It’s Not Just About Price, It’s About What’s Hiding in the Contract
Price Is Just The Beginning of The Conversation
When you get an offer, it’s exciting to look at the price and start celebrating, but there’s so many other terms and considerations in an offer you receive on your home other than just price. Price really is just the beginning of the conversation. Depending on the other terms in the contract (see below), the offer you accept could be full of hassles, contingencies that open up negotiations after taking your home off the market, and even determine how quickly you need to be out of your home.
But, on the pricing front, one thing to pay most attention to is your NET price. The price listed on the purchase price line, might not be the actual purchase price. We have to look at things like closing costs credits, rent back fees, and the escalation clause, for example.
When it comes to the escalation clause,,—the highest price someone offers in their escalation clause might not be the price you get. The final agreed upon price depends on what ALL the buyers offer and what their escalation clauses are too.
One thing I do for my clients at this stage, is provide a estimate seller’s net sheet so you know exactly what to expect as far as proceeds based on the contract in hand, inclusive of things like commissions, estimated closing costs, transfer taxes, closing credits to the buyer, title charges and other fees all based on the agreed upon settlement date.
Everyone wants a great price for their home, but it’s about more than just price. It’s also about you and your specific circumstances, needs, timelines and goals, called terms, that determines what offer is the very best offer for you, even if it’s not the highest offer you receive.
Equally As Important Are The TERMS of the Contract
Not only do you want the best price, but you also want the best terms that work for your particular situation and timeline. You also want to be sure to accept the offer that is most likely going to make it to settlement with the least amount of hassles or surprises. All that is possible, but understanding the “hidden” terms in the contract is important. Here’s a run down of the most important terms to pay attention to and why they are equally as important as the price your buyer will pay:
Appraisal contingency - This is a big one these days. Even if your buyer doesn’t include an appraisal contingency in their offer, their lender is sending out an appraiser. We still need your home to appraise to avoid any hiccups while under contract. In some cases homes have been selling for more than the comps will support and so we are seeing that some contracts have issues with appraisals, even when there is no appraisal contingency. One thing I can do to “help” the appraiser is to meet them personally to provide the comps, how we determined the price, and provide an overview of how we came to the agreed up price. I put this plus a list of updates you've made to the home in a package to make their job to appraise your home for the agreed upon price as easy as possible. This way, we have provided everything we can to get the purchase price and the appraised value of the home to match and not have to open up price negotiations again.
Financing contingency - If you agree to a financing contingency, did you know that it stays in place until settlement, even after the contingency time period has expired? So, obviously, this is a term in the contract that no matter what price you get, you’d want to think twice about agreeing to it because even if your buyers want to pay the most for it, they might not be able to qualify and leave you high and dry.
Lender choice - Of course, buyers can use any lender they want to finance their purchase, but it’s important to know which lender they are going with, as that will determine many details of the process. I require a pre-approval letter and also call the lender to confirm that the buyer’s file has been fully approved, meaning, the lender already has pulled credit and has received all the documentation to fully approve the loan including things like the last two years worth of tax returns, two months of paystubs, banks statements and everything else they will need to get this contract to settlement!
EMD - That’s real estate ling for Earnest Money Deposit. This is the money the buyer sends to the title company saying they will show up for settlement OR the money they get back if they void for a reason we allow in the contract. It’s important to have a healthy EMD amount based on the sales price. Typically we want to see anywhere between 3-5% or more for an earnest money deposit. Anything less would make me question how earnest they really are. The only time it makes sense to take less is if the financing for the buyer is VA or FHA or another low down payment loan-type and then it’s important to have a healthy deposit based on that buyer’s financial circumstance. Overall, the EMD has to “make sense” for the overall contract.
Settlement Date - We’ll discuss your ideal move-out timeline and suggest a preferred settlement date that suits your ideal timeframe. Of course, I can’t guarantee that every buyer will be able to agree to the exact date you want and we certainly don’t want to scare off any potential buyers simply because of the closing date, so this is something that I can say the sellers would prefer, if possible…a suggestion instead of a requirement.
Rent Back - This is a great clause to include if you want to close on your current home and don’t want to move right away. These days, we can even negotiate a FREE rent-back for you. How great would it be to live mortgage-free and rent-free for two months in your own home? If this is something that interests you, we can negotiate for it.
Attorney- Although Illinois law does not require a real estate attorney, it is a good idea to have an attorney working on your behalf as you work to sell your home! The goal is to protect your best interest and make sure that the deal is fair for you. Let me know if you need a connection to some real estate attorneys in Illinois.
Settlement company/Title Company choice - Technically speaking, the buyer can choose the title company, but we can suggest a title company we prefer. The title company is a crucial choice to make because they are responsible for making sure settlement happens on time and that everything that needs to be done while under contract goes smoothly.
Home Sale or Home to Close Contingency - In our competitive market, these contingencies aren’t typical, BUT, oftentimes, buyers need to sell their home and just don’t disclose that or don’t include a contingency. So, it’s important to know where the funds are coming from for the down payment—even if they don't have the contingency, I ask both the lender and their agent, do they have a home to sell and if they do, where are they in the process? So, even if it’s not a contingency listed in the contract, it’s still something we have to be vigilant about and ask the right questions to the right people to know what may happen down the line.
Why A Cash Offer Is Not Always The Best Offer To Choose
Cash offers are great to receive as long as they are the highest offer and there are no other terms (see above) that are deal breakers. If the cash offer isn’t the highest or has other terms that don’t make it as favorable, then it’s worth looking at how the financed offers measure-up. And, one thing we’ll look out for is a “cash” offer that’s not really cash. There are clues in the offer we’ll look out for. We’ll ask for proof of funds, for example, to make sure there is no funny business happening.
It’s All About You
I can’t reiterate enough, don’t focus solely on price, even in this seller market. Yes, of course getting the best price is important, but equally as important is getting to the settlement table and move-out day on YOUR terms. It’s about both price AND terms. Both of these equally determine how your experience will be and defines the relationship you will have with the buyer between offer acceptance and settlement.
And, don’t worry, I’ll be with you every step of the way and make sure you get the best price and the most favorable terms that fit YOUR particular situation, goals, needs and timeline.
If you or anyone you know is thinking about buying or selling a home in the next year, I’d love to help. Email me and we’ll start with a conversion about why you are moving, where you are headed and when you want to be there.