Deerwood Realty and Friends Podcast
When I work with buyers in the current market, we talk early and often about making offers that are “clean”…but what does that mean? I’ll go over that more in detail below.
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Thoughts:
1. A “clean contract” is simply a contract that doesn’t contain too many contingencies. What are contingencies? Basically anything that says something along the lines of this isn’t a completed deal until x, y, or z are done.
Clean doesn’t have to mean no contingencies. It can also be in the structure of your offer. We’ll go over some examples…
2. Date until closing – A clean sales contract would typically have a small closing window. That is the period of time between when your offer is accepted and when the property transfers ownership. In my market, 30 days is considered a quick closing. However, your offer should be crafted to what your seller is looking for. So if the seller requests a 45 day closing or a 60 day closing…a clean contract would then have those time frames.
3. Whether or not your offer is in all cash. An all cash offer will beat a mortgage for the most part. There are two main reasons for this.
1. An all cash offer does not require an appraisal UNLESS it is specified in the contract.
2. An all cash offer does not have a financing contingency.
If you are a seller, the last thing you want to do is lose a buyer at the last moment because the property doesn’t appraise or the buyer is somehow not able to get financing. An all-cash offer beats both of those scenarios as far as a more clean offer.
The most logical thought after learning that an all cash offer beats a mortgage is that you are doomed in the market. That’s not the case. Every buyer isn’t walking around with a million dollars in cash for a house….so there is a strategy here as well.
A lot of times an all cash buyer ends up getting a mortgage. What’s the deal with that? Well, they offered to buy the house in cash, but they can pretty much pay for it any way they want as long as they bring the money on closing day. So, what you would usually see in this case is someone makes an all cash offer. In that offer they include a bank statement showing they have the cash to close. Then, they work to get a mortgage in the interim. Closing day comes and seller really doesn’t know otherwise.
4. There’s probably going to be some sort of inspection clause, and the seller is probably going to be selling as-is. You can choose not to waive the inspection clause, but your offer will not be as clean as someone who does. I always recommend getting a home inspection…but it’s how you word the as-is and inspection clause that can differentiate your offer from another potential buyer.
5. There are many contract riders … Take a look at ones you need and ones you really don’t There are a lot of riders. Riders are things that go with the offer that aren’t usually found in an offer. For example, there could be a subdivision rider that says something like you have 10 days to see the convenants and indentures and if you don’t like anything in there, you can walk from the offer. The inclusion of that rider is going to make a less clean contract than someone else’s
We talked about the appraisal rider previously. Sellers in this market are concerned that the sales prices of homes are rising so quickly that an appraiser may not agree to the value of the home that a buyer offered. This would normally mean the buyer would be responsible for the difference between what it appraises for and what the house actually sells for. Appraisal riders benefit the buyer. They are of no significance to the seller…the seller just sees them as impediments to getting the house sold.
6. The less personal property written into the offer the better. An appraisal is supposed to be the property itself and not it’s contents. As an example, is a house with a Thermador stove worth more than a house with a Frigidaire? Appraisers are loathe to get into that sort of thing. An agent representing the seller is usually going to look for an offer that has few, if any personal property involved. Why? Would you want to lose a deal over a light fixture? No.
This doesn’t mean that down the line you couldn’t ask to purchase furniture or personal property. It just means that for your offer to be clean, you want to avoid as much personal property that you can.
7. Earnest money can make a difference Earnest money is the money you put down at the time of the offer that shows the seller that you are serious about acquiring the house. Quick example, if someone puts 500 dollars down in earnest money and someone else puts down 20,000, the seller is more likely to go with the person who put the 20k down. Why? If seller complies with the offer to purchase and buyer does not, seller can keep the money. While it isn’t a game I’d recommend to play, I will say that more escrow usually means better chance of contract acceptance.
So now that you have a good idea about what a clean offer is, I wanted to kind of show you different scenarios that actually happen. Sometimes
Two offers
Offer 1
300,000 sale price
5% down in escrow = $15,000
30 day close
Cash offer with proof of funds included
As-is, inspections for buyer benefit only
No appraisal rider
No personal property included in offer
Buyer Love Letter
Offer 2
305,000 sale price
1,000 down in escrow
45 day close
Mortgage with pre-approval
Finance contingency
Appraisal rider
Buyer wants living room couch and one chair in basement
10 days to get inspections, 10 days to negotiate resolution.
Which offer you taking?
A. The one with 5,000 more sales price? MAYBE NOT. The first offer is clean. The chances of that closing without a snag are great. There’s no concern for financing, there’s no concern about personal property, and there’s no concern about leaving furniture.
When seller takes first offer, buyer 2 is going to be mad. They will say that they had the highest offer and therefore they should get the house.
Seller probably isn’t going to tell the buyer what the house sold for…they will probably find out when the house actually closes. But, it’s important to note that sometimes the highest money isn’t the best offer.
8. Understand that if you are in a multiple offer situation, one little concession here or there is going to be the difference in the seller accepting your offer.
This is why I DESPISE the banning of buyer love letters. What is that? It’s a letter the buyer writes telling the seller how much they love the house and how much they’d like to be chosen. The National Association of Realtors has said that you must be careful because it could be construed as a violation of fair housing laws…but that letter could be the difference between a buyer getting a house and not…so I disagree. If people are racists, they are racists…the banning of a love letter isn’t going to solve the problem of being a racist in the first place.
Finally, let’s look at a scenario again, this time, both buyers have a mortgage
Offer 1
310,000 sale price
30 day close
Finance contingency
Appraisal rider
Buyer wants living room couch and one chair in basement
10 days for inspections, 10 days to negotiate resolution
Offer 2
307,000 sale price
30 day close
Finance contingency
Appraisal rider
Inspections for buyer informational purposes only
Who wins?
Offer 2. Even though it’s 3,000 less, seller doesn’t have to deal with buyer inspections or personal property.
Keep this sort of thing in mind. When there are 40 offers on a house, there are going to be probably 20 that are exactly the same, so the more clean you can make your offer, the better chance you have to get the house.
Source: ME
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