RISMEDIA, July 16, 2009-Yesterday we discussed how to gather the preliminary information in preparing contract offers. The next step is to prepare it. When negotiating a real estate purchase offer, the seller wants to sell at the highest price and the buyer wants to buy at the lowest price, obviously. The reality is that a home will sell for what is worth, whether a seller is looking to get more or a buyer wants to pay less. That is why it is called negotiating the contract offer. Contract negotiation is all about getting agreement.
Prepare a Market Analysis for the buyer. The report should contain information comparing similar properties which are active on the market for sale, homes which expired and did not sell in the past six months, under contract sales and closed sales in the past six months, including asking price history and days on market before sold. With a report like this, a buyer can then have a better understanding of the real estate market and be better prepared when submitting a contract offer.
And bring the Market Analysis to the contract presentation. It could become very valuable in contract negotiations with the seller. Do not assume the listing agent has provided the seller with an updated market analysis after the original listing presentation.
So how does a buyer start negotiating to purchase a home? That depends on a number of things, such as the risk to losing the home to another buyer, how close to market value the seller’s asking price is and what is the maximum price the buyer is willing to pay for the home.
When a buyer’s contract offer is low, or in situations where there are multiple offers being submitted, it becomes even more important that the content of the contract is structured to be more pleasing to the seller, and listing agent.
Terms of the Contract – Binder and Earnest Money Deposit
Writing a binder check for $100 shows good faith, but what kind of statement is that making to the owner when the contract offer is presented to them?
Would a more substantial initial deposit, say $1,000, make a stronger statement? How about $5,000 as an initial deposit, or even more? Wouldn’t a larger initial deposit check make a stronger impression with a seller in making a decision to accept a contract offer?
What about the second deposit, the earnest money deposit? Where buyers have a substantial down payment, more then 10%, it is becoming very rare that contract offers are prepared with an earnest money deposit of 10% of the purchase price. Use the buyer’s assets to their advantage in the contract presentation.
When buyers have minimum down payments, such as an FHA offer with 3.5% as a down payment, why is the contract offer structured with some part of the down payment as the earnest money deposit and the balance being paid at closing? Utilize the entire 3.5 % as the earnest money deposit; it can become an advantage in the contract presentation.
Many buyers, and buyer agents, under estimate the importance of these two aspects of contract preparation, and the benefits they can provide in contract negotiation. The Initial Deposit and Earnest Money Deposit can be the difference in whether a contract offer gets accepted and signed by the seller or refused, especially in multi-contract presentations.
The mortgage contingency date is another area of concern for sellers in contracts presentations. A common statement from sellers is, “I don’t like the idea of keeping my home off the market that long”. This is where the buyer’s Mortgage Pre Approval becomes very valuable, especially in low down payment contract offers.
Contract offers need to have a reasonable time frame for obtaining mortgage approval. Agents need to know the expected time frame in processing the mortgage application, whether it is conventional, VA or FHA, and whether it could take two weeks, one month or six weeks. This depends on the buyer, the mortgage company and what verifications were obtained in the Pre Approval process.
The mortgage contingency date is a condition in the contract; it is a subject to event. When a short mortgage contingency date is provided in the contract and mortgage approval is not received, most all real estate contracts provide language such as: If the Mortgage Loan has not been arranged by DATE, then either buyer or seller can void this agreement by providing written notice to the other party.
Why are contracts prepared with a two week mortgage contingency clause when contract approval and the home inspection could take that long and the buyer does not plan on submitting a formal mortgage application until they are satisfied with the results of the home inspection? If there is a short mortgage contingency date due to a fast closing, or otherwise, advise the buyer that the home inspection, mortgage application and bank appraisal must be ordered immediately in order to meet the time frames and include it in writing in the contract offer.
What about transactions which involve a delayed closing, say six month, due to the seller purchasing a home being built? Many buyers, and some agents, believe that a mortgage application would not need to be submitted for three months or so because a mortgage rate lock-in would not be available for such an extended closing date. That is the wrong thinking. Prepare the buyer in advance for the need to obtain mortgage approval in advance of an extended closing date.
Why would a seller want to sign, or a listing agent advise a seller to sign, a contract offer which allowed the buyer three months to obtain mortgage approval? Mortgage approval is the most important aspect in a real estate transaction. Why would a seller agree to such a long period of time where the home is off the market and the contract can be voided by the buyer if mortgage approval is not obtained?
When submitting a contract offer, so much is dependent on the seller and what time frame they have in selling. Some sellers are extremely flexible in when they would like to close, others are buying another home and need a specific date, and others may need a fast closing due to relocation or otherwise.
If a fast closing is required by the buyer or the seller, prepare the buyer with the importance of time lines. Depending on the time needed for processing the mortgage application, it may be necessary for the buyer to have their Attorney or title agent order searches and prepare the title work prior to mortgage approval. If that is the case, include it in writing in the contract offer.
Conditions in the Contract Offer
As previously mentioned, conditions are found in most all real estate contracts. What is important and needs to be reviewed is that as a condition, these subject to clauses can be a concern to a seller. The concern is not that a mortgage needs to be obtained or that a home inspection needs to be performed, but it is a question of in what time frames will they be completed by the buyer. Again, in most cases, their home is off the market during this time period.
Depending on the state or specific geographic location, the home inspection, termite inspection and perhaps radon inspection are generally the most common inspections found in real estate contract offers.
If the time frames for these inspections are too long, there may be a negative response from the seller in contract negotiations. If the dates are too short, complications could arise, such as a waiver of the right to inspections or perhaps even voiding of the contract of sale. The sooner the buyer can complete the inspections in the contract, the more comfortable the seller will be in knowing that their home will be under contract with the inspection contingencies satisfied.
Prepare the buyer for the types of inspections which need to performed, ask them investigate inspection companies in advance, advise the buyer that it is recommended they attend the home inspection and provide information relating to the time frames involved in obtaining inspection dates and receiving the written reports.
Buyer Home Sale Contingency
There are other subject to contingencies that can be more of a concern to a home seller, such as subject to the sale of the buyer’s present home, especially if it is not yet on the market for sale or not under contract. While it is understandable that most home buyers need the equity from their home sale in order to purchase another home, many sellers may not be willing to take their home off the market and wait for the buyer to sell their current home.
The seller’s situation and home sale needs will be the factor in whether a buyer’s home sale contingency is something that may be acceptable or something which is completely unacceptable. A buyer with a home sale contingency is a much weaker buyer than a buyer without a home sale contingency. However, a buyer who has a signed contract on the sale of their home would be in a much better negotiating position than one without a sales contract.
Provide as much information as possible related to the buyer’s home sale, whether it is the listing agreement and showing activity if the home is not sold or a copy of the sales contract and copy of the mortgage commitment if it is under contract. And again, explain the difficulties to the buyer of presenting this type of contingency to the seller.
There are times when buyers are willing to make an offer to purchase another home without a contingency to sell their present home, something which was quite common in 2002 to early 2006 and perhaps now in multiple contract situations. Even though the buyer may be financially prepared to close without the sale proceeds of their current home, they need to know, obtain and provide documentation that their mortgage approval will not be subject to the sale of the current home as well. It is one thing for a buyer to agree to purchase without closing and paying off their existing mortgage on their home sale, but it is another that they have it in writing on the mortgage approval.
While price is an important aspect in contract presentations and negotiation, the structure and the conditions in the contract, such as mortgage terms, inspection time frames and other contingencies, are the most overlooked details by REALTORS® in preparing a contract offer. In fact, I’ve seen more contracts than I can count in my 38 years of listing and selling real estate that would have been signed and accepted at the initial presentation, if they were properly structured and prepared to begin with!
Licensed since 1971, David Fialk, CRB, CRS, ABR, GRI, e-Pro Certified Internet Professional, is the broker/owner of Choice Realty Co., Iselin, NJ and provides Real Estate Sales Seminars and Training. He can be reached at 732-283-3400 or David@ChoiceRealty.com.