Comparing Offers in a Seller’s Market
One of my sellers called me the other day and happily announced that she had a buyer and asked me to prepare the contract. “Great I said, and by the way, how many offers did you get?” “We had 3 she replied, so we picked the highest one,” she proudly responded. “Are they financing?” I asked. She paused, and then let out “I forgot to ask that question.”
Multiple offers are a welcome change from the market we just went through, and well-priced property is regularly generating significant interest and it’s not unusual to have several suitors. But counseling a seller on how to evaluate different offers merits some refresher. Let’s return to the basics.
Terms Matter: Price is important, but so are terms. If Bob offers me $1,000,000 for my house, all cash, 60 day closing, and Sarah offers me $1,000,000, 80% financing contingent, 60 day closing, the choice is pretty easy. Cash wins. But what happens when Sarah raises her bid to $1,050,000, 80% financing contingent? Most sellers would instinctively choose her now, but in this market where financing is anything but certain, the cash offer there likely is superior. What about $1,200,000, 80% financing contingent? Well, now we need to do some homework. The only way to evaluate the offer is to vet whether Sarah is likely to secure the financing. What are her chances of success? Pretty good? Very likely? Prudent sellers will ask:
- Is she pre-approved for the loan?
- Who is her bank?
- Do we know her loan officer and how experienced is she in the industry?
- What did the bank do in connection with issuing the pre-approval?
- Have financial statements been submitted to demonstrate buyer’s financial position?
Is The Buyer Ready To Move Quickly: Suppose the seller asks the questions above, and determines she wants to pursue the deal with Sarah. How quickly is Sarah able to move forward? We have the situation all the time where we have a contract signed by Bob, with a downpayment check, and along comes Sarah with her outbid. Now what? If the seller pursues the deal with Sarah, Bob will likely drop off and withdraw his contracts. What if Sarah now takes her time and refuses to move quickly? What if she changes her mind after a few days, and decides not to buy? Now the seller is stuck with no Bob, and no Sarah. Two bids quickly devolve to zero. A better way to manage the situation is to first decide whether it makes sense to give Bob the option to raise his offer. Typically that makes sense, but it can backfire if Bob becomes frustrated at being asked to bid against himself after tendering his signed contracts; there is always the risk that he’ll simply walk right then. Some sellers might give Sarah a very quick timeframe to sign, understanding that they cannot keep Bob holding indefinitely without a signed contract as he will quickly get suspicious as to what is happening.