It’s still a seller’s market, and the combination of increased buyer demand and a shortage of housing means you’re definitely on the winning side of the law of supply and demand. In fact, you may end up with several competing offers as buyers try to outbid each other.
However, it turns out that you shouldn’t always accept the highest bid on your home. In fact, Jonathan Self, a licensed Compass real estate broker in Chicago, IL, tells us that on several occasions, he’s advised clients to take an offer that appeared less attractive on the surface. “I uncovered red flags in the buyer interview/showing process that I had to discuss as a fiduciary to my clients, the sellers.”
And even though a higher offer might sound appealing, Self explains that it’s just “theoretical money” until the wire lands in your account. “In my market, multiple offers are common on quality, well-priced homes – and it actually fosters an environment perfect for missteps.”
He says a competitive buyer might offer you the moon, but it’s your job (with the help of your realtor) to determine if the buyer can actually deliver.
Jason Gelios, a realtor at Community Choice Realty in Detroit, agrees that you shouldn’t hone in on the price alone. “When reviewing multiple offers, home sellers should take into account all of the details to determine which is best for them,” he says. “Home sellers typically choose convenience over a higher-priced offer because it could mean fewer headaches during the process.”
So, what type of headaches are we talking about? Our team of experts broke down some of the factors you may want to consider before accepting the highest bid on your home.
Contingencies Based on Appraisals
Most people (should) set the home’s selling price based on several factors, including market value and comps. However, Mike Jones, broker/owner at RE/MAX At The Crossing in Indianapolis, IN, tells us, “An unfortunate tactic that is being used in today’s market is buyers offering way higher than list price to get the sellers to accept a higher offer – but if that offer is based on the buyer obtaining financing, it could require an appraisal to support the accepted value.” And if the appraisal doesn’t support the accepted value, he says the buyer may back out of the deal unless you agree to lower the price.
And, that’s why Glen Pizzolorusso, a real estate broker with West View Properties in Watertown, CT, advises sellers to closely view the appraisal language when a buyer is financing the property. “A mortgage company, regardless of the price, will require an appraisal, and if the sales price is $700,000, and the appraisal comes in at $650,000, the bank will only lend on the $650,000.”
Pizzolorusso says this is where an appraisal gap letter is used. “It tells my sellers that the buyer is willing to cover any difference between the house’s appraised value and the offer price they submitted.”
Contingencies Based on Inspections
The home inspection could also lower the asking price. For example, agent Robert Elson of Coldwell Banker Warburg in New York, NY, tells us that a leaky roof could reduce that higher offer. If the lower offer waives the inspection contingency, that could result in huge savings for the seller. “So, moral of the story is that sellers should look at all aspects of an offer, because the paradox is that more money does not always translate to more money – it’s caveat emptor in reverse – seller beware,” Elson says.
And, here’s something else to consider: if you have been negligent in maintaining your property, Patrick Garrett, broker/owner at H & H Realty in Trussville, AL, tells us that there are certain loan types that will require seller repairs before a buyer can acquire a clear to close on the property. “In this scenario, it is in the seller’s best interest to accept a lower cash offer or accept an offer where the buyer has a mortgage approval that allows for repairs to be completed post-closing,” he explains.
Broker Kimberly Jay of Compass in New York, NY, wholeheartedly agrees with this strategy if you have issues with your home that will come to light and need to be addressed. “If you have another offer without this contingency, it may be better for you to get to the closing table with that buyer instead.”
According to Pizzolorusso, an as-is offer beats one with an inspection, but with the latter, pay attention to the language. For example, when he’s representing buyers in a multiple-offer situation, Pizzolorusso makes sure to include language that tells the sellers they will not nitpick little things. “We are only concerned with significant ticket items that were not visible when we toured the property – so the wording is something like ‘Buyer will conduct an inspection, within 72 hours of offer acceptance, for major structural, mechanical, health and safety issues only.’”
Using this type of language protects the buyer, and also lets the sellers know they’re not trying to negotiate on small items. “So, we may see a cash offer 20% over the asking price with standard inspection language, and accept an offer with financing that is 15% over the asking price but waives the inspection,” Pizzolorusso explains.
Unsubstantiated Cash Offers
A cash offer can be ideal for sellers, compared to an offer that requires financing. “A higher offer that comes with a mortgage contingency may not be higher at all,” warns Elson, who is a fan of cash deals. He explains, “Cash deals are quick, time is money, and banks take their time.” So, if it takes 30 to 60 days for the bank to make a decision regarding the buyer’s mortgage, and the buyer ends up getting turned down, he says the seller ends up with nothing and has to restart the process again.
On the other hand, the saying, “cash is king” isn’t always true. “The risk factor of a cash offer is generally less because there is no contingency for the buyer to get financing,” explains Bill Golden, a realtor-associate broker at Keller Williams Realty Intown Atlanta, GA. However, if you’re considering a cash offer, he says the buyer needs to provide some sort of ‘proof of funds’ to show that they have the ability to pay cash for the property.
Risky Financing Scenarios
The type of loan the buyer has can also make a difference when weighing offers. “I’ve seen home sellers choose an offer that was less than the highest bid, simply because it came with conventional financing, which has less hurdles compared to, let’s say, an FHA financed offer,” says Gelios.
The type of lender is indeed important, and Self says it should be a reputable lender with appraisers that live in the area. “Do they have in-house underwriting, and has their agent checked to see if the lender verified income and assets?” He also warns sellers to be cautious. “Some buyers may also try to pull a switcheroo and suddenly want to use an internet site, like Bob’s Cut Rage Mortgage Barn (fictitious title) – which is a red flag.”
Golden totally agrees that a buyer using a trusted source is not as much of a risk as one using a lender that was randomly selected on the Internet. “Also, as with an anonymous Internet lender, sometimes a mortgage from a big-box bank can be slow and cumbersome, if the buyer does not have a familiar contact at the bank who has decision-making authority and is invested in moving the loan forward timely,” Golden explains.
These are some other financing scenarios to consider as well. For example, Golden says the more the buyer puts down on the mortgage, the easier it will be for that person to qualify for a mortgage. “In other words, someone putting down 50% of the sales price on the mortgage will have a much easier time getting a mortgage than someone putting down 5%.”
Pizzolorusso says the person with more “skin in the game” (like a higher down payment) has a higher probability of closing on time. “So, if we receive an offer with zero down that is 10% higher than a cash offer, I discuss the probability of closing with my sellers,” he says, which can help to manage their expectations.
And here’s something else to consider. According to Jay (who lives in NYC), there are many co-ops in Manhattan. “If you’re selling this type of property, the buyer will need to have the financing qualifications to pass the board.”
Timetable for Closing
Another factor that may be more important than money is the time frame for closing. “If the offer includes a non-negotiable closing date that is too soon or too far away, consider other offers that are lower but meet your closing date needs,” advises Candice Williams, a realtor at Coldwell Banker Realty in Houston.
Timing is so important that Golden is noticing a new trend in this competitive market. “Buyers are allowing sellers to stay after closing for a designated amount of time that suits the sellers’ needs, sometimes even at no cost.” He says this can be worth a lot to a seller, especially if it helps them avoid having to move twice.”
On the other hand, timing can also be important for another reason. “If the home seller needs to close as quickly as possible due to risk of foreclosure or due to time constraints related to a contractual agreement on another property, a cash buyer at a lower purchase price might be the best option to alleviate the risk of any closing delays,” explains Garrett. Even with higher offers on the table, he says the person providing the quickest closing date may be chosen.
Request to Pay Closing Costs
When determining if an offer truly is the highest bid, Williams advises sellers to consider if the sellers need to pay anything toward the closing costs, since this reduces the amount of the offer. “For example, if one offer is $400,000, but asks the seller to pay $10,000 in the buyer’s closing costs, the offer is really $390,000,” she says. “If the other offer is $395,000, but does not ask for any closing cost contributions from the seller, this offer is $5,000 higher than the first offer.”
Questionable Buyers and Motives
Finally, there’s another category of reasons why you might hesitate to accept the highest bid on your home. If the offer is significantly higher, Jay warns that these individuals may be trying to test the water and they’re not serious buyers.
According to Agent Jeremy Kamm of Coldwell Banker Warburg in New York, NY, that’s why the buyer’s profile and financial well-being are so important. “If the highest offer comes from a questionable buyer, then it cannot be considered the strongest or most compelling offer.” And when there are multiple bids, Kamm warns that it’s critical that each buyer’s genuine interest level to move forward be properly assessed. “The worst thing that could potentially happen is that after accepting a bid, the buyer walks away, and you are forced to go back to the pool of buyers whose offers were originally passed on.”
It’s also possible that the person making the offer isn’t even the actual decision-maker. For example, it could be the buyer’s parents who are paying for the house – and they may live in another state. “I had a deal fall apart in a vintage condo because the mom showed up at the inspection and thought the floors were too squeaky,” Self explains.