How Do I Even Begin Analyzing Offers?
You’ve made a big decision to sell your house. After putting the house up for sale, offers begin pouring in. Receiving multiple offers on your house can be exciting, but extremely stressful at the same time. first, congratulations on having a home with multiple offers! This means that you currently own a home that is in high demand and you now have the opportunity to put some serious cash in your pocket! But, how do you even begin to analyze all of these different offers? We’ve put this article together as a guide to help you down this journey by giving you six things to consider when you evaluate offers on your house.
What To Consider When Reviewing Offers On Your House
Priority or reason for selling
Evaluate the offer price
Evaluate their financing
Evaluate their contingencies
Evaluate their requests
Evaluate their commitment
What Is Your Priority Or Reason For Selling The House
This may seem obvious, but the first thing you should consider before reviewing offers on your house is the reason you are wanting to sell in the first place. Are you changing jobs and moving? Do you just want the highest price possible? Are selling the house to buy a new one? Is this a secondary home that you just want rid of? Your priority for selling your home will have the largest impact on determining what offers are competitive and what offers are not. For example, lets say you inherited a home from a family member. Of course you would like to receive the most money possible, but selling the home as-is carries a higher importance to you than offer price. Buyers that offer at or close to list price, but agree to request no repairs, would be more competitive to you versus someone who offers over list, but wants several repairs. Offers that include buyers willing to waive contingencies and wanting to move into your home as soon as possible would be competitive for someone who just accepted a position for a new job out of state, and needs to sell their home as fast as possible
Evaluate The Offer Price
There is a reason the offer is one of the first components of a real estate contract. It is usually the single most important factor to the seller. After you determine your motivation for selling, determine your criteria for offer prices. If you refuse to accept an offer below a certain amount, go ahead and remove any offers below that price point from your consideration. Once removing these offers, sort your remaining offers from highest to lowest. One thing to keep in mind; you are after the “net proceeds” and not just the highest offer. The net proceeds of a home sale is what you actually receive at closing. Once real estate commission fees, buyer credits, and other items are removed from the offer price, you are left with the net. In some cases, you may have a situation where you get a lower offer price, but will walk away with a higher amount at closing.
List Price = $200,000
Offer Price: $202,000
Realtor commissions: $12,300
Seller concessions: $7,000
Repair requests: Waived
Offer Price: $199,000
Realtor commissions: $11,940
Seller concessions: $2,000
Repair requests: $3,800
Offer Price: $195,000
Realtor commissions: $11,700
Seller concessions: $0
Repair requests: Waived
Evaluate Their financing
According to the National Association of Realtors (NAR), 87% of home buyers financed their purchase in 2021. What does this mean for you? This means that the majority of your buying pool will be using a lender to finance their transaction. Not all mortgages are the same. Some are straight forward, and others, not so much. Here we will evaluate the two most common types of mortgages buyers use to finance the purchase of their home. This should carry a tremendous amount of weight in evaluating how competitive an offer is to you.
Conventional mortgages are mortgages offered by traditional lenders such as banks, credit unions, and mortgage brokers that are not normally backed by any type of government entity. However, some of these mortgages qualify for Fannie Mae and Freddie Mac guidelines and are therefore eligible to be sold to them. Most conventional mortgages require a down payment of 5-20%. The amount of the down payment is determined by the lender. Conventional loans qualify for a primary residence, secondary residence, and investment properties. Buyers using a conventional loan typically have great credit, solid debt-to-income (DTI) ratios, and cash reserves to make the purchase.
The most popular government insured loans are FHA, USDA, and VA loans. These loans are popular for buyers who may not have strong credit scores or have low cash reserves to make the purchase. Since these loans require low down payments, they are ideal for someone who does not have a large amount of cash to invest in the purchase. Although these loans make it easier for the buyer, they do not make it easier for the seller. These loans typically have many requirements that the home must meet in order to qualify. For example, FHA loans have a clause known as minimum property standards. Although FHA considers normal wear and tear to be acceptable, they will not insure a loan for a house that has missing handrails, cracked or damaged exit doors, dry wall damage, plumbing leaks, evidence of termites, or poor workmanship. If you are wanting to sell a home as-is that has multiple issues, offers using an FHA mortgage would not be ones to consider.
Oh cash, you are always king. Cash offers are the strongest offers and should always go to the top of your list when evaluating a multiple offer situation. A cash buyer has no bank to depend on, meaning no underwriter, no appraiser, and no waiting game. Waiting on a lender to underwrite a mortgage is what takes a home sale so long to close. Buyers willing to offer cash eliminate much of this timeline and can speed the process of selling your house up dramatically. If you are needing to sell as fast as possible, this should be your most valuable offer.
Evaluate Their Contingencies
A contingency in a real estate contract is simply an event that must take place for the contract to officially become binding. If all of the contingencies in a contract are not met, the contract officially becomes voided, and one party (often the buyer) can walk away without any consequences. The most common contingencies in a real estate contract are appraisal, financing, inspection, and home sale. In this section, we will evaluate each of these so that you become more educated in each of them.
An appraisal contingency protects the person purchasing the house. It simply means that if the value of the property does not meet or exceed the agreed to purchase price, the buyer can walk away from the purchase without penalty. In some cases, the buyer will agree to cover a discrepancy (known as an appraisal gap) up to a certain dollar amount if they are really wanting the home. In other events, many buyers will attempt to renegotiate the purchase contract. In a seller’s market, it is common to meet the buyer “half-way” if they are serious about buying your house. In a buyer’s market, it may be difficult to get a buyer to cover any of the appraisal gap.
A financing contingency states that the buyer must be able to secure financing for the home in order to purchase it. The contract usually gives the buyer a specified amount of time to be able to go out and secure financing for the transaction. If the buyer cannot find financing for the home, they can utilize this contingency to walk away from the deal. Although it is common to require a prequalification letter in all offers; these are just letters stating the buyer has met preliminary qualifications. Once they turn over an official contract, the buyer then goes to underwriting. Underwriting involves more strenuous requirements than a prequalification letter.
This contingency is often referred to as a due diligence contingency. It allows for the buyer to have a period of time to have the home inspected. Most buyers will hire a qualified professional to go out to the property and inspect the property’s exterior and interior components. Once the buyer gets the inspection report back, they can negotiate repairs, or elect to move forward with no repairs requested. It is very common for a buyer to request at least a few items be repaired. If the seller does not agree to make the repairs, the buyer can utilize the inspection contingency to walk away from the deal without penalty. In some events, the seller may elect to offer the buyer an allowance for repairs. By offering an allowance, it eliminates the seller from having to make the repairs themselves, or spending the time to hire a qualified professional.
Many buyers are needing to sell their current home to buy yours because they will not qualify for financing if they are still carrying the mortgage of their other property. This can be tricky. If it is a seller’s market and your buyer has a popular property, this could be of minimal concern. However, if they have a home that may be difficult to sell, it could create a long delay in getting your home sale to the closing table. One way to protect yourself is creating a “kick-out” clause. A kick-out clause is a contingency added by the seller that allows them to continue marketing the property. If another buyer steps up to purchase your home, you can give the original buyers with the home sale contingency a specified amount of time (normally 24-72 hours) to remove their home sale contingency.
Evaluate Their Requests
Most buyers request something. Whether that is an allowance for closing costs, asking for repairs, or asking for items to convey; you will usually have a buyer make at least one request. Many buyers will request an allowance for closing costs (normally up to a certain percent of the sale price) to cover some of their expenses at closing. Most contracts will commonly request items such as refrigerators, stoves, and microwaves to convey with the house. To convey simply means to remain with the house at the time of sale. But some buyers can make odd requests. The buyer may really like your dining room set or your bedroom set, and ask for those items to stay with your house. If the buyer’s offer is competitive, it may not be a bad idea to leave a $500 kitchen table with the house to get to the closing table.
Evaluate their commitment
How do you evaluate someone’s commitment to buy your house? One of the best ways to evaluate that commitment is the amount of earnest money they are willing to put down. Earnest money is a deposit a buyer puts down on your house that represents their good faith to buy the home. A buyer that elects to waive several contingencies and puts a large earnest money deposit down on your house is a serious buyer that wants your home. This type of buyer stands a high chance of making it to the closing table and should be at the top of your list when considering offers on your house. With that said, contracts that contain several contingencies like the ones we discussed above are easy to get out of. A buyer with a smaller earnest money deposit, but is willing to waive contingencies is a more serious buyer than one that throws down a large earnest money deposit but asks for several contingencies.
Final Thoughts On Multiple Offers
The most important thing to consider when analyzing multiple offers is what your ultimate goal is with the sale of your home. It’s also critical you understand that “net proceeds” is more important than offer price. Although it can be extremely stressful to analyze a multiple offer situation, it’s still a great thing to have! Remember to seek counsel and advice from trusted professionals and friends. With that said, it’s your house, and only you can determine what offer works for you.
*These articles are not a substitute for legal advice. All real estate transactions should be reviewed by an attorney that is knowledgeable about the laws and rules of your state.