Determining Difference Between a Good Offer and a Bad Offer on a Home
After you’ve put your home on the market, how do you decide if a buyer’s offer is acceptable?
Price is just one of the many important factors to assess in a prospective homebuyer’s offer. Below are some issues to address before you accept, reject or counter a buyer:
Is the Offer Complete?
In California real estate, everything must be in writing. And smart sellers require specific items to effectively evaluate a buyer’s offer. So when an offer arrives, the plenitude of the package will speak volumes about a buyer’s willingness to cooperate and an agent’s ability to follow instructions.
Purchase Agreement: First of all, is the offer on the correct form? In California, there are many different purchase agreement forms designed for different situations. The most common is the Residential Purchase Agreement, which would be used in a standard transaction on a single-family home.
Other offer forms include the Notice of Default Purchase Agreement (seller in foreclosure, buyer an investor), Vacant Land Purchase Agreement, Residential Income Purchase Agreement (rental properties, usually more than one unit), Probate Purchase Agreement (property in probate process), Manufactured Home Purchase Agreement (structure is a manufactured home, on leased or owned land), and the New Construction Residential Purchase Agreement.
Each form has terms that are unique to different types of transactions. And an offer on the wrong form could leave gaping holes in the transaction that later become disputes.
There are also contract addenda to cover situations such as short sales, agent representation, and inspections.
Proof of Down Payment: The offer should include a copy of a financial statement showing enough money to cover the buyer’s down payment and closing costs. Be wary of funds that are not in a U.S. financial institution, in U.S. funds. Escrow will not accept them, and it could add time to the deal to convert funds later.
In rare cases, non-U.S. funds are also a red flag for scammers trying to steal properties from unsuspecting homeowners and listing agents.
Financing Preapproval: If the buyer has applied for a mortgage, they should have a loan preapproval, dated within the last 30 days. It should also include contact info for their loan officer, in case your agent wants to discuss the buyer’s qualifications or has questions about their loan program.
Be wary of loan “prequalifications.” A prequal usually indicates the lender has not actually examined the buyer’s financial documents or done anything to legitimately evaluate the borrower. A preapproval goes deeper into the loan process.
“Cross-Qualification”: You’d be surprised how many loan prequalifications and preapprovals are fake. If your agent doesn’t know the buyer’s lender, you should require the buyer to be evaluated by a trusted lender. If the buyer is resistant to talk to another loan officer, this could be a red flag that they are not truly able buyers.
Earnest Money Deposit: The good-faith deposit should be at least 1 percent of the sales price. This is money that will be held in trust by an escrow company that oversees the transaction. If it’s too little, the buyer could more easily walk away at the end of the transaction without financial pain.
No Blank Lines: The offer should be completely filled out, with no blank lines. The financing section should have terms of the buyer’s proposed mortgage, including the loan type and maximum interest rate and points. The down payment and loan amounts should be accurate and reflect the financing indicated on their loan preapproval.
All of the agent’s broker and contact information should be provided, and all pages should be signed or initialed where necessary.
Price: Don’t focus solely on the purchase price of the offer. True, it is important. But the terms of the offer can be just as important.
In a buyer’s market, when it’s more difficult to sell a home, the offer may be much lower than the list price. In a seller’s market, you may attract multiple offers from buyers willing to pay more than the list price. At the end of the day, an appraiser will have an impact on the final sales price, so terms are crucial.
Financing Type: Bigger down payments equal lower-risk offers. A small down payment, a closing cost credit and some down-payment-assistance programs create escape points for a buyer and obstacles to close a deal. Knowing that, you must decide if you’re willing to take the chance on a higher offer or go with the buyer who is more likely to close worry-free.
Who Pays Fees: A real estate transaction includes third-party fees for such services as escrow, title insurance, government recording fees, homeowner association fees, home warranty, and any inspections or certifications the buyer may want.
Buyer and seller each have their own fees. The contract should spell out who pays for each and every one.
Seller Credits: If a buyer doesn’t have enough money to pay their own closing costs, they will ask you to credit back money to cover their costs. This is common with some low-down mortgage programs such as FHA and VA. Buyers will often add the amount of their closing costs to their offer and then ask for a rebate back for the same amount, effectively building those costs into their mortgage.
The problem is, if the offer price is higher than market value, this could lead to low-appraisal problems. And a low appraisal can kill a deal. Either the buyer comes up with the extra down payment, or you reduce your sales price to the appraised value.
Contingencies: In most California real estate contracts, buyers have 17 days to investigate anything they choose about a property, perform an appraisal of the home’s value, and get deep enough into the loan process to feel confident that they can close.
At the end of the contingency period, you will ask the buyer to remove their contingencies in writing. This signals the buyer’s commitment to close the deal, and earnest money deposit in most cases becomes non-refundable.
In hot markets, the buyer and seller may agree to shorten or even eliminate some of those timeframes. And shorter contingency periods mean less risk for you — if the buyer walks away, you will have lost less marketing time.
And in extreme cases, a buyer who is so eager to purchase your home that they forego an appraisal or inspection escape clause, at the risk of loss of their deposit, could be a no-brainer.
If the property is vacant, the buyer usually would take possession after the sale closes. But if you live in the home, you’ll probably want to make sure you negotiated three days after the closing to move out. This is typical in Southern California, especially when a seller needs the funds from their home sale to complete the purchase of their new home.
The change of possession must be clearly addressed in the contract to avoid disputes at the end.
If a buyer offers you more time to move out, or even offers to rent back for a month until you find your new home, that could save you money and the necessity to move twice.
Price is indeed important in a home-sale negotiation. But the terms of the sale can add monetary and intrinsic value to any transaction.
Thinking about selling your home? Want to discuss the best strategies with a Certified Homeowner Advocate? Call us today at 951-778-9700 or use the form below and ask for a 10-minute consultation.
Illustrations and photos courtesy of phasinphoto, Stuart Miles, Danilo Rizzuti, Ambro | freedigitalphotos.net
Sellers: Evaluating an Offer on Your Home | Riverside CA Homes For Sale | Home Seller Strategies | Brian Bean and Tim Hardin Dream Big