It’s Not Just About Price, It’s About What’s Hiding in the Contract

The highest offer might not be the best offer.

Want to get the very most money for your home in this hot seller’s market? Read on to learn why it’s not just about the price, it’s about what’s hiding in the contract.

This week I’ll talk terms, contingencies and the little-known clauses in the contract that could keep you from getting to the closing table. I’ll also explain why a cash offer is not always the best offer to choose. 

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Price Is Just The Beginning of The Conversation

When you get an offer, it’s exciting to look at the price and start celebrating. But, there are so many other terms and considerations in an offer you receive – other than just price.  

Price is really just the beginning of the conversation.  Depending on the other terms in the contract, the offer you accept could be full of hassles and contingencies. This could lead to opening negotiations back up after taking your home off the market. Or worse – having to put it back on the market after going under contract.

To get the attention of a seller in today’s competitive market, buyers are using creative terms when making an offer. Unfortunately, we are seeing deals fall apart due to these terms – even after going under contract.

The thing to pay most attention to when it comes to price, is your NET price.  The price listed on the purchase price line, might not be the actual purchase price.  For example, we must look at things like closing costs credits, rent back fees, and the escalation clause. 

Escalation clauses are common right now in our market. However, the highest price someone offers in their escalation clause might not be the price you get.  The final agreed upon price depends on what ALL the buyers offer and what their escalation clauses are too.  Don’t worry, though! I have an awesome spreadsheet to present each offer, so you know exactly what the final price will be. 

One thing I do for my clients at this stage, is provide an estimated seller’s net sheet.  This shows exactly what to expect as far as proceeds based on the contract in hand.  It includes things like commissions, transfer taxes, closing credits to the buyer, title charges and other closing costs – all based on the agreed upon settlement date. 

Everyone wants a great price for their home, but it’s about more than just price. It’s also about the terms in the offer.  Terms are a specific set of circumstances, needs, timelines and goals.  They determine which offer is the best offer for you, even if it’s not the highest priced offer you receive.  

Equally As Important Are The TERMS of the Contract

Not only do you want the best price, you also want the best terms for your situation and timeline.  You also want to accept the offer that’s most likely to make it to settlement, with the least risk of folding. 

All that is possible, but understanding the “hidden” terms in the contract is important.  Here’s a rundown of important terms to pay attention to and why they are equally as important as the price:

• Appraisal contingency – This is a big one these days.  Even if your buyer doesn’t include an appraisal contingency, their lender is sending out an appraiser no matter what.  We still need your home to appraise to avoid any hiccups while under contract.  Homes are selling for more than the comps will support. Therefore, we are seeing many contracts have issues with appraisals, even when there is no appraisal contingency.
  • This is why I have the square footage professionally measured (click here to read more)—because accurate square footage can oftentimes circumvent an appraisal issue.  It is not uncommon for the square footage in the tax records to be lower than the actual square footage. Providing our measured square footage to the appraiser can help with the appraisal.   
  • I also meet with the appraiser to discuss the comps and how we determined the listing price.  I provide an overview of the offers and how we came to the agreed purchase price.  This, combined with a list of updates you’ve made to the home, are given to the appraiser. It makes his job to appraise your home for the agreed upon price as easy as possible.   This way, we’ve done everything we can to get the purchase price and the appraised value of the home to be the same and not have to renegotiate price again.

• Financing contingency – Did you know that a finance contingency stays in place until settlement, even after the contingency period has expired?  That’s right, it never goes away.  That means the buyer can lose their job the day before settlement, void the contract and get their deposit back.  Therefore, this is a term you’d want to think twice about agreeing to, no matter what price is offered.  Even if your buyer wants to pay the most for it, they might not be able to qualify. This leaves you in the position to have to re-list and start the process all over again.

• Lender choice – Buyers can use any lender they want to finance their purchase, but it’s important to know which lender they are going with. I require a pre-approval letter to make an offer, as that will determine so much.  I also call the lender to confirm that the buyer’s file has been fully approved.  That means the lender has pulled credit and has received all the documentation to fully approve the loan.  This includes things like tax returns, paystubs, bank statements and everything else they need to get this contract to settlement.

• EMD – That’s real estate lingo for Earnest Money Deposit.  This is money that the buyer sends to the seller’s agent. The intention is to show the buyer’s commitment to follow through with the contract and show up for settlement. The buyer would also get this money back if they void for a reason we allow in the contract.   It’s important to have a healthy EMD amount based on the sales price.  Typically, we want to see anywhere between 3-5% or more for an earnest money deposit. Anything less would make me question how earnest they really are.  The only time it makes sense to take less, is if the buyer is financing with an FHA, VA or other low down payment type of loan. In that case, it’s important to have a healthy deposit based that buyer’s financial circumstances.  Overall, the EMD must “make sense” for the overall contract. 

• Home Inspection – This is the contingency that can make or break a deal after going under contract.  Depending on what the inspector finds, it could even change the price you receive at settlement.  Therefore, we want to minimize the time the buyer has to conduct the inspection. We could even provide a list of repairs or allow for pre-inspections to a home inspection contingency entirely.

• Settlement Date – We’ll discuss your ideal move-out timeline and suggest a preferred settlement date that suits your ideal timeframe.  Of course, I can’t guarantee that every buyer will be able to agree to the exact date you want.  We also don’t want to scare off any potential buyers simply because of a closing date. So, this is something I would state as a preference – versus a requirement.

• Rent Back – This is a great clause to include if you want to close on your current home and don’t want to move right away.  These days, we can even negotiate a FREE rent-back for you for up to two months.  How great would it be to live mortgage-free and rent-free for two months in your own?  If this is something that interests you, we can certainly negotiate for it.

• Attorney choice – The buyer and seller will each hire an attorney to review and execute the contract of sale.  I highly recommend using a firm that handles real estate transactions exclusively. Or at the very least, specializes in them.  Now is not the time to use a friend or family member just because they are an attorney, or to save a little money.  Any attorney CAN do them. However, it is those who specialize in real estate that will make this part of the process seamless.  Using an attorney who isn’t proficient in real estate transactions could result in a missing deadlines.  They may not be up to speed with some of the creative terms being agreed to between buyers and sellers. This could delay the process, give the buyer an “out”, and they would get their entire deposit back. This leaves you to have to relist your house and start all over again. (Trust me, your attorney-friend will most likely be relieved you don’t ask them for a favor on this.)  If you don’t already have an attorney in mind, I can provide referrals to the ones we work with often.

• Settlement company/Title Company choice – Technically speaking, the buyer can choose the title company, but it is usually selected by the buyer’s attorney from a list of preferred companies.  The title company is a crucial choice to make. They are responsible for making sure settlement happens on time and that everything that needs to be done goes smoothly.  This is another reason using a real estate attorney is important. They have companies they work with often that are less likely to delay settlement.

• Home Sale or Home to Close Contingency – These contingencies aren’t typical in today’s competitive market. However, it’s common that a buyer needs to sell their home and doesn’t disclose that in their offer. Therefore, it’s important to know where the funds are coming from for the down payment.  Even if a contingency is not included, I still ask the lender and their agent if they have a home to sell. And if so, where they are in the process.  Asking the right questions to the right people is still something we must be vigilant about. This helps us know what may happen down the line.

Why A Cash Offer Is Not Always The Best Offer To Choose

Cash offers are great – as long as they’re the highest offer AND there are no other terms that are deal breakers.  If the cash offer isn’t the highest or has other terms that make it less favorable, then it’s worth looking at how the financed offers measure-up.  One thing we’ll look out for is a “cash” offer that’s not really cash.  There are clues in the offer we’ll look out for.  We’ll ask for proof of funds, for example, to make sure there is no funny business happening. 

It’s All About You

I can’t reiterate enough, don’t focus solely on price, even in this seller’s market. 

Yes, getting the highest price is important. But – equally as important is getting to the settlement table and the move-out day on YOUR terms.

It’s about both price AND terms.  Both will equally define the relationship you will have with the buyer between offer acceptance and settlement.

Don’t worry, I’ll be with you every step of the way. I’ll help you get the best price and the most favorable terms that fit YOUR situation, goals, needs and timeline.

If you or anyone you know is thinking about selling a home in the next year, I’d love to help.  Email me and we’ll start with why you are moving, where you‘re headed, and when you want to be there.