Lions and Tigers and Escalation Clauses. Oh My!! The Wild 2013 Northern VA Market Part 1 – What Sellers Want

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It’s a jungle out there as anyone looking for a home will tell you.   With limited inventory and scores of buyers,  multiple contract scenarios are common place.  Escalation clauses, appraisal waivers and more more are being  included in contracts.   How does one increase the odds of a successful bid?  Well, the simple answer is give the seller what they want which is not as simple as it sounds.  In this blog we will try to see the world from the seller’s eyes and in part 2 we will discuss which clauses to add and delete in a contract.

Bottom line, there are only 3 things  every seller wants out of contract:  the best price;  a timely settlement and the security of knowing settlement will occur.    Most folks think price is #1 but not always.  The first step in putting together a good contract is for the buyer agent to have a conversation with the listing agent to learn about the seller’s situation and determine their hot buttons.   I am surprised how many contracts I get without the buyer agent first calling me to ask how to present a strong offer.  Agents, like buyers, often think it is all about price.  It is not. Let’s explore each category individually.

PRICE

Yes, for the majority of sellers this is of utmost importance but some sellers will trade dollars for a great settlement date or for a buyer who presents a sure path to closing.  And when thinking about the numbers,  it is not the sales price alone that matters.  It is the net the seller will receive.   I have agents call me to say that are sending a full price offer.  I get excited and then look at the contract only to find out they want $10,000 in closing costs.  Well that is not full price.  Why did they even say “full price?”  Sort of gets us off to a bad start.

Let’s say a home is on the market in Vienna  VA  for $550,000 and one contract comes in at $550,000 and not asking for closing cost help.  Another comes in at $555,000 asking for $10,000 in closing cost help.  Well, of course the $550,000 less zero is better.

But let’s say the $555,000 buyer in an effort to strengthen their contract keeps the $10,000 in and raises the price to $560,000.  So now the seller has $550,000 – 0 and $560,000 – $10,000.  Equal, right?  Nope.  I would advise the seller to go with the $550,000 less zero.  Why?  Less appraisal risk.  No matter how comfortable we feel about the price of a home, it all comes down to the appraisal and the lower the price the less likely there will be a problem.

SETTLEMENT DATE

Very often the right settlement date is more important to a seller than the absolute highest price.

For occupied homes, the seller may need to stay for a period of time.  Perhaps they need to finish out the school year or their transfer orders require a specific move out.   Of course, if the money is so much more than expected,  in some situations, a seller can be persuaded to move into temporary housing.    But let’s say a seller needs to stay for 60 days and  buyer #1 absolutely wants to get in in 30 days.  They offer a little above asking as an incentive to get the seller to move.  Buyer #2 can wait 60 days but their offer is a $1000 or $2000 less.  It is likely buyer #2 gets the home.  Hitting the settlement date is more important than a little more money and the inconvenience of moving twice.

If the home is vacant, the seller wants to settle as quickly as possible.  A buyer offering more money but delaying settlement may lose to a buyer offering less but a 20 for a 30 day close. Even if the buyer wanting to wait offered more money than the carrying costs, unless it is a significant amount, I always advise a seller to take the earlier settlement.  Lots of things can happen to a vacant home while waiting for settlement.

TRUE STORY 1:  A few years back, I had two contracts on a vacant single family home in Vienna.  One settled at the end of September and one settled in the middle of September.  We took the earlier settlement.  Between the middle of September (our settlement date)  and the end of September (the settlement date on  the other contract), a tornado came through town and the neighbor’s tree fell on the house demolishing the kitchen.  The good news:  The new owners had not moved in and no one was in the home.  Plus the kitchen was outdated and they were able to do a remodel using insurance company money.  The lesson for a seller:  settle as early as possible.

So, meeting the seller’s settlement needs will sometimes trump a slightly higher offer price

GUARANTEED SETTLEMENT

Every seller wants to feel confident that they are taking their home off the market for a buyer that will actually go to settlement.  Every contract in today’s market comes with a lender approval letter.  But not all approval letters are equal.  There are differences between brokers and direct lenders, big  vs  small,  types of loans, etc.  Is there a right or wrong here?  Not an absolute but the past experiences of the listing agent and the seller may come into play. If a buyer’s agent tells a listing agent they are using loan A with lender Z and the listing agent says they have had bad experiences with lender Z and the seller thinks loan type A never settles on time, well, perhaps switching lenders and loan types would be a good idea.

Having a high level of confidence that the loan will settle on time is somewhat tied into the settlement date discussion above but some sellers really need to make sure that the home settles by a certain date or things get complicated.

True story #2.  A few years back in a very hot real estate market a couple asked me to put their home on the market.  They had bought a new home 2 and 1/2 years prior and been renting their old residence since.  Well, in another 1/2 year they could no longer say that they had lived in the home 2 out of the last 5 years and if they settled after that date, they would be subject to capital gains tax.  In this situation that was a big number.  Right before we were to go on the market, a cash buyer surfaced who was willing to make a very strong offer.  However, the market was extremely hot and there was no doubt in my mind that these sellers could  get a higher number on the open market.  We discussed the pros and cons.  They decided that the certainty of this offer settling was more important then a bit more money.  They took the cash offer as they knew the individual absolutely had the resources to complete the deal.

Other times sellers are taking the proceeds from the old home to buy the new home and if things get delayed, all kinds of bad things happen.  Or investors are planning to use the proceeds from the sale to purchase the next investment.  A delay in settlement means they will need to incur borrowing costs.

In these situations and more, a buyer who shows they are clearly going to settle may win over a higher priced contract.   As we will discuss in the next post, how the contract is presented also helps the seller determine if a particular buyer will be easy or hard to work with.

True story #3.  I was the buyer agent on a home a while back and there were multiple offers.   My offer and one other were almost identical – same price, same settlement date,  same down payment, same contingencies.  The seller was buying another home and wanted to make sure everything lined up just right.  So the question was which contract offered the best odds of settling.  Well, I talked to the listing agent about our lender, the buyers and me reassuring him that it was a great trio.  He called back to say that the other agent also gave them a level of confidence but that since I had significantly more experience (he had checked how long each of us had been licensed and checked our production level), he was going with us.  The feeling was that with more experience, I could better navigate any bumps in the road. You never know what the deciding factor will be.  Don’t under estimate experience.  Happy to offer mine to you whenever needed!

Next post will be a discussion of contract clause to use or not use to increase your chances of success.

 

 

 

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