a mortgage, you want to work with one who is preapproved. Very cautions sellers not to get into a binding agreement with an unqualified buyer, which can take weeks to find out, all while your home is off the market.
- Earnest money. Also called a good-faith deposit, this is what buyers put down when making an offer to show their commitment. Conventional wisdom says a more substantial deposit signifies a serious buyer, however, Very points out that an extremely qualified and serious buyer with a VA loan or an FHA loan would likely be making a small deposit.
Closing date. The intended closing date needs to work for you, especially if you are moving out of town or are purchasing another home.
- Date of possession. This term is important, depending on your situation, as it could mean you may need to find temporary housing or rent back the home from the buyers.
- Expiration of offer. Buyers will include a date the offer expires to ensure timely negotiations.
- How real estate taxes and utilities will be prorated and who will be paying them.
- Who will pay for title insurance, survey, termite inspections, etc.
- State-specific requirements. For example, attorney review, disclosure of specific environmental hazards or other clauses.
- Special requests. If the buyer would like you to leave specific items or appliances in the home, this must be stated.
- Contingencies. Any contingencies included in the offer means the purchase will go through only if those conditions are met. Sellers can expect to find the following common contingencies in offers:
- The buyer’s securing of financing
- A title search (a historical review of all legal documents relating to ownership of the property to ensure that there are no claims against the title of the property)
- The purchasing of title insurance (in case the records contain errors or there are mistakes in the review process)
- A professional appraisal of the home (requested by the mortgage lender to ensure that the home’s actual value justifies the loan amount)
- Any additional contractual promises you have made (home improvements, etc.)
- An independent inspection of the home’s structural and functional condition (foundation, roof, electrical, heating, plumbing, etc.)
- An independent termite inspection
- A final walk-through by the buyer (to verify that the home is in the same condition as when the sale agreement was signed)
Another contingency you may encounter is the buyer’s need to sell their home before closing on yours, also called a Hubbard Clause. This contingency can make the coordination of the sale a bit more complicated — even more so if you are simultaneously buying a home with the same condition.
Every clause impacts your bottom line
As you review your offers, recognize that several of the terms and conditions, not just the amount the buyer is willing to pay, impact how much money will be in your pocket at the close of the transaction. For this reason, the offer with the highest price does not always amount to the best offer.
“Maybe you’ve got a buyer that’s going to waive inspection,” said Very. “It’s a few thousand less than you would like to get, but it’s [beneficial] because there will be no second round of negotiations after inspections.”
Alquist, when shopping for her home in 2005, did exactly that. She had already been outbid on six houses, and with her existing home under contract, was frantically trying to find a house.
“We were so sick of losing; we were trying to figure out what we could do. That was one of the things our realtor said: waving inspection might make us look better.” And it worked. They beat out 15 other bids, including a cash offer that was $5,000 higher.
Work with your agent closely to review how each condition and clause will affect your specific situation and your net proceeds from the sale.
Watch out for unreasonable requests
Make sure you review the contract carefully. Do not agree to any terms and conditions that will likely delay the purchase or add unnecessary headaches.
What appeared to be an attractive cash offer on Alquist’s South Orange, N.J., home turned into a nightmare situation when the buyer requested multiple soil-testing related to a removed oil tank and nitpicking requests regarding appliances.
Very has seen her fair share of unreasonable requests. She recently encountered a buyer who demanded professional cleaning to the tune of $8,000 on a $325,000 home.
Any request that seems over-the-top to you should be addressed immediately.
Since your goal is to walk away from the home-selling process with the most favorable terms and price, how you approach negotiations with prospective buyers is crucial.
Very describes the negotiation process as a combination of skill and art. “It’s part numbers, and it’s part knowing the market and knowing your situation, needs, and desires,”
Keep these tips in mind:
- Be flexible. Because there are so many moving parts during the sale of a home, being as flexible as you can, whenever you can, will help make the transaction go as smoothly as possible. If you have wiggle room on the closing date or other terms, offer that up.
- Honor reasonable repair requests. If you have a favorable offer on the table, be wary of haggling over repairs so much that you send the buyer walking.
- Buyer and seller concessions. Use buyer and seller concessions to your advantage. If a buyer is taking on some of your closing costs, that improves your bottom line and can offset a lower sale price. On the other, taking on some of the buyer’s closing costs can help speed up the sale and improve their chances of qualifying for financing.
- Use deadlines. When countering offers or making requests, use specific dates to keep everyone on task.
- Have an open mind. Not everything that appears to be a hurdle is. When Alquist was evaluating offers on her Verona, N.J. home in 2010, she chose an offer with a conventional mortgage over a higher bid with an FHA loan assuming it would make for a faster closing. In the end, the home did not appraise high enough, and the buyer later switched to an FHA. Alquist regrets passing on the FHA loan with the higher offer.
- Disclose everything. The NAR advises sellers to disclose all known defects to their buyers proactively.
- Respond quickly. Don’t delay responding to buyers if you want the sale. They may move on.
- Stay calm and be patient. Keep communication as civil and agreeable as possible.
Expect the unexpected
Attempting to predict how the sale of your home will play out is an exercise in futility. Even with the best and thorough preparation, you may encounter some unusual scenarios as you navigate offers on your home.
But you can help reduce confusion and improve your confidence as a seller by following the tips outlined in this article.
Remember, communication with your real estate agent throughout the process is critical as is educating yourself and preparing as much as you can for what to expect as well as for the unexpected.