negotiating Archives

What to Consider When Writing an Offer

May 12, 2020 By Rick

There is a lot that goes into writing an offer when purchasing a home. Most people are just focused on the price and getting the best deal possible, however, there are many things to consider. Some of these effect the bottom-line number and others address other terms that are just as important.

What’s Included and What’s Not

The first thing is to make sure you are clear what is and isn’t included with the purchase. Our typical purchase agreement already includes things like surface and mineral rights. The purchase also includes things like built-in appliances (dishwasher, water heater, furnace, etc), shelving, cabinets, lighting fixtures, window treatments, etc. If you are expecting the kitchen appliances to stay, then you must explicitly list those items. Although any attached items should be included, I would list out any attached speakers or home theater equipment is you want it to stay. You may also explicitly EXCLUDE items. This means you do not want it and the seller is responsible for removing it from the premises before the closing. The seller might want to exclude appliances they intend to take with them (like a washer & dryer).

Purchase Price & Financing

I’m including these together because they many sellers may take a lesser offer price if the financing is stronger. In general, a cash offer is the best financing option. Typically this means the buyer doesn’t have to jump through hoops with a lender and an appraisal is not necessary. If the buyer is getting a mortgage, then the more they are putting down, the better their offer.

Earnest Money Deposit (EMD)

This is a deposit on the offer. It will be credited towards the buyer’s purchase. The EMD is usually contingent on the home inspection and financing (specifically the appraisal in most cases). The higher the EMD, the more serious the buyer. That is because once all of the contingencies are removed, the buyer is less likely to abandon the deal knowing they will lose the EMD.

Closing Date

Believe it or not, this could be a bigger deal than people realize. On the seller’s side, they might need time to arrange their move. So a quick closing isn’t necessarily desirable for them. For the buyer, however, that closing date could be based on the end of their current lease, the sale of their own home, the start of a job or the beginning of the school year.

Possession

In some cases, after the closing date is negotiated, the seller might need to remain in the property for a week, a month or even more. Possession is when the seller (previous owner) will hand over the keys to the new owner. If this is not happening at closing, then there is a daily occupancy rate the seller must pay to the new home owner. This amount is typically based on the new home owner’s principal, interest, taxes and insurance payments. However, this is totally negotiable. The new owner might want to collect more than that or maybe will accept less just to make the deal work.

Sewage & Water

You can negotiate who pays the sewer and water bill during any potential possession period.

Home Warranty

The buyer can request the seller to provide a home warranty. Who pays for the home warranty is totally negotiable.

Offer Time Limit

In order to put some pressure on the seller to decide before entertaining other offers, the buyer can put a deadline on their offer. This works well in a buyer’s market where the seller is desperate to get offers. However, in a seller’s market, a seller could ignore any expiration date/time on the offer knowing that you might still be interested whether they respond in time or not. So don’t put too much weight on this unless you know it will have the impact you are expecting.

Inspection Contingency

The buyer can sometimes increase the “attractiveness” of their offer by waiving the home inspection. However, I always recommend getting a home inspection (even if you want to waive the contingency). How much time you have to do your due diligence is another negotiable item. A seller could favor an offer with a 3 day inspection period over one that is 10 days.

City Inspections

Some cities require an inspection or certification. Who pays of it, who pays for any required repairs, etc are all negotiable.

Seller Concessions

For buyers that might need help with closing costs, you can negotiate a credit from the seller towards the buyers’ closing costs. This is typically applied towards closing costs, pre-paid interest, tax pro-rations, etc up to an agreed amount and not as cash back to the buyer at the closing. Use it or lose it.

Final Walk-thru

Typically scheduled within 24 hours of the closing, the final walk-thru is the buyer’s chance to check the property and ensure that everything is as expected. In most cases the buyer last viewed the property at the home inspection. The final walk-thru is to make sure that the property condition has not changed. It is not to see if they change their mind or not. Any repairs or unexpected changes can be dealt with prior to closing.

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What to Expect with the Appraisal Process

May 9, 2020 By Rick

In my experience buyers and sellers have a huge misconception about the appraisal when purchasing a home. The simplest and best way I can describe the purpose of the appraisal is to justify the lender’s investment. It is not to prove the seller has negotiated the best price or for the seller to prove how much equity they are receiving.

So what does the above actually mean? Well let’s start with buyer’s equity position. I have noticed the appraisal usually comes in at or around the purchase price. This is not a coincidence that the buyers and sellers have negotiated the exact appraised value! Instead the appraiser is justifying (if the evidence supports it) the bank’s loan to the buyer which is based on the purchase price. Essentially, the appraiser is telling the bank that if the buyer defaults on their loan, the bank should be able to take the house and sell it to recover their loan amount. This is especially critical when the buyer is putting less money down.

Sellers often like to know that they didn’t leave a lot of money on the table. So they want to know what the appraisal came in at. However, the appraisal is paid for by the buyer and is required by the lender. It is really on for their information. If they decide not to share the appraisal amount, that is their right. Typically the lender will just report that the property appraised and that they are moving forward with their loan approval process.

In some occasions when the buyer is in fact purchasing a home well below market value, the appraisal can come in much higher than the purchase price. That is typically expected by all parties in that case.

The bigger issue is when the appraisal comes in low. In that case, any of the following could apply:

The buyer must come up with the difference out-of-pocket in order to satisfy the lender’s requirement. This will allow the lender to proceed with the loan and purchase.
The seller might agree to reduce the purchase price to keep the deal together and move forward with this buyer.
The seller and the buyer can split the difference (to varying degrees) of a price reduction by the seller and more cash down from the buyer.
The buyer can kill the deal because they don’t want to do any of the above. It is their right by most contracts as finance contingency is based on a loan approval which requires the appraisal. In this case, the buyer gets their Earnest Money Deposit (EMD) back and can move on to another property.

I hope this helps you understand a little more about how appraisals are related to the transaction. If you have any questions, please feel free to reach out to me anytime.

What’s a Pre-listing Home Inspection?

May 6, 2020 By Rick

Getting a pre-listing home inspection is probably my #1 tip for homeowners looking to sell their homes (whether with a professional or on their own). Hire a home inspector to perform a full home inspection just like the buyer will do. Why? Well there are several reasons:

You can identify repairs and maintenance issues. This will give you an opportunity to take care of these items before you go on the market. This can help improve showings too as buyers are smart and savvy and look at everything. When buyers see that a homeowner is proactively addressing issues, they are much more confident in their purchase.
You can eliminate a buyer’s negotiating power. Now keep in mind that no two home inspectors are alike. Also, the same inspector may find different issues on the same property during different inspections. However, I would guess that 99% of the issues that would come up during a buyer’s inspection would have been found and taken care of with a pre-listing inspection. This is very helpful when negotiating because buyer’s will exaggerate the cost of a repair. For example, if you found a leak in the roof due to bad flashing around the chimney, you might get it fixed for a few hundred dollars. The buyer might try to get a new roof out of you!
You can have peace of mind. Knowing what issues may or may not exist in your home will give you peace of mind. If you find something problematic, you now have an opportunity to fix it. Knowing your house is taken care of and you and your family are safe is worth a few hundred bucks for the inspection. If you find that there are no major problems, you can be comfortable and confident in showing your home to potential buyers.

I am certain that a pre-listing home inspection will help you get top dollar for your home. Spending about $400 upfront can easily help you net much more than that with an accepted offer.

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