Comparing Seemingly Similar Offers

When average homeowners sell their property, they often act as auctioneers looking for the high bid, but price is only one component of an offer (or purchase agreement). In many cases, a lower offer is superior if the buyer can close quickly and doesn’t demand a lot of extras, such as closing costs and repairs.

When you’re flipping houses, you need to be able to evaluate offers and see beyond price to weigh all factors. In the following sections, I reveal the major factors you should consider so that you can compare offers as you receive them. Consult with your agent for specific advice on issues that concern you.

Your first offer is usually the best offer, so don’t reject it outright thinking that better offers are soon to follow. If you receive an offer soon after you put the house up for sale, you may be tempted to assume that you priced the house too low and try to sabotage the deal so you can raise your asking price. This tactic is often a costly mistake. That first offer may be the only one you get. Remember, pigs get fat; hogs get slaughtered.

Does the buyer have financing?

A buyer doesn’t have to be able to afford your house in order to bid on it. He can have a dollar in his pocket and ten dollars in his bank account and still submit an offer. If you accept the offer by signing the purchase agreement, he can tie up your house for several days of negotiations until you discover that he can’t get financing.

When fielding offers, don’t sign a purchase agreement unless the bidder provides proof of one of the following types of financing (see Chapter 5 for general information on financing):

Cash: Cash offers are tops, but you should verify that the buyer has the available cash to close the deal. Verification can be in the form of a letter from the buyer’s bank or credit union or from Grandma Rowland, who’s putting up the money. Or, you can ask for a copy of the buyers’ recent bank statements — advise the buyers to black out their account numbers so that the account numbers don’t fall into the wrong hands. If you can’t get the actual statements or the buyers prefer not to provide copies of bank statements, the bank can provide an official letter stating sufficient funds are available in the buyers’ accounts.
Pre-approval: Pre-approval means that a lender has already okayed the loan. This offer is the next best thing to a cash offer, but pre-approval letters are worth only as much as the paper they’re printed on. Ask the buyers to talk with your mortgage person (a loan officer you trust or one your agent recommends). Don’t trust the word of the buyer’s loan officer, because that person may not be the most reliable source of accurate information. If the buyers balk at this suggestion, tell them that buying and financing a home is important business and they wouldn’t have major surgery without getting a second opinion, so they should consider getting some additional input from your loan officer. More than likely, your mortgage specialist will be of a higher caliber than the one they may have just stumbled on.
Pre-qualification: If the buyer has pre-qualification, a lender has researched the buyer’s financial records and decided that the buyer is probably able to secure a loan. Pre-qualification is one rung down from preapproval.

All things being equal, a cash offer is best, but if the cash offer is more than 5 percent lower than a non-cash offer, you have to weigh the benefits against the lower purchase price.

Accept offers only from serious buyers who are at least pre-approved for a loan that’s sufficient for purchasing the property. Have your mortgage specialist on call to check up on a prospective buyer’s qualifications before you sign the purchase agreement. You should always receive a letter from the buyer’s lender with the offer, and this letter should contain the lender’s contact information. Your mortgage specialist can contact the buyer’s lender and perform background checks to ensure that the buyer has sufficient financing in place.

How “earnest” is the buyer?

Most offers have an earnest-money deposit attached to them that shows how committed the buyer is to purchasing the property. If the buyer backs out of the deal without due cause, he forfeits the earnest-money deposit, and you get to keep it. Needless to say, an offer with a large earnest-money deposit is less likely to fall apart at the last minute than an offer with a smaller deposit. To the seller, having that assurance carries a lot of weight.

A reasonable amount to offer as an earnest-money deposit depends on the nature of the financing: 20 percent deposit on a conventional loan, 10 percent on a cash offer, and 3.5 percent on an FHA loan. Any less shows a weakness in the buyer’s financing or commitment. Any more shows that the buyer is in a stronger position to purchase the property and more committed to closing the deal.

When buyers offer a low deposit, explain that by putting down more money now, they have to come up with less money at closing. You can also consider adding an incentive for putting down a higher deposit by saying something like, “I’d be much more comfortable with a deposit of $5,000 than with the $1,000 you’re offering. In fact, I’d be willing to drop the price of the house by $500 in exchange for a larger deposit.” If you figure that each day you hold the property costs you $100, $500 is a small investment for ensuring that the deal goes through.

I strongly recommend that you not hold the earnest-money deposit yourself. Ask your agent, attorney, or title company to hold onto the cash. That way, you won’t be tempted to dip into the cookie jar before the deal is done.

What else is the buyer asking for?

Buyers ask for all sorts of stuff when they submit an offer. They may ask you to remove that pool you just installed thinking it would boost the value of the house. They can ask for the sports car you have stored in your garage. They can request that you pay up to 6 percent of their closing costs, pay for a home warranty, or immediately vacate the property at closing. When evaluating an offer, take all these requests into consideration. Following are suggestions on how to handle common requests:

Possession at closing: Buyers often want to take immediate possession of a property. When you’re flipping, this situation is ideal, assuming you don’t reside in the house. If you’re living in the house you flip, draw up a contingency plan and try your best to accommodate this request. It may inconvenience you, but as a flipper, you want to sell your house as quickly as possible to cut your holding costs and have cash to finance your next flip.
Payment of closing costs: Many first-time homeowners request that the seller pay a portion of the closing costs so they don’t have to pay these costs upfront. If buyers ask for closing costs, consider offering to pay the closing costs upfront if the buyer is willing to pay a little more for the house to cover the closing costs. Many first-time buyers would rather roll the closing costs into their mortgage than pay the fees upfront. Of course, this is an option only if the property appraises for the amount the buyers are willing to pay. If the appraisal comes in too low, you can challenge it, but if you lose that battle, you need to lower the price.
No tax proration: At closing, you normally get back any taxes you paid for the months that the new owner is going to live in the house. When buyers request no tax proration, they’re asking you to pay their property taxes. Ask your title company to calculate the amount you would be getting back at closing. If the amount is small — only a few hundred bucks — you may want to agree to this request. (Chapter 4 has tips on finding a title company.) If you just paid the tax bill and the sale closes in the first month after paying, that money should be reimbursed to you. For example, if the taxes are $3,000 for the year, which equals $250 a month, you lose $2,750 at closing if you give up tax proration.

In some states, homeowners pay taxes in arrears rather than in advance. In other words, the homeowner pays this year to cover last year’s property taxes. In states in which taxes are paid in arrears, the seller customarily credits the buyer at closing for as much as one year of taxes. The theory is that because the seller used the property in the previous year and those taxes are being paid this year, they are the seller’s responsibility. In such cases, you’re better off if the buyer doesn’t ask for the taxes to be prorated. Consider offering to pay the next installment due after the closing — it can save you approximately six months in taxes versus a full year’s proration. But again, if the buyer won’t budge on this term and is presenting a sweet offer, you may want to give in.

Beware of the red herring move. Buyers often request something they know you won’t agree to in an attempt to focus your attention on that one request and give in on everything else. If the buyer requests something odd, such as the Oriental rug in the living room, it should raise a red flag. Unless giving away that rug eats up your profit, giving in may be your best option.

Under no circumstances should you offer a buyer cash back at closing. Con artists often use cash-back-at-closing deals to trick lenders out of money. With a cash-back-at-closing scheme, the buyer agrees to pay a little more for the house (often much more than the asking price), and the seller kicks back a portion of the extra money (or all of it) to the buyer after closing. These deals are fraudulent; if you get involved in one, you may find yourself on the wrong end of a judge’s bench.

What conditions has the buyer included?

Conditional statements (weasel clauses) accompany every offer. Some are built into the offer, but the buyer can jot down additional conditions. If you’re smart, you probably did the same thing when you bought the house (see Chapter 13 for details on buying a house). Following are the most common conditions buyers stipulate:

Financing must be approved. Every purchase agreement has this condition, and if you’re already screening out anyone who’s not pre-qualified for a loan, this clause shouldn’t pose a problem. (See the earlier section “Does the buyer have financing?” for more information.)
Property must appraise at the sale price or higher. If you’ve done your homework and priced your property competitively, this condition shouldn’t pose a problem.
House must pass inspection. You had the house inspected when you bought it, and you repaired everything, so this point is another non-issue.
Title must be clear. Before you purchased the house, you researched the title and purchased title insurance, so you’re safe here, too.
My existing home must sell first. You don’t want the sale of your house hanging in limbo because the buyers can’t sell their house. If you like the offer, consider countering with an offer that gives the prospective buyers first right of refusal, which keeps the house on the market but provides the buyers with notice (often 72 hours) before you sell to someone else. The buyers then have that much time (72 hours, for example) to match any offer you receive. If you don’t like the offer, give your other offers a higher priority.

Beware of any conditions that the buyer adds to give himself an unfair advantage or saddle you with all the financial risk. Anything that enables the buyer to easily back out of the deal with no financial loss should raise a red flag, including interest-rate contingencies (offer is removed if buyer can’t get a loan at a certain interest rate), a clause saying the buyer’s attorney must review and approve the offer, or a clause giving the buyer the right to back out of the deal without cause.

AVOIDING THE DOMINO EFFECT

Having the sale of your house conditional upon the sale of another house is known as a domino effect. I’ve seen this go seven deep. Each house is dependent on another one selling. If something happens anywhere along the line, your deal is dead. My advice is to sign a 72-hour contingency that allows you to keep your house on the market. This contingency gives you two opportunities to sell the house. You can sell the house to the first buyer, or if another buyer comes along, you can sign an agreement with the second buyer contingent upon the first deal not going through. You then give the first buyer notice that he can lift his 72-hour contingency or you will act on the second offer at the 73rd hour. Top-producer agents are well trained in this method, and you should be, too.

Keep in mind that each offer stands on its own terms. The first buyer is under no obligation to match a higher offer. Price has nothing to do with the contingency.

How soon does the buyer want to close?

As a flipper, you’re well aware of holding costs. Every day you own your property costs you money, so the sooner you close, the less money you’re out. When comparing offers, check the date on which the buyer wants to close. If one buyer who wants to close immediately is offering $2,000 less than another buyer who wants to close a month from now, the lower offer may be the better offer, assuming all other conditions are equal.

Mastering the Art of Counteroffers

Some offers are so low, all you can do is laugh and shrug them off, but in most cases, no offer is too low to reject outright. When you receive an offer that appears to be a little irrational, don’t take it personally. If you’re not ready to say either “yes” or “no,” simply reply with your counteroffer.

Take-it-or-leave-it ultimatums have no place in negotiations. Defuse your emotions. Depressurize your passions. Proceed with logic and always treat buyers with respect, even if you think they’re off their rockers.

The following sections explore counteroffers in greater depth and show you some techniques for turning the tables on buyers without insulting or confronting them.

Never counter yourself. For example, suppose you’re asking $200,000 for a property, and you get an offer of $180,000, so you counter with $195,000, and the buyer hesitates. You begin thinking about it. Maybe you should have countered with $190,000. You have bills to pay. Baby needs new shoes. You want to call back with a new counteroffer. Don’t do it. Your baby doesn’t need new shoes that badly. Wait for the next counteroffer to come in before you decide on your next move; otherwise, you’re essentially bidding against yourself.

Submitting a counteroffer

After you receive and evaluate a reasonable offer, you have two choices — you can accept the offer as is or submit a counteroffer in writing. If the buyer offers the full price and attractive terms (as I cover in the earlier section “What conditions has the buyer included?”), accept the offer immediately. Don’t start to second-guess yourself or wonder whether you sold yourself short. Lady Fortune has smiled down upon you, so smile back and sign the agreement.

If the offer isn’t stellar but shows some promise for negotiation, craft a counteroffer. I show you the basics in the following sections.

Coming up with a savvy counteroffer

Offering and counteroffering is like a game of chess, in which buyer and seller attempt to anticipate one another’s next move. You never know what a buyer is going to request or state as a condition, so you need to tread carefully and think creatively. Following are some examples of counteroffers that have worked for me in the past:

Buyer offers $5,000 less than asking price and no tax proration. Knowing that the loss of tax proration will cost you $1,000 at closing, you counter that you agree to pay the tax proration if the buyer pays the full asking price.
Buyer offers $10,000 less than asking price. Knowing that your home is priced competitively with comparable homes in the area and that you’re currently in a sellers’ market, you counter with your original asking price but provide a comparison chart showing that your house is well worth that price.
Buyer makes a firm offer for less than you can accept. Return the offer with a note that says, “Sorry, but I can’t accept less than _____.”
Buyer requests that you provide a home warranty. The average home warranty costs around $425, so it’s usually not a deal breaker. A home warranty is a reasonable request, and if it doesn’t break the bank, accept it. Besides, having a home warranty may protect you from a future lawsuit if the property has some defect that went unnoticed during the inspection.

Putting your counteroffer in writing

If you decide to counter, write your counteroffer on the copy of the purchase agreement you received from the buyer or the buyer’s agent, initial your changes, and either scan and e-mail or hand-deliver your counteroffer to the buyer’s agent or directly to the buyer if she’s not working through an agent. (Some agents prefer to submit counteroffers on a separate form instead of marking up the original offer; they number the counteroffers something along the lines of Seller 1, Buyer 2, Seller 3, and so on.) If you’re using an agent, have your agent present the counteroffer. Be sure to stipulate the time period in which the buyer needs to respond to your counteroffer.

Only what’s written on an offer counts, so make sure that all offers and counteroffers are in writing. Don’t make verbal agreements. They won’t stand up in court.

THINKING LIKE AN AGENT

Agents are master negotiators, so when you’re selling a house, it pays to think like an agent or work with an agent. Skilled agents know how to break down the numbers into minimums. For example, if a buyer offers $5,000 less than the asking price, the seller is out $5,000 over a single transaction. But for a buyer with a mortgage interest rate of 6.5 percent, that $5,000 represents about $30 a month or less than $1 a day! Presenting these numbers in this way to the buyer puts the offer in perspective. I’ve found this strategy to be highly effective in convincing buyers to up the ante when the seller won’t budge.

Another strategy we use in our office is to place the buyers and sellers in separate conference rooms — we have several of them. The buyers and sellers exchange letters. They each jot down bullet points of what they like and dislike about the offer, and we eliminate their differences one by one. After everyone has agreed, we join together in one room and sign documents.

Leveraging the power of multiple offers

When you receive an outstanding offer, jump on it. If the offer falls short of outstanding, call your other prospects and let them know that you’ve received an offer and are going to pursue it if you don’t receive an offer from them by a certain deadline (one or two days). This tactic applies pressure to all interested parties, encouraging them to get off their duffs and act quickly or lose the house for good. Keep the details about the offer you received a mystery so new bidders don’t have an unfair advantage.

If additional offers arrive, you can now compare offers, as I explain earlier in this chapter, and accept the best offer or counter it. Keep a copy of those other offers on hand, however, just in case what you consider to be the best offer falls through.

If you have competing offers, get word back to both buyers that you’re going to be looking at their best and final offer. If you have an agent, let the agent do the talking. After both offers come in, you can then pick the best offer and start negotiating.

Countering two offers with signed counteroffers is fraud. You can legally respond to more than one offer by submitting unsigned counteroffers and stipulating that none of the counteroffers is legal and binding until you sign it. However, I prefer to ask all interested parties to submit their best offer so I know who’s most serious.

Shuffling Papers and Other Legal Stuff at Closing

After you and the buyers reach an agreement on price and terms, and assuming nothing happens to sabotage the deal, the sale proceeds to closing, where you receive your money and sign over the deed to the buyer. At this point, you have two goals — to make the closing proceed as smoothly as possible and to ensure that your back end is covered. In the following sections, I show you how to proceed with a closing from start to finish.

In real estate, everything must be in writing. Everything must be disclosed. You can’t hide anything or make deals on the side.

Having the right folks represent you

Even if you sell the house yourself, you should never try to fly solo during the closing. Closings are complicated legal and financial transactions accompanied by mounds of paperwork. You need to make sure that your interests are protected at closing by hiring a closing agent and a real estate attorney to represent you and ensure that all paperwork is properly completed. Your agent can attend the closing but usually advises you to have your attorney present; whether you choose to have your attorney present is up to you.

In most cases, your title company supplies the closing agent, but in some cases, the buyer’s lender insists on handling the buyer’s end of the closing. However the closing is handled, you should supply your attorney with copies of the paperwork to review before the closing date to avoid any nasty surprises at closing. See Chapter 4 for details on hiring a title company and a real estate attorney.

As soon as you and the buyer agree on price and terms, call your title company or real estate attorney and schedule a closing date. Closings typically occur 30 to 45 days from the day you sell the property, so you don’t want to waste any time. As soon as you sell the property, you must order the title policy. Neither the buyer nor seller needs to worry about this — your real estate agent keeps the process moving forward and can recommend a title company or attorney to handle the paperwork.

Prepping for closing

To ensure that the closing proceeds as smoothly as possible, supply your closing agent with any documents she may need to put together the closing packets. Documents typically include the following:

Termite inspection report. If the buyer is financing the purchase with a Veterans Affairs (VA) loan, immediately schedule a termite inspection, if it hasn’t already been done, and send the report to the closing agent or attorney who’s handling the closing. (Typically, the buyer orders the termite inspection and has it done prior to closing, and the seller pays for it at closing.)
Purchase agreement and any addendums.
Mortgage payoff information and any second mortgages or other liens.
Buyer’s financial information.

If you use the same title company at closing that you used when you purchased the property, the title company often discounts the fee it charges for title work. Even if you’re using a different title company, turn in your old policy. You can usually receive a credit for it.

Sealing the deal with paperwork

At the closing, the closing agent or attorney in charge supplies you and the buyer with separate closing packages. The buyers’ package is typically much thicker than yours, because they’re the ones borrowing money. Your package should include the following items:

Settlement statement: You and the buyer both receive a settlement statement that breaks down the charges and credits for the buyer and seller and shows the net amount each of you receives or must pay at closing.
Deed: The deed is the document that transfers ownership of the property from you (the seller) to the buyer.
Bill of sale: If you included any appliances in the sale of the property, your closing package may include a bill of sale that transfers ownership of these items to the buyer.
Mortgage payoff statement: If you took out a loan to purchase the property, your lender supplies you with a letter indicating the full amount due on the closing date to pay off the mortgage. After the closing is final, the lender receives full payment.
Escrow statement: If your monthly mortgage payments included escrow payments to cover bills, such as water and sewer, homeowner’s insurance, or property taxes, some of the money held in escrow may be returned to you at closing. The escrow statement shows you how much you can expect to get back.
1099-S report: The federal government requires that the 1099-S be filed to report the exact sale price of the house.
Estoppel certificate: Some title companies require the buyer and the seller to sign an estoppel certificate that verifies they are of legal age to enter into a legally binding agreement, that the deed has no hidden liens, and that nobody’s currently disputing the title.
Homestead exemption update: Some properties qualify for a homestead tax exemption. At closing, you may be asked to rescind the exemption that’s in place so the buyers can claim the exemption, if they qualify for it.

A lot of times the buyers sign their closing paperwork first because they have so much more to sign. Often buyers and sellers sign together, sometimes separately, and sometimes through the mail. No way is wrong as long as it fits your circumstances.

After you and the buyer sign the required documents, the deal is done. Hand over the keys and the garage door openers to the new owner along with any manuals for appliances you’re leaving with the property. At this point, you should also inform the buyers of the date on which utilities will be turned off. Bring the phone numbers of the various utility companies to the closing. After closing, you and the new owners can call the companies and have the utilities transferred to the new owners. Because your name is on the utility bills, you may need to verify with the utility company that you approve the transfer. Overlooking a minor detail like switching over the utilities can inconvenience the new owners and result in your receiving unexpected bills later.

Negotiating the Sale to Maximize Your Profit