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How Sellers Should Evaluate Multiple Offers
Amid an ongoing pandemic, seller’s markets are still holding strong across the country. In many cities, buyer demand is up while inventory remains low — leaving homebuyers battling it out in multiple-offers situations and sellers trying to navigate it all.
Having multiple offers is great, but how do you ensure you choose the best offer and don’t pass up on an even better one? With multiple-offer situations becoming the norm in hot markets, knowing how to navigate these scenarios is a must to ensure you’re getting the perfect sale.
Sellers might be tempted to jump on the highest offer received, but price is only one (albeit important) piece of the puzzle. Aside from price, there are several other factors sellers should consider — and sellers should make a decision based on the whole picture, not just part of it.
Before I jump into how we evaluate an offer, there are two points sellers need to remember…
Sellers want the very best deal, and to get that they first need to understand your selling goals. Are you looking to make the most money from the sale? Do you need the flexibility to move on their timeline, or do they just need to sell fast? Knowing your goals for selling ensures you’re making the best decision.
Once sellers understand what’s most important, they need to prepare for what to expect. Based on your sales goals, you must educate yourselves on what terms you need to pay attention to and what these terms mean, even before you start receiving offers. Taking the time to walk through the process helps to set expectations upfront while allowing sellers to understand and evaluate offers more easily as they come in.
The key to evaluating offers is making sure the offer terms align with your goals. Whenever you receive an offer, sellers need to pragmatically analyze the offer’s different facets by grouping offer terms into three categories: speed, certainty and price.
Speed: How fast does the buyer want to move?
Although speed mostly revolves around the closing date, there are a few other factors to consider, but we’ll start with the most obvious:
What is the closing date — and does it work with the seller’s timeline?
This one is pretty self-explanatory — when does the buyer want to close on the home? But more importantly, how closely does this date align with the seller’s timeline? If the seller is looking to move out as soon as possible, a more immediate date is probably ideal. But if they’re waiting to close on a new home, they’re probably looking for a bit more flexibility.
How flexible is the buyer on timing?
If sellers’ circumstances require them to move on a specific timeline, is the buyer willing to accommodate that? More flexible buyers might present an offer with a leaseback option, which could be an excellent alternative for the sellers if they need to buy themselves more time before moving out.
Many offers include an expiration date set by the buyer. This date can be a good indicator of how fast the buyer is looking to move to close the deal. However, this can sometimes put sellers in a tricky situation, especially when there are multiple offers on the table, and they need to decide within a short timeframe.
Certainty: How qualified is the buyer?
Once sellers consider how well the offer aligns with their timeline, sellers can move on to evaluating the certainty of the offer:
Is it an all-cash offer?
Most times, all-cash offers mean quicker and less risky sales, which is what makes them so appealing. The primary benefit to an all-cash offer is not having to worry about the possibility of an appraisal coming in too low or third-party financing falling through. But even though all-cash offers bring a heightened level of certainty, they often come with a lower price tag, so depending on the sellers’ goals, they’ll have to weigh this cost.
How financially secure is the buyer?
Having a financially stable buyer will help ensure a smooth closing. A few factors can help you determine how financially secure a buyer is: how much they’re putting down, their earnest money deposit, and if they’re preapproved for a loan.
Down payment: Typically, a higher down payment is indicative of a serious and more financially secure buyer. The higher the down payment, the better. Down payments between 20-50 percent are a strong indicator of financial stability.
Earnest money deposit: Earnest money is a signal of good faith from the buyers that they want to purchase the home. The buyers won’t get this money back if they back out of the deal unless specified in the contract. Typically, buyers will default to 1 percent of the purchase price. An earnest money deposit higher than 1 percent means they’re very serious about buying the home.
Preapproval: These days, being preapproved for a loan is pretty much a necessity in competitive markets. Even though preapproval doesn’t guarantee buyers’ financing, it’s a good indicator that they’re ready and able to make a purchase.
Are there contingencies?
When a buyer submits an offer with contingencies, they’re stipulating additional requirements that must be met before the sale can be finalized. Any contingency included in the contract should be noted and taken into consideration. When presenting offers to sellers, it’s critical that the sellers understand how contingencies might impact the sale.
Financing, appraisal, and inspection contingencies are pretty standard inclusions. Although home-sale contingencies are also common, they do add another layer of complexity to the deal. In any case, the fewer contingencies, the fewer chances the buyers have to back out of the sale. And throughout the pandemic, buyers have been waiving contingencies to craft a stronger offer.
How much is the option fee?
In certain states the option fee is a nonrefundable fee paid to the sellers at the start of the option period — a specific timeframe in which the buyers can terminate the contract for any reason without risking their earnest money deposit. If the buyers terminate, the sellers get to keep the option fee.
In competitive markets, the amount of the option fee is one of the best indicators of certainty. When buyers offers to pay a larger option fee, it suggests they aren’t afraid to put some skin in the game.
Price: How much are they offering?
Although price is pretty self-explanatory, there are a few additional factors sellers must always take into account when evaluating an offer because they’ll end up affecting the sellers’ net proceeds:
Is the buyer offering to pay closing costs?
Generally, both the buyers and the sellers are responsible for paying a portion of the closing costs. But in a competitive market, buyers might offer to pay more than their typical share. Sellers can often negotiate closing costs like the owner’s title policy — the third-largest closing cost expense for sellers.
Sellers can also negotiate facets such as escrow fees, home warranty fees, HOA transfer fees, recording fees and title insurance fees — all a part of the sellers closing costs. Sellers should take these expenses into account when calculating their net proceeds from the sale.
If needed, will the buyer pay for a new survey?
It’s typical for lenders — and title companies — to require a survey before finalizing the buyers’ loan. If the seller has an existing survey, the buyer will often opt to use that. But in cases where there is no survey, say if it were misplaced or insufficient to meet a lender’s requirements, one party would have to pay to draw a new survey. In their offer, the buyer will indicate which party they expect to pay.
Will the buyer pay for the survey endorsement or coverage?
The survey endorsement, also known as survey coverage, protects the buyer against any survey errors. If the buyers opted to use an existing survey provided by your seller, they’d usually add this coverage to their title insurance policy. Because this expense is negotiable, the buyers might stipulate that they or the sellers pay for the coverage, which will ultimately impact your sellers’ net proceeds.
Are the buyers requesting that the sellers pay for the home warranty?
Although home warranties aren’t required, most buyers choose to purchase one for peace of mind. For example, it’s standard in certain states for the sellers to pay for the buyers’ home warranty, but the buyers might also choose to pay for it themselves to make their offer more appealing.
Are the buyers offering a leaseback — at what expense?
If the sellers require a more flexible timeline, buyers who are in-the-know might add the option for a leaseback to their offer, giving your sellers the flexibility to move out on their terms. Typically, the buyers require the sellers to pay rent during this time. But in competitive markets, buyers might agree to lease at an under-market rate or for nothing at all — a gesture that could end up saving the sellers a nice chunk of change.
When it comes to sellers navigating multiple-offer situations, you should always aim to provide a comprehensive analysis. But when you receive five, 10 or even more offers, thoroughly evaluating each offer and presenting this information in a clean and organized way that makes sense to you is no easy task.