In this wild D.C. region market, many home selling scenarios often unfold in the following way: You list your home on Thursday, have an open house on Sunday, and by Monday you have multiple contracts on the home.
Now all you have to do is pick the highest offer and you’re done, right? Well, not really.
It’s not just a matter of choosing the “highest offer.” It’s a matter of choosing the best offer at the highest price that has the best chance to make it to settlement.
Buyers can submit offers at any price that might look appealing to sellers. But completing the entire process—the sometimes-bumpy road between ratification and settlement—is something that could hinge on crucial decisions made in that that golden hour when sellers choose the right contract. Not only do sellers need to consider price, but they also must consider contingencies and situations that come up between ratification and settlement that could derail a deal and have buyers legally walk away after a listing is off the market for a couple of weeks.
Here we take a look at some key factors that sellers should consider, many related to the Realtor® association contracts used within the D.C. real estate region, which change periodically. Accordingly, we advise sellers—as well as buyers—to read every word of each contract and accompanying addenda to understand what’s relevant to them and to consult an attorney if they require legal advice. The following is not an all-exhaustive look at every possible contract scenario, but it still can serve as a solid guide to determine the best contract characteristics that will get that contract to settlement.
First, to get it out of the way, what we would consider as air tight an offer as possible would be one for all cash (with proof of available funds) at asking price or higher, with no contingencies—no inspection, financing, appraisal, etc.—and a settlement date agreeable to the seller. With few exceptions, if accepted by a seller, buyers would be obligated to go all the way to settlement as soon as the contract is ratified. But in most scenarios, that’s not the case. So, here’s how we would go about analyzing an offer to find the strongest candidate.
Price is the starting point. For most, price is ultimately what it’s all about. How much is someone willing to pay for a home? This is the figure upon which most everything else in the process hinges—from ratification to settlement. So, when selecting the best contract, it’s natural to select highest priced contracts as strong contenders. But there’s more to it than that single, final number.
How much is the down payment? The total price is one thing, but the down payment can provide a glimpse into what kind of money buyers have on hand. Remember, the key is getting to closing at the highest possible price. With two competing offers at the same price—and all other pertinent items within the contract essentially the same—sellers might need to decide which is more appealing, the offer with a 3 percent down payment or an offer with a 20 percent down payment. On paper, the offer with a 20 percent down payment would be considered stronger. As buyers venture through the loan process, a higher cash reserve can indicate their ability to endure more bumps in the road. On the other hand, buyers with a small down payment might be in a bind if their lender, during underwriting and loan processing, determines that they need to put more money down to secure the loan. Regardless of amount, the down payment could indicate all the cash some buyers have on hand. Still, some buyers with much more cash on hand choose low down payment options to save money up front, but a higher down payment can be an advantage.
Are buyers asking for a subsidy? In some cases buyers will ask sellers to help with closing costs by offering a subsidy—money back to the buyer—if they ratify a contract. What this ultimately does is lower the net price paid to the seller. So, a contract for $750,000 with a $5,000 subsidy, means the buyer will ultimately pay $745,000. There are many reasons for this, some being that buyers would like to keep more cash on hand and roll the price paid into the loan, which can help them after they close. It’s just something to consider. If you have two buyers at the same price, but one asks for a subsidy, the subsidy ultimately pulls the final price down. Please note: A contract with a subsidy does not lower the price in the eyes of a lender (see below).
What contingencies are part of the offer? After looking at the offer price and down payment, we typically look at contingencies within the offer. While they can vary, typical contingencies include home/radon inspection, financing, appraisal, and a homeowner association (HOA)/condominium document review period.
Home Inspection/Radon Inspection: Most contracts—even all-cash offers—will ask for a home inspection. It’s a period of typically one week or so from ratification in which sellers can hire inspectors to evaluate a property. If after completing the inspection buyers decide to withdraw, they may do so for any or no reason, so long as it’s before the inspection contingency runs out. They will forward the inspection report to the sellers with a form stating they wish to cancel the contract. Though the wording in contracts utilized by local Realtor® associations is a bit different depending on whether it’s a D.C./Maryland purchase or one in Virginia, buyers have a couple of options, and these can help determine the strength of a contract. Buyers will state in the contingency paperwork that they will wish to negotiate repairs as a result of the inspection, or they will inspect with the option to cancel the contract only—and not ask for repairs. We can’t emphasize enough how much stronger a contract is that states buyers will not ask for repairs. Yes, there’s always a chance they will withdraw, but sellers will know, even before inspection, that they will not have to deal with small—often annoying—nickel-and-dime requests from the buyer. It also can mean more than nickels and dimes. Aging roofs, electrical panels that don’t meet current code (but are still legal for the home they’re in), scuffed hardwood floors, you name it, can prompt repair or compensation requests from buyers. These can easily total in the thousands. The best bet for sellers is to ensure the home is in safe, full-working order—from plumbing and electrical to mechanical and everything in between. It will make the journey to closing much smoother and hassle free.
Financing and Appraisal: If buyers are financing their purchase, they have several loan types to choose from. It will typically be a conventional, Veterans Administration (VA), or Federal Housing Authority (FHA) loan. As such, the lender will require a financing contingency. It basically says the home is contingent on securing financing. Timeframes can vary, but in a typical scenario, the financing contingency is about 30 days—at which time buyers promise to confirm they qualify for financing. It depends on specifics and jurisdiction, so pay close attention to the individual contingency paperwork, but if buyers don’t perform within the proscribed timeframe, sellers can have avenues available to encourage the buyer to remove the contingency or withdraw from the contract.
An appraisal is a key element of the financing contingency. Oftentimes it’s within about 21 days of contract ratification. Basically, buyers must have the appraisal completed within that period or the contract will proceed to closing—and buyers will be required to pay the agreed price of the property, regardless of loan amount. An appraisal must match or be higher than the agreed upon sale price in the contract to proceed without further actions or negotiation.
Remember: Regardless of a subsidy amount, the home must appraise for the total price, as the lender is still lending up to the total price amount. Depending on the type of contract, buyers and sellers have different options regarding appraisal if it isn’t at or above the sale price. In a conventional and FHA contract, if the appraisal comes in at or above the price, the contract will automatically proceed, unless the property doesn’t satisfy lender requirements—this can include repairs an appraiser says sellers must make to get loan approval. Repairs can be anything, but what we’ve seen most often is with a VA loan, the appraiser will insist on a repair being made for safety reasons, such as a missing stair railing, or even instances of peeling paint that is possibly lead-based. But be ready for lender-required repairs, which aren’t removed even if the inspection contingency says buyers will not ask for repairs.
HOA/Condo Document Review: If your home is in an HOA or part of a condominium, buyers can use this contingency to withdraw free and clear from the contract. Under current law, in Washington, D.C., buyers have three business days to review HOA/condo documents. In Virginia, the timeframe is three calendar days. In Maryland, the law currently specifies seven calendar days to review condo documents and five calendar days to review HOA documents. There is no option for buyers or sellers to negotiate removing this contingency. As such, it’s best for sellers to have documents ready to submit to buyers as soon as a contract is ratified if the home is in a condo or HOA development. That way, the contingency will end as soon as possible—and typically within the home inspection timeframe. If sellers wait and order the documents after contract ratification, it can take weeks. Buyers could make it past inspection and financing and still, once the documents arrive, withdraw if they’re within the prescribed timeframe. It’s best to order the documents as soon as a home is listed.
Does a high earnest money (EMD) deposit help? It definitely can. The EMD, of course, is the deposit buyers make immediately when an offer is accepted; it is cashed and held in escrow with the buyer’s brokerage. In a noncompetitive situation, we typically recommend that our buyers offer a 1 percent EMD to accompany an offer, but they may want to offer more in a competitive case. The EMD can indicate how serious buyers are and how much they want a property. Buyers who withdraw from a contract without a valid contingency could risk losing some or all of the EMD as “liquidated damages.” Regardless of the amount, remember that if sellers want to sue for damages after buyers default on a contract, the sellers aren’t limited to the EMD amount. It gets legal, and they could sue for all and much more of the EMD or less. In a competitive situation, sellers might request in a counteroffer that buyers submit a somewhat higher EMD to indicate more interest—maybe 2 percent or more of the property price.
Don’t underestimate the strength of the lender pre-approval letter. A telltale sign of a strong offer is one with a strong letter from a qualified lender outlining a buyer’s qualifications to likely obtain the loan. This is where it pays for buyers to have a strong, thorough lender. The lender letter should be much more than a throwaway prequalification letter indicating the lender has reviewed credit score and maybe confirmed a buyer’s employment. It should explain, at least, that the buyer’s credit, employment (W-2 and other tax forms), assets, and debts have been reviewed by the lender. Though some lenders have policies to not place such items in the letter itself, it is imperative that a lender confirm that those reviews have taken place. We directly call the lender of potential buyers and ensure these pre-approval steps have been taken. It’s always great if buyers have been through underwriting on their loan approval, but sometimes that’s not possible. Still, it’s crucial that the lender confirm the lengths they’ve taken for the pre-approval.
Other aspects can influence a seller’s opinion of an offer as well. Several other—possibly smaller, but telling—items sometimes get thrown into the mix when sellers are reviewing contracts and can have an impact. The key is getting from contract ratification to settlement in the smoothest possible way, so anything buyers telegraph of a future concern must be considered. As agents, we inform sellers of a number of things that we see as we’re reviewing contracts. One of the biggest red flags in this respect would be sloppy offers. This is often the fault of an agent. Missing signatures, disorganized pages, and presentations could signal a problem in the future. If the contract is sloppy, what other shortcomings might there be within the contract? Another problem can be incomplete contracts. If we receive an incomplete contract, we’ll promptly tell the offeror to please submit a complete contract. It’s not considered submitted until all the parts are there. Other things could be as simple as responsiveness. If you’re considering one or multiple offers, and one of the buyers is simply not responsive or reachable, you need to seriously think about what that could mean when you’re getting close to closing or trying to negotiate a later aspect of the contract. If they show they’re not attentive, it should be considered when deciding to move forward.
In the end, a smart and conscientious real estate agent is a seller’s best guide to get through the process, and choosing the contract you’d like to take across the finish line is perhaps the most important decision you’ll make as a seller. Be sure you’re armed with the best information and best representation possible, so you can make an educated and confident decision about the best contract you can work with.
Christopher Prawdzik and his wife Angela Logomasini are licensed Realtors® with Samson Properties in Alexandria and are members of the Northern Virginia Association of Realtors® Top Producer’s Club. Operating as D.C. Region Real Estate, they serve the Virginia, Washington, D.C., and Maryland real estate market and offer comprehensive real estate services, including 4½% full-service listings.
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