Everyone wants to get an offer that’s higher than what they’re asking for, but sometimes the highest offer isn’t the best offer. The “best offer” can vary based on your needs, the terms of the sale, the right timing, and of course, the right price.
There are also many costs involved in selling a home, such as real estate agent fees, closing costs, and home overlap costs if you aren’t able to buy and sell your home at the same time. The offer you accept doesn’t always translate to the total number you walk away with after these costs are accounted for, also known as your net proceeds.
Understanding the different components of an offer, how they affect your close date, your risk tolerance, and your bottom line, will help you choose the offer that makes the most sense for you.
In this article we will cover:
- How to understand and weigh the cost of contingencies
- What to look for in a cash offer
- The emotional aspects of choosing an offer
- Why the highest offer isn’t always the best offer
- Key takeaways
How to weigh the costs of contingencies
At their most basic level, contingencies are a set of terms in your contract that allow either the buyer or seller to cancel the agreement if those terms aren’t met. These can vary but common contingencies may be related to inspections, financing, and repairs. For example, a buyer may ask for a contingency that allows them to back out of a sale if both parties can’t agree on repairs following an inspection.
In hot markets, you may encounter buyers waiving contingencies as a way to “sweeten” the deal. If there’s not a lot of competition for your home, buyers may ask for more contingencies since they run a lower risk of their offer not being accepted.
While contingencies can protect a seller’s needs, they can also be opportunities for the buyer to exit the contract or negotiate for a lower offer. This is why when you consider what you’re willing to accept in an offer, it is wise to think of how contingencies might impact your net proceeds.
These are a few of the most commonly used contingencies, and the costs to consider:
- Inspection contingency
This contingency provides a way for the buyer to negotiate for repairs, ask for an extension of the closing date, or even rescind their offer if the home inspection turns up any major issues that weren’t disclosed. Since no one wants to be stuck with a money pit, this is a very common contingency to include in an offer. It is also a common reason why purchase contracts are canceled.
While this contingency can eat into your net proceeds if you have to perform costly repairs, fully disclosing all issues with your home prior to accepting an offer will significantly lower the risk of getting stuck with a hefty repair bill or a canceled contract. Some sellers even choose to do a pre-listing inspection to uncover any unknown issues with the home before putting it on the market.
- Financing contingency
The financing contingency allows a buyer to cancel their offer if their mortgage funding falls through. By accepting this contingency as a seller, you run the risk of wasting time by taking your home off the market and having to relist it if the buyer can’t get financing. This can affect your net proceeds because if a home is de-listed and re-listed, prospective buyers may think there is something wrong with the property; you could lose negotiating power with future offers.
This is where it is crucial to understand the difference between a buyer who is pre-qualified and a buyer who has been pre-approved. Pre-approval typically means the buyer’s lender has gone beyond a simple credit check and has performed a thorough vetting of their financials, whereas pre-qualification is a less critical first-step a buyer takes to get an estimate of what they can borrow, according to Investopedia.
- Appraisal contingency
Lenders want to be sure the amount their lending is in line with the value of the home. They’ll typically require that the home appraises for a minimum amount, otherwise they could risk holding an asset worth less than the outstanding loan balance if the buyer defaults. The appraisal contingency can give the buyer the option to cancel the contract or request the seller to lower the price of the home if the appraisal comes in low.
If a buyer waives the appraisal contingency, they are essentially agreeing to cover the amount of the purchase price beyond what the lender will fund, rather than asking the seller to lower their price to the appraised amount. Keep in mind, a buyer waiving this contingency doesn’t amount to much if the financing contingency is still in place; a low appraisal is a major reason why lenders won’t fund a loan.
- Home sale contingency
In some cases the buyer won’t be able to purchase your home until they sell their home. This contingency is a way for a buyer to ensure they will have the proceeds from their existing home before they purchase yours. This can pose two potential problems. The buyer’s timing may not align with yours, and agreeing to this may mean handing control over the timeline to the buyer.
There’s also the possibility the buyer isn’t able to sell their home at the price they need in order to purchase yours; this could give them the right to walk away. If you decide to accept an offer with a home sale contingency, consider the time frame you’re willing to allow. The longer your home is off the market, the more you risk a change in demand for your home.
What to look for in a cash offer
An all-cash offer does not necessarily refer to the source of funds. In other words, a buyer may still be using a loan to purchase the home. However, the closing of the sale is not contingent on the buyer getting that loan. Since you don’t need to allow time for the buyer’s loan to fund, accepting a cash offer can make for a quicker sale. However, there are several questions you should consider asking.
Do I want a quick home sale?
A fast transaction isn’t always a smooth transaction. Additionally, you may need to time the purchase and move-in date of your next home, and a speedy sale could cause a gap in housing–this can be expensive.
Is the offer as certain as it seems?
There are more hurdles to jump through with a buyer using a mortgage, but there are also more safeguards in place to prevent fraud. That’s why securing proof-of-funds is paramount when considering a cash offer. Consider requiring a proof of funds letter from the buyer’s bank or other source of funds. For example, a buyer may intend to use a line of credit to purchase your home, which is different from a buyer who has the cash sitting in their account.
How much will accepting a cash offer really cost?
A buyer may use a cash offer as an incentive to pay less for your home because they are removing contingencies and permitting a faster sale. Ultimately, you’ll need to determine whether the discount on price is worth the time saved.
The emotional aspects of choosing an offer
There’s no doubt that selling your home is an emotional process. While many argue that removing emotion from a financial decision yields better results, we know it’s not always possible. When the process gets overwhelming, it can be helpful to think about what you value most, no matter how intangible. These are a few of the emotional aspects you may face when choosing an offer:
Home buyers often write offer letters, and they can be heartfelt, or sometimes, tactical in competitive markets. Depending on whether or not you are emotionally invested in what the next owner does with the property, you may give these more or less weight in your decision. However, you should also be aware of the pitfalls in considering them.
Pressure from your neighbors
Your neighbors might have an opinion or two on who moves in, maybe they would love a family with kids the same age as theirs. It’s easy to let opinions like these distract you from making the best decision for yourself. Keep in mind, the Fair Housing Act also prevents many types of discrimination, and your real estate agent should be well aware.
Pressure from your real estate agent
A good real estate agent should never pressure you to accept one offer over another. Their job is to provide you with all of the pertinent facts and leave it up to you to decide. With that said, your agent may have their own motivations and opinions counter to your own. Ultimately, the decision is yours.
The highest offer isn’t always the best offer
Hopefully it’s clear that the offer price is often just a starting point for negotiations. In some cases, the lowest offer in terms of price may prove to be the best offer in terms of net proceeds after you factor in time, risk, and all the other costs of selling.
Selling a home has many trade-offs. You may find yourself bending on certain terms even though they result in lower net proceeds. One of the advantages of selling to Opendoor is you can quickly receive a competitive offer on your home, streamline any repairs, and control the timeline. You don’t have to worry about the risks of buyer financing fall-through and many of the stresses of a traditional sale like showings and months of uncertainty. Requesting an offer is free, and there’s no obligation.
The process of selling your home can become overwhelming, especially once you add up all of the nuances to consider when choosing the best offer for you. Everyone’s situation is unique, here are some key takeaways to keep in mind:
- All contingencies included in an offer come down to a cost/benefit analysis where you decide what you’re willing to accept to accomplish your goal.
- An all-cash offer provides more certainty, but be sure to consider the source of funds.
- In evaluating an offer, remember the offer price is just a starting point. It’s important to evaluate the impact of contingencies on net proceeds.
- Don’t underestimate the role your emotions can play when choosing the best offer. Be ready to balance your feelings and your bottom line.
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